When it comes to small business lending, you already know that conducting a global cash flow analysis is a must. These businesses may not cash flow sufficiently on their own, so you have to know how to evaluate cash flow, and look at the owners/guarantors and even related entities too, and performing a global cash flow analysis is one of the most important steps in determining whether or not a deal should be approved.
A global cash flow statement analysis is commonly put together by calculating the business’s cash available for debt service coverage, then the person’s cash available, and adding them together to get the global cash flow. However, this is insufficient and often inaccurate for a variety of reasons.
GAAP principles
One of these reasons is that many small businesses do not rigidly follow the GAAP principles and formal accounting practices. In other words, unlike large publicly traded companies, small business owners do not make as much effort to provide transparency in terms of the lines between their personal finances, personal cash flow, and the business’s finances. This allows small business owners to stray into gray areas, whether intentionally or unintentionally, and blur the lines in terms of their personal versus business finances. They also have more leeway to borrow or lend to the business as they wish, which can make the business look much stronger when viewed in isolation, obscuring the fact that the owner is supplementing the company with personal assets, and personal cash flow.
Related Entities: Getting the full picture
Many small business owners have multiple companies or are intertwined with other businesses they have invested in. In order to get the full scope of what lending to these businesses entail, you will want to take the time to collect and analyze financials for all related businesses and business entities and understand the role they play in the bigger picture regarding business loans.
Key pitfalls of double counting in a global cash flow statement
While conducting a global cash flow analysis is a necessary part of your underwriting, it introduces a number of new opportunities for mistakes to be made, and you must be careful to get it right. If not, you may end up double-counting revenue or assets, which can result in overstating the cashflow.
The most common error is probably in accounting for Dividends/Distributions, including them in the owner’s Cashflow Available for Debt Service figure without deducting them from the business’s EBITDA.
Another common scenario arises when a business owner has two businesses that feed off of each other, which must be taken into account. If one of the owner’s businesses is fueling another, the businesses may be too intertwined for you to fully understand how much cashflow either of them is generating. This could easily cause you to overestimate the cashflow of both of the businesses.
How FISCAL can Help
If you are concerned about the accuracy of your current global calculations in financial spreading, or simply tired of fighting with Excel to make sure you don’t miss anything in basic formulas for global cash flow, FISCAL Forward's financial spreading software may be the perfect option. Providing you with consistent worksheets, flexible global cash flow analysis templates, loan exception tracking, and much more, allow FISCAL to be your go-to solution for calculating the true cashflow for deals of all shapes and sizes.
