Importance of cash flow analysis in corporate lending:
- Motives behind the Increasing regulatory emphasis on cashflow-based lending
- Why cashflows matter to managers and to debt and equity providers
- Why cashflow forecasting methods are essential for the successful operation of the SME
- Why cashflow forecast analysis reveals more than income statement and balance sheet analysis
- The rationale for increased cash flow based lending particularly for SMEs in service industries, IT and trading companies
- The difference between cash flow and profit
- Identifying Non-cash items
- Assessing accruals and funding
- Cash inflows and outflows (sources and uses)
- Timing differences
- Understanding why profitable SME’s can still default.
- Why EBITDA does not spell cash flow
- Distinguishing cash flows from operations, investing and financing
- Review of Cash flow statements in IFRS in the light of accounting changes in Egypt
- The three blocks of cash flows under IFRS / IAS 7 and the six blocks
- The use of the debt service coverage ratio as the principal credit risk ratio from forecast cash flow analysis
- Proxy ratios (for DSCR) include debt to EBITDA and their limitations
Workshop: During the morning we will examine a sample of cash flow statements from a range of international corporate clients including InBev and Nestle. We will compare these accounts compared to IFRS accounts. Using these cash flow statements we will analyse the respective company’s ability to honour their debt service repayments.
Challenges facing SME financing and Cash flow analysis and construction
- Challenges faced in SME management and SME understanding of cash flow statements
- The need to create cash flow statements and forecasts for the client SME
- The importance of working capital changes on net operating working capital cashflow
- Constructing the SME cash flow
- The difference between the Indirect and Direct methods of cash flow statements
Cash flow workshops: During the afternoon sessions we will construct a number of cash flow statements for SME’s from the income statement and balance sheet of SME companies using both the indirect and direct methods. The aim of the workshop is to increase the delegate’s speed and technical skills in cash flow creation.
Credit risk analysis using cash flow forecasts
- Assessing the impact of risk crystallization events on the borrower’s ability to honour its debt service through cash flow generation
- Reviewing an international risk management framework to manage potential SME risks by:
- Identifying risks
- Assessing risks through their probability and impact and
- Mitigating risks using the risk mitigation model TARA model
- Application of the risk management framework to a potential client company in the tourism industry
- Sensitivity analysis using simple cashflow forecasts in an excel model to assess which risks provided the greatest downside impact on the company’s projections and its ability to service debt.
Cash flow workshops: During the day, the delegates will work through the cashflow forecast accuracy of a major case study of a company based in the European tourist industry. The case study centres on a family-run boutique hotel which is looking to expand its operations and improve its profitability.
Firstly, the delegates working in workshop project teams will use the international risk management framework to identify and assess the principal risks that will affect the company’s forecast cash flows and its ability to service its debts.
Once the project teams have identified the key potential risks affecting the case study they will use the excel financial model of the company’s cash flow forecasts to undertake a sensitivity analysis to assess the impact on the company’s DSCR of risk crystallisation. The delegates will create different scenarios based on differing downside assumptions of the key cost and income drivers associated with the company’s forecasts. They will then use the ‘downside scenario’ as the basis for lending to the company and assessing the company’s potential debt capacity.
PM: Assessing the impact of working capital management on cash flow forecasting
- Assessing the risks of overtrading in SME’s and its impact on cash flow forecasts and the company’s DSCR
- Assessing the importance of good working capital management in corporate cashflow financing
- How bad working capital management can impact the credit risk of the corporate client
- Using cash flow analysis and sensitivity analysis to assess the gross and networking capital needs of the client
- Developing concepts in guaranteeing working capital financing through the client’s working capital assets
- Assessing the importance of cash flow forecasting even when only providing working capital financing to corporate clients
Cash flow workshops: During the morning sessions the delegates will be introduced to a new food producer case study operating in the meat production industry. In their project groups, and using the company’s cash flow forecasts, the delegates will assess the principal risks associated with the company and assess the impact of changing working capital management on the company’s DSCR and its ability to honour both long term and short-term financing.
Using excel cash flow forecasts to structure the SME debt facility
- Using sensitivity analysis of the project’s key sales and costs assumptions to assess the impact of risk events on the company’s ability to service debt
- Creating a base case and a downside case cash flow model against which the delegates would then assess a variety of lending options to potential provide the company
- Using the cash flow forecasts to assess how restructuring the company’s existing book could improve company performance and generate a return for a lending organization
- Structuring the repayment schedule in the light of the company’s credit risk rating and its interest charges in line with forecast DSCR year on year
- Creating a term sheet for the prospective financing options for the cashflow management case study
- Using the cash flow forecasts to assess the level of financial ratios that should be included in the structured loan documentation in order to act as Early Warning Signals post drawdown.
- Presenting the different financing options created by the project teams to the rest of the delegates who will act as a credit committee.
- Using the cash flow forecasts to assess the company’s potential Enterprise Value.
Cash flow loan structuring workshop: During the final afternoon sessions the delegates will use the forecast cash flow model of the meat producer to structure new loans for the company. They will be free to use the excel model to assess which type of loans to provide the company, including long term loans as well as short term working capital facilities. They will use the model to assess the overall debt capacity of the company to honour their new loan book, based on their new forecast cash flow assumptions.
We will also discuss a draft Term Sheet for the company including the key covenants and conditions that the delegates would include as part of their loan agreement. As part of that exercise, the delegates will sensitise the forecasts in order to derive the levels of key financial ratios that they will include in the loan documentation.
Finally, we will briefly review how we can calculate the estimated Enterprise Value of the company using the same cash flow forecasts discounted to reflect the time value of money and assess the impact on the company’s valuation in the event of changing business and financial assumptions.
Course conclusion and evaluations