In the commercial lending world, the uniform credit analysis (UCA) cash flow is a powerful tool allowing lenders to accurately determine sources and uses of cash for a business and determine the ability of a business to repay a loan. In this article, we will discuss UCA cash flows in FINPACK, how to use the UCA cash flow, and how to sleuth for discrepancies in the UCA cash flow.
A UCA cash flow is a tool to help turn accrual-based income statements into cash-based. To utilize the UCA cash flow, the business needs beginning and ending balance sheets, as well as an income statement, for the period being analyzed. FINPACK allows for UCA cash flows to be analyzed for multiple periods. UCA cash flows are part of the output in a C&I Business Analysis.
UCA cash flow breaks down the cash from business activities into cash from sales, trading, and operations to arrive at net cash income. The current portion of long-term debt is subtracted from net cash income to reveal the cash available to the business after debt amortization. The business’s financing surplus/requirement is then calculated by examining cash outlays for capital expenditures, investing, and changes in other noncurrent and intangible assets. Finally, changes in short and long-term debt and equity describe the cash available to the business after financing. When using the UCA cash flow for analysis, look for the section where UCA cash flow turns negative. At this point, the analysis will show what part of the business is causing the weak cash flow. In the example below, the business has positive cash flow each year for cash after debt amortization, but the financing surplus/requirement is negative for the business. On further examination, the driving factor for negative cash at the financing surplus/requirement line is the cash outlay of the business for capital expenditures. In other words, this business is using their cash to purchase property, buildings, or equipment. This tells the analyst that they will have to pursue financing in order to preserve their cash reserves.
UCA cash flow analysis in FINPACK also shows discrepancies between the change in the cash balance on the balance sheet between periods, and the change in cash calculated by the UCA cash flow. The example below shows an example of discrepancies in UCA cash flow:
We see in the example above that for each period, the actual change in cash differs from the cash after financing calculation in the UCA cash flow. These discrepancies are caused by issues on the balance sheet. If your UCA cash flow analysis shows a discrepancy, ensure the following:
These are just a few suggestions to begin sleuthing the cause of the UCA cash flow discrepancy, but any incorrect value on the balance sheet will cause a UCA cash flow discrepancy. In the above example, the causes of the discrepancies in each year were due to copying forward equipment values from the previous year without adjusting for depreciation or new pieces of equipment, incorrectly recording loan balances on current loans, and missing contributed capital values. After making these adjustments, the cash after financing calculation and the actual change in cash match, and there are no discrepancies in our UCA cash flow analysis.
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