CFADS, also commonly called cash available for debt service (CADS), is the amount of funds available to pay for a business’s debt obligations. It assesses the various cash flows into and out of the business and looks at the ability to pay debts both during the lifetime of a project, as well as shorter periods of time.
Cash Flow Available for Debt Services is a key formula in finance and lending for several reasons. One is that because it looks at the ability to pay debt over time and takes into account expenditures such as paying taxes, it is generally a reliable and accurate assessment of the ability to pay over the life of the loan. CFADS, as lenders know, is also used in other important formulas and calculations, including:
While small business lenders recognize that CFADS is a more accurate figure in determining the lending capacity of a project, such as building expansion, they are often going to use simple EBITDA instead, as it is faster and easier to calculate.
Before we dive into the formula for CFADS, let’s define some of the terms that will be used in the calculation.
One way to calculate CFADS is the waterfall model, a top-down method. Loan analysts start with revenue, and then factor in the outflow and inflow of cash in the order that they occur, such as operating expenses (opex), capital expenditures (capex) operating revenues, taxes, and funding.
Lenders could also use NCAO (net cash flow after operations) from a formal cash flow analysis, such as Uniform Credit Analysis (UCA). While this is certainly more accurate, small businesses often don’t have the detailed, professionally prepared financial statements needed to use this method.
When evaluating a loan for a small business, your formula might look something like this:
CFADS = Revenue – Expenses +/- Net Working Capital Adjustments – Capital Expenditures – Cash Tax – Other Items
A more common method for calculating CFADS would be a bottom-up approach, especially in small business lending that commonly works from tax returns or management-prepared financials. Here, the analyst would start with Net Profit, then add back non-cash expenses like depreciation and amortization, as well as interest expense and income taxes.
Project-specific or unusual one-time items, such as rent expense if the proposed loan is to purchase an operating location or a non-recurring expense or income item, should also be adjusted to ensure an accurate reflection of the company’s typical CFADS.
When calculating CFADS, following best practices is essential. Here are a few common mistakes.
Many small businesses rely upon Excel for spreading tasks and calculations, such as CFADS. While extremely flexible, Excel can allow errors to be introduced into formulas and calculations. At the very least, it requires more hands-on time double- and triple-checking spreads, taking up valuable time that could be better spent elsewhere.
Spreading software like FISCAL Forward automates calculating CFADS and formulas like Debt Service Coverage Ratio (DCSR). With sufficiently accurate financial statements, it can even give a more accurate UCA NCAO figure. FISCAL Forward takes a business’s financial data and accurately calculates CFADS for that borrower, taking into consideration and making appropriate adjustments for multiple businesses, people, and loans when looking at Global Cash Flow.
Looking for an easier, more accurate way to calculate CFADS? We’d love to show you how. Schedule a demo today.