UCA Cash Flow

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UCA Cash Flow
Posted by: Jacob Apr 7 2004, 08:50 AM
We are one of the institutions switching from traditional to uca cash flow; however, noone here can make sense of it. Let me explain using an example:
Cash from sales $3224431
Cash prod costs -$2736479
Gross cash profits $220613
Cash oper expense -$250646
Cash after oper -$30033
Current port LTD -$155894
Interest Exp -$6011
Cash Expenditures $240371
Cash afer capital $48433
Change in STD $84285
Change in LTD -$122648
Cash after financing $10070
Beginning Cash $49766
Ending Cash $59836

Now, here is my question(s):
1) if $59836 is my ending cash for 2003 and my Current portion of LTD for 2004 is $62000, then the company is already negative and I should not grant a new loan, right?
2) But, current portion of LTD, $155894, was already subtracted to get the ending cash flow for 2003. So, isn’t that “double-dipping” to say after we’ve subtracted debt from 2003 and got ending cash flow, let’s take his debt for 2004 and subtract debt (again)?
3) So, do I take ending cash flow, add back Current portion of LTD and interest expense to get cash (that would have been available for financing, then subtract 2004’s current portion of LTD and what interest expense would be for the requested loan (line of credit)?
Then use that to get a debt coverage?
We are completely lost, HELP, please!!!
Posted by: loanuniverse Apr 7 2004, 10:13 AM

I think that the source of your confusion is to find out exactly which number if the one that is going to be used to calculate Debt Service Coverage. Normally you want to use NCAO or Net Cash After Operations as your numerator. I do not see anything called that in your example, but the closest would be the one titled “Cash after oper.”

It is important to remember that the UCA Cash Flow divides the Cash Flow of the borrower by activities, and as a lender you are looking for a borrower that is able to service the debt from its operations. You do not want your repayment to come in from the sale of assets or from other financing. Not that this could not make an acceptable source of repayment for a particular loan, but it should not be your primary source for working capital financing.

I do not know what kind of software you are using, but remember that the way the UCA Cash Flow works is by using financial information from two periods. Traditional cash flow can be obtained by using just one income statement, but UCA looks at changes in the asset accounts from one period to the next. In my opinion, it gives a much better accounting of where the money is going.

Now lets take a look at the numbers.

Cash after oper -$30033

From the above entry, I can deduce that the company has a shortage of cash after operations, which is not a good thing because it means that the company can not really repay anything just from the course of doing business. For argument sake, lets say that this customer of yours is a “shoe manufacturer”, if you still want to make the loan work the negative NCAO has to be mitigated. You have to find where the problem is and explain it away if possible. Could it be that this customer has new customers that require better terms? Have A/R collections slipped? How about inventory levels, are they carrying more than before? Have operating expenses increased as a percentage of cash collected?

Since your NCAO is negative, the DSC will be inadequate no matter what you do. However just so that you know, the denominator will be the sum of the following accounts:

Current port LTD -$155894
Interest Exp -$6011

Do not use Ending Cash That amount is nothing more than the one shown in your balance sheet {if you did the spreads right}, it reflects the cash flow for the period added to the beginning cash for the period. It is not cash flow. Remember that you are looking for the operational cash flow and specifically for the operational cash flow to be sufficient to service the debt.

Whether or not your company grants the loan depends on a lot more than the NCAO being enough to service the debt, but as mentioned above the fact that the operating cash flow is negative is not a good start.

Hope this helps.
Author: Commercial Loan Underwriter