Analyzing the riskiness of a borrower becomes more complex when the borrower operates multiple businesses or mixes personal and business finances. To address these complex borrowing situations, FINPACK’s Global Cash Flow Analysis (GCFA) tool provides a structured way to evaluate financial performance.
What is it?
Global Cash Flow Analysis has the ability to evaluate the total repayment capacity for multiple entities and individuals across multiple years.
The input is broken down into 4 categories:
- Primary Business Cash Flow
- Other (any other business entities)
- Personal (this can include Guarantors)
- Proposed New Income or Debt
The tool first analyzes the entities and individuals separately; displaying the debt coverage ratio and debt repayment margin of each entity and individual (see screenshot below).
The tool then combines all the entities and individuals into a ‘global’ entity. The Global Debt Coverage section of the output breaks down how the total debt coverage ratio is calculated (see screenshot below). This global debt coverage calculation removes any duplicated business income that is included in personal income. This helps arrive at the global cash available for debt service.
The default output will display the data for all the years the user selects, as well as an average column.
Why use it?
Global Cash Flow Analysis is used because it provides a holistic view of a borrower’s financial health. This is essential for dealing with interconnected enterprises or a closely held business, where personal and business finances often intertwine. By consolidating the cash flows of all related entities and individuals, GCFA allows lenders to determine if the combined operation is viable or if individual entities are hiding weaknesses. Ultimately, GCFA provides a view of ‘global’ debt service coverage that ensures any additional debt the borrower takes on will be supported by the strength of the combined entities.
Scenario Analysis
In addition to analyzing the actual financial performance of a borrower, FINPACK’s Global Cash Flow Analysis allows for scenario analysis. The tool lets the user input proposed loans or projected new income to see how it will impact the total debt service coverage ratio. These adjustments are applied to 3 years of historical data.
The input is very simple. It requires a description, and then the user can adjust income or P&I payments incurred by the hypothetical scenario.
There may be a situation in which a borrower is just incurring new debt, so the lender wants to see how an increase in debt (P&I payments) will impact the total debt coverage ratio. There may also be a scenario in which someone is getting a raise or income for a business is expected to decrease, and the lender would like to see how these changes in income will impact the total debt coverage ratio. There can also be situations in which income and debt are adjusted simultaneously to see how it could impact the total debt coverage. There are many different situations this ‘scenario’ tool can be used for, and it provides helpful insight on how changes to one entity or an individual may impact the total debt coverage ratio for global analysis.
In the example above, we can see that there is proposed new income of $18,000 and proposed new debt of $15,000. To provide a clearer comparison, the top of the analysis features a three-year historical trend of the original total debt coverage ratios. This layout allows for an immediate side-by-side evaluation of previous performance against the newly adjusted total debt coverage ratio.
Summary
Global Cash Flow Analysis in FINPACK is a powerful tool for evaluating complex financial relationships. By combining multiple entities into a single analysis and enabling what-if scenario testing, it helps lenders and analysts make more informed decisions about credit risk and repayment capacity of the global borrower.
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Coryn Davidson is an Extension Economist at the Center for Farm Financial Management in the Department of Applied Economics at the University of Minnesota. Coryn has a Bachelor’s Degree in Agricultural Business from the University of Wisconsin-River Falls and a Master’s Degree in Agricultural Economics from Colorado State University. She has experience in extension work through her 2023 AmeriCorps service and has also been part of a farmer educational program through ‘Farmer Campus’. Coryn’s interests include farm financial management, enterprise analysis, and economic impact assessment. She has an agricultural background in both dairy and mixed produce production.