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What is global cash flow?

Libby Sharman
August 12, 2013
Read Time: 0 min

This video is a segment taken from a recent webinar hosted by Sageworks’ Chuck Nwokocha and DM Analytics LLC’s owner, Dave Matricciano. For the full recording, visit Global Cash Flow Analysis – What, When, Why, and How”.

From the video

Starting off, I have an example from one of my colleagues. A few years ago, my colleague’s father, John, sought to purchase a hotel property along with a family friend named Eric. The friend’s bank (Bank A) asked for the business financials for the new purchase, and the personal financials for both of them. This should not be a surprise. However, John’s bank, (Bank B) asked for more information. Bank B wanted the financials for both individuals, along with John’s two existing hotels and Eric’s three existing hotels. Same project, same hotel, same loan, but two very different processes and sets of information were required for the lending decision.

Not too long ago, almost everyone operated like Bank A. A business loan could be obtained by anyone demonstrating his or her ability to repay the loan. In recent times, rules have changed because of regulator-induced pressure and the real risk of understanding what the global cash flow analysis is for all entities evolved. So what this looks like is, John and Eric, plus their individual hotels, coming together to purchase a new hotel. Bank B, which asked for more information, was able to see that one of Eric’s hotels was in trouble and bleeding money. If finances at that hotel start to go down, it affects the new purchase. If we just go through the initial or the basic information that Bank A asked for we would not have been able to see or understand that there was a risk present within Eric’s hotel. Needless to say, Bank A was ready to approve, but Bank B did not approve, and importantly, John avoided entering into a potentially risky partnership with Eric.

Why is global cash flow important?

In a global cash flow analysis it is common for business owners to lend personal funds or borrow funds from their businesses. It is common for the businesses (for tax advantages, primarily) to rent its office/warehouse/production facilities from a real estate holding company or partnership controlled by the business owners. It is also common for owners to control their own levels of salaries, bonuses, benefits and dividends to the extent allowed by prudence and tax regulations.

Global cash flow analysis is easy to overstate or in some cases even understate in regards to income or debt and you may be missing out in some of those parts of this analysis. That leads to inaccurate information, be it in debt or in cash flow. A high net worth guarantor who has all of his assets tied up in non-cash-producing real estate or a business venture that is losing money, may not have the capacity to support the debt if the bank calls upon him to honor his guarantee. Without a global analysis, the bank wouldn’t know about this risk. Again, typically within our individuals, business owners and the businesses, there’s an overlap of information: the income, debt service, assets and liabilities. Not only are you looking at businesses as well as individuals, but you can also have real estate as part of that analysis, where cash, income and debt flows sometimes a little too freely between all of those entities. Hence, it is important to avoid double-counting issues when performing a global cash flow analysis.

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For more in-depth information on the biggest obstacles credit analysts face with global cash flow, download the whitepaper titled: The Definitive Guide to Global Cash Flow.

About the Author

Libby Sharman

Libby Sharman is a Vice President of Marketing at Abrigo.

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