Analyzing a commercial credit can be challenging. Figuring out how a business is doing when you don’t have a good comparison or even figuring out if the core of the business is providing for the other pieces can make it difficult for you to understand how to analyze the business or structure the loan. Fortunately, FINPACK includes a report in the C & I Business Analysis tool that can be used to help you identify where the cash is being used in the business.
The Uniform Credit Analysis, or UCA Cash Flow, is designed to help you identify where the business’s cash is going and how it is being used. Is it being used to purchase additional inventory or is it being used to purchase equipment?
What is the UCA Cash Flow?
The UCA Cash Flow is a report included in the C & I Business Analysis tool for FINPACK Commercial. You may need to go to ‘Preview Options’ to activate this portion of the output, to view the UCA Cash Flow.
The UCA Cash Flow takes information from the beginning and ending balance sheets and the income statement to analyze how cash is being utilized in the business. The “business of the business” is analyzed in the “Cash From Trading” section. Next, general operating expenses are subtracted to calculate “Cash After Operations”. Then financing costs are factored in to arrive at “Net Cash Income”. “Cash After Debt Amortization” is calculated by subtracting the current portion of long-term debt. Cash outlays for capital expenditures are assessed to calculate the “Financing Surplus / Requirement”. Finally, “Cash after Financing” looks at the changes in the external financing of the business.
How to use the UCA Cash Flow
So, how do you use this report? Very simply, look for where the bolded lines in FINPACK’s UCA Cash Flow turn negative. Assess the UCA Cash Flow at this point and above to dig in to see the weak link leading to negative cash flow. If the “Financing Surplus / Requirement” line is where cash turns negative, take a look at outlays for capital expenditures they have made or maybe they are paying out too much in dividends. Use this report along with the common size and percent change reports in FINPACK’s C & I Business Analysis to identify the hole in the cash flow through the business.
The UCA Cash Flow provides you a roadmap to how cash is being generated and used in the business and gives you a starting point for discussions with your borrower in analyzing their loan request.