Cash Flow Analysis Part 2

Cash Flow Analysis 2 delves deeper into understanding the calculation of Cash Flow. Bankers often resort to the Traditional or EBITDA (Earnings before Interest Taxes Depreciation and Amortization) Methods of calculating Cash Flow for all types of borrowers.

Although those methods may work for certain types of borrowers where the primary sources of repayment are the sale, leasing or renting of real estate (Commercial Real Estate Transactions) it does not capture all information required when dealing with Non-Commercial Real Estate borrowers such as Manufactures, Wholesalers, Retailers and Service Providers.

Covered Topics

Cash Flow Analysis Part 2 uncovers the fallacies of utilizing Traditional and EBITDA methods which include the following:
  • It ignores the changes in the Balance Sheet items from one period to another period (i.e. a large increase in Inventory will be a use of cash that is not considered in the Traditional or EBITDA Methods)
  • It assumes that the Available Cash Flow produced the Traditional and EBITDA Methods will be converted into cash.
  • The Traditional and EBITA Methods consider activities that occurred within a period of time when the proper way to calculate Cash Flow Analysis considers activities over two periods of time (i.e. year to year, quarter to quarter or month to month).
  • When the Available Cash Flow is calculated it assumes that those funds will be used to pay the bank's debts first and ignores the fact that those funds may be required to cover a dividend payment or to support increases in balance sheet items such as Accounts Receivable and Inventory.
This program also demonstrates the relationship between the Income Statement and the Balance Sheet in calculating Cash Flow utilizing the Uniform Cash Analysis Method. Having an understanding of this relationship will enhance an analyst's ability to calculate and interpret the Cash Flow Analysis Statement.