Business Development

• Getting Business explores whether credit knowledge is either useful or necessary for business development professionals, along with the role of credit administrators in the business development process

Cash Flow

• A Cash Flow Snapshot explores the computation and use of simple operating cash flow statements that can be sketched out in a matter of minutes to provide surprising information about a prospect or borrower.
• Cash Based Income Tax Returns assesses the information included in, and missing from, information-only income tax returns filed on a cash basis.
• Collateral or Cash Flow? examines the relative importance of assessing four possible cash sources of repayment – cash flow from business operations, cash from a guarantor, cash from additional interest-bearing debt, and cash from collateral liquidation – in the process of maximizing our prospects for proper debt service.
• Distributions and Withdrawals reviews the nature and purpose of distributions and withdrawals and suggests necessary adjustments to reported profit and cash flow in assessing debt service capability.
• Due from and Due to Owners explores the difference in purpose and intent between cash outflows from a business to its owners and cash inflows from owners to a business. There is usually a fundamental distinction between these two cash flows that has critical implications for cash flow classifications and, therefore, for the final form and structure of the Uniform Credit Analysis (UCA) cash flow statement and its use in identifying borrowing causes.
• EBITDA and Cash Flow examines the similarities and differences between EBITDA and actual cash flow in concluding that lenders may be seriously misled in accepting EBITDA as a proxy for cash flow.
• Global Cash Flow examines the increasingly common practice of combining business and guarantor cash flow to produce a resulting global cash flow in support of a business loan request.
• Revisiting Cash Flow examines critical messages about debt service, borrowing causes, financing requirements, and financing sources embedded in the UCA cash flow statement.
• Sales Growth and Borrowing Causes focuses on separating the cash impact of sales growth from the cash impact of poor balance sheet management or excessive owner distributions.
• Subprime Business Loans examines several widely-used underwriting standards that, if consistently applied and promoted, may inadvertently result in subprime business loans.
• The ABCs of Cash Flow examine the fundamental considerations and concepts in constructing and interpreting the UCA cash flow statement.
• Working Capital or Cash Flow? explores the factors that drive and determine changes in working capital and examine whether changes in working capital provide us with clear signals about a borrower’s ability to service interest-bearing debt from ope

Commercial Real Estate

• A Simple Stress Test emphasizes the primacy of property cash flow - net operating income - as the critical source of debt service, especially in a stagnating economy.
• Cap Rates and Lending Decisions reviews the components and function of the capitalization rate, examines its role in establishing the market value of an asset, and explores the implied expectations embedded in relatively marginal capitalization rates for
• Cap Rates and Risk examines the relationship between cap rates and risk against a backdrop of alternative investment opportunities.
• Operating Income vs. Market Value? examines the benefits of changing the primary focus in commercial real estate analysis from an estimate of market value to an estimate of property cash flow available to meet debt service on the property’s interest-bearing debt. The premise underlying the Credit Refresher is that property cash flow and not market value services interest-bearing debt on an on-going basis.
• Refinancing and the Cap Rate explores a lender’s options and possible course of action in responding to an appraiser’s estimate of market value for an income producing property in the process of refinancing.
• The Income Capitalization Approach examines possible pitfalls in routinely accepting estimates of market value based largely on application of this valuation approach.

Credit Culture

• A Common Credit Culture? explores the necessary and sufficient conditions that lenders must establish and maintain in creating a common credit culture while concluding that a common credit culture itself is no guarantee of lending success.
• A High Performance Credit Culture? suggests the characteristics of a high performance credit culture and explores qualities within a common credit culture that lead to exceptional performance.
• The Credit Write-Up examines the purpose and content of the credit write-up, as well as emphasizes the critical importance of a cash flow statement in properly identifying borrowing causes and repayment sources.

Debt Service

• Cash Flow and Debt Service explores the best indicator of cash flow available to service debt and examines the necessary components of an effective debt service covenant.
• Covenants and the First Way Out provides an overview of the purpose of financial loan covenants, along with brief comments about covenant benefits, limitations, and lender options in the event of a covenant breach. In addition, we introduce and explore two critical financial covenants that address business profit and business cash flow required to properly service interest-bearing debt.
• Guarantors and Personal Cash Flow addresses the benefits and limitations of the personal cash flow statement in assessing the value of a personal guaranty while focusing attention on the value of current personal financial statement information.
• How Much Debt? explores the process and computations in estimating the amount of short and long-term interest-bearing debt a borrower can support from operating profit and subsequent cash flow.
• Shareholder Loans and Cash Flow examines the impact of shareholder loans on borrower cash flow and associated debt service capabilities.
• Subordination and Risk examines the definition and application of subordination and its likely impact on borrower cash flow and debt service capability.
• Tracking Cash Outflows explore the cash exit routes from a business to its owners. In the process of doing so, we access the possible cash impact on debt service and suggest a debt service coverage covenant to help contain the cash outflows and pr

Derivatives

• Forwards and Futures reviews the application of widely used forwards and futures contracts to lock in revenue or supply costs, along with the cash flow and accounting impact of completed transactions and their implications for key performance ratios.
• Interest Rate Swaps introduces several broad derivative categories while focusing on a specific derivative – interest rate swaps – in the process of examining the benefits and limitations that may arise in using this financial instrument.

Financial Analysis

• Accounting Profit and Business Profit explores the possible differences between the two and suggests that one can be highly misleading in providing signals about borrower performance.
• Balance Sheet Management explores the relative roles of sales growth or decline and company management in explaining the increase or decrease in receivables, inventory, and payables over an operating cycle.
• Big Companies and Small Companies explores whether big companies are truly more difficult to assess than small companies.
• Business Income Tax Returns examines the breadth, detail, and value of information in business income tax returns and their usefulness to the credit decision process.
• Credit Scoring and Risk examines specific statistical considerations and practical issues that may pose limitations to the expanding use of credit scoring for business loans.
• Distributions and Income Taxes examines the impact of distributions and shareholder loans on both personal and business income tax obligations.
• EBITDA - the Last Word? examines the role of EBITDA in assessing both income producing properties and commercial businesses. In one instance, it appears that EBITDA and cash flow may be identical. But in another instance, we conclude that EBITDA may be
• Fund Accounting Basics reviews the differences in financial reporting objectives, formats, reports, and accounting terminology for commercial businesses and government organizations with an emphasis on the role of fund classes as wells as the modified accrual basis of accounting in shaping financial reports.
• Income Statement Management explores the relative roles of a) sales growth or decline and b) company management in explaining the increase or decrease in cost of goods sold, operating expenses, and EBITDA.
• Incomplete Information explores a) the results of common accounting errors and omissions found on company-prepared financial statements as well as b) a useful tool for trapping a great many of them.
• Information Overload addresses the issue of sorting through computer output to pinpoint the critical financial risk indicators that provide the most consistent and unambiguous signals about a borrower's risk profile.
• Information Oversight addresses the issue of sorting through computer output to pinpoint the critical financial risk indicators that provide the most consistent and unambiguous signals about a borrower's risk profile - or finding that some of those critic
• Loan Structure and Bad Deals reviews the critical considerations that should properly drive and determine loan structure and examines the impact on risk in their absence.
• Management and the Numbers reviews the management essentials that must be in place and working effectively for a borrower to perform successfully in its competitive environment.
• Non-Financial Red Flags reviews a series of common non-financial red flags and examine the likely impact on a borrower’s financial performance and debt service prospects from a) problems within a concentrated customer base, b) existing divorce proceedings, c) a law suit brought by a key supplier, and d) an income tax challenge from the IRS.
• Not-for-Profit Basics examines differences in financial reporting objectives, reporting formats, reports, and accounting terminology for commercial businesses and not-for-profit organizations with an emphasis on the effect of revenue and neet asset restrictions on debt service.
• Projections and Credit Decisions explores the benefits and limitations of financial projections in the credit decision process while cautioning against accepting any projection assumption that exceeds historical performance.
• Related Party Transactions explores the cash flows among and between related companies with common ownership and among and between the companies and the owners and identifies likely pressures on future cash flows and debt service capabilities by re
• Revenue Recognition and Cash Flow explores the relationship between revenue recognition and cash flow and, in the process, examines several key balance sheet accounts such as customer deposits and billings in excess of costs and profits.
• Revenue Recognition and Reported Profit reviews the accounting rules that determine when a product or service can be recorded on the income statement as revenue and the impact on profitability, leverage, and risk if the rules are disregarded or overlooked.
• The Magic of Rate Cuts reviews the apparent status of the U.S. economy and examines the likely outcomes of various monetary and fiscal policy options in the face of an economic slowdown. It concludes with a very brief set of commentsabout identifying port
• The Matching Principle and Reported Profit examines the impact on company-prepared financial statements and our resulting assessment of borrower profitability from the misapplication of the matching principle, i.e., from the failure to match expenses with revenue.
• Working Capital and Risk explores the messages about a borrower's cash flow and financial performance implied in working capital levels and changes.