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Small Business Credit: Cash Flow Lending: Analyzing Cash Flows for Credit to Small and Medium Size businesses

Cash flow summary and Cash flow analysis

The cash flows of a company are different from the profit or loss that we see in its income statement. A company may be making profits every year but it may still be cash strapped and facing liquidity problems. A bank needs to thoroughly review a potential borrower’s cash flows, as it is the cash generated by the company, and not the profits that it makes, which goes towards repaying the loan. In order to assess the company’s cash flows, the bank will prepare a cash flow summary. This summary presents the movements that occurred in cash during the year being assessed. The bank accompanies this summary with a quantitative and qualitative cash flow analysis.

Let us look at the layout of a sample cash flow summary.

Cash Flow Summary

Wilson and Co.

 

2010

Sales

xxx

? Accounts receivables

xxx

Cash collected from sales

xxx

  

Cost of inventory sold

xxx

? Inventory

xxx

? Accounts payables

xxx

Cash paid for production

xxx

Cash from trading activities

xxx

  

Operating expenses (less non-cash expenses)

xxx

? Prepaid expenses

xxx

? Accrued expenses

xxx

Cash paid for operating costs

xxx

Cash after operations

xxx

  

Other income (expenses)

xxx

? Other current and non-current assets

xxx

Tax

xxx

? Deferred Tax

xxx

? Tax payable

xxx

Tax paid and other income/expense

xxx

Net cash after operations

xxx

  

Interest expense

xxx

? Interest payable

xxx

Dividends declared

xxx

? Dividends payable

xxx

Cash paid for dividends and interest

xxx

Cash after financing costs

xxx

  

 

Current portion long-term debt (prior year)

xxx

Cash after debt amortisation

xxx

  

 

? Fixed assets

xxx

? Intangibles

xxx

? Investments

xxx

Cash paid for fixed assets and investments

xxx

Financing surplus (requirement)

xxx

  

 

? Short-term debt

xxx

? Long-term debt

xxx

? Preference shares

xxx

? Ordinary shares

xxx

Total external financing

xxx

Financing surplus (requirement) + Total external financing

xxx

  

 

Proof: ? Cash and marketable securities

xxx

Figure 1: Sample cash flow summary

As the sample cash flow summary shows, it is divided into eight different segments populated by items from the balance sheets. The summary enables the bank to evaluate the impact of changes in these items on the cash flow of the company. Any change in item that is a source of cash is added, whereas a change that uses cash is deducted. The final figure arrived at in the summary of “Financing surplus (requirement) + Total external financing” should equal the change in the cash balance at the end of the year over that of the previous year.

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