Global Cash Flow Analysis
Copyright © 2013 University of Minnesota
Global Cash Flow
=
Repayment

Where Is the Cash?
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1
“Perfect” Global Cash Flow
• Considers all existing and potential
sources of income
• Analyzes all asset holdings and
balance sheet cash flow
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“Perfect” Global Cash Flow
•
•
•
•
•
Personal income
Business income, assets & inventories
Real estate holdings
Direct liabilities and debt service
Contingent liabilities
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2
Why?
• “Because the examiner told me to…”
• Find the weak thread(s)
• How do they impact the stronger
threads?
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When?
• Debt repayment for…
– “Mom & Pop”  “Self-employed”
– Multiple entities not directly related
– Multiple guarantors
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3
How?
• FINPACK Global Cash Flow uses tax
return data
– Balance sheets optional
•
•
•
•
One primary entity
Multiple other entities
Multiple personal
Proposed new income / debt payments
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How?
• Show each business / entity / personal
cash flow and debt coverage
• One “global” merged cash flow and
debt service
– No double-counting income
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4
Slim Jim Sample
1040 - Example #1
Tax year
2010
2011
2012
Tax Return
Tax Return
Tax Return
7. Wages, salaries, tips, etc.
8a. Taxable interest
8b. Tax-exempt interest
9a. Ordinary dividends
10. Taxable refunds of state and local income taxes
11. Alimony received
12. Business income or loss
13. Capital gain or loss
14. Other gains or losses
15a. IRA distributions
15b. IRA distributions, taxable amount
16a. Pensions and annuities
16b. Pensions and annuities, taxable amount
17. Rental real estate, royalties, partnerships, etc.
18. Farm income or loss
19. Unemployment compensation
20a. Social security benefits
20b. Social security benefits, taxable amount
21. Other income
22. Total income
34,500
68
11,413
6,487
67,422
119,890
25,838
69
14,880
7,682
43,983
92,452
32,358
62
11,265
6,393
152,034
202,112
36. Total adjustments
37. Adjusted gross income
119,890
92,452
202,112
11,351
21,668
20,043
-
-
-
119,890
119,890
11,351
11,087
65,000
32,452
92,452
92,452
21,668
7,934
65,000
-2,150
202,112
202,112
20,043
17,418
65,000
99,651
12,092
6,240
5,000
23,332
12,092
4,800
5,000
21,892
12,092
4,800
5,000
21,892
19
19
9,120
24
24
-24,042
11
11
77,759
Statement type
60. Total tax
Child support, other divorce income
Cash Flow for Debt Service
Total income
+ Other non-taxable income
- Non-recurring income
+ Non-recurring expense
= Recurring total income
- Federal income tax
- State, other taxes
- Living expenses
= Cash available for debt service
Personal Debt Payments
Mortgage payments
Vehicle payments
Credit card payments
Other debt payments
Total annual debt payments
Debt to total income
Debt to recurring income
Personal debt margin
FINPACK © Center For Farm Financial Management
University of Minnesota
Prepared by: Wynn Richardson
University of Minnesota
Example #1
• Other information…
– Married couple, sole proprietor
– All debt listed on the farm balance sheet
• Approach to global cash flow?
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6
Example #2
• Same couple from Example #1
• Partnership with in-laws on apartment
building
– $1.2 million loan balance
• NOW what?
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Copyright © 2013 University of Minnesota
7
Slim Jim Sample
Global Example #2
Actual $
2010
2011
2012
Average
Sch F - Slim Jim Farms
Net farm profit or loss
+ Other non-taxable income
+ Depreciation
+ Interest (total)
- Interest on current debt
- Non-recurring income
+ Non-recurring expense
= Cash available for debt service
Debt payments
Debt service coverage ratio
Debt repayment margin
67,422
215,605
107,214
76,105
314,136
89,889
3.49
224,247
43,983
288,163
126,626
47,999
410,773
113,996
3.60
296,777
152,034
211,414
111,050
54,171
420,327
120,798
3.48
299,529
87,813
238,394
114,963
59,425
381,745
108,228
3.53
273,518
8825 - Prairie Home Apartments
Net rental real estate income
+ Depreciation
+ Interest
- Interest on current debt
- Non-recurring income
+ Non-recurring expense
= Cash available for debt service
Debt payments
Debt service coverage ratio
Debt repayment margin
42,695
48,000
82,250
172,945
114,520
1.51
58,425
40,173
48,000
80,089
168,262
114,520
1.47
53,742
39,537
48,000
77,783
165,320
114,520
1.44
50,800
40,802
48,000
80,040
168,842
114,520
1.47
54,322
1040 - Jim & Sarah
Total income
+ Other non-taxable income
- Non-recurring income
+ Non-recurring expense
= Recurring total income
- Federal income tax
- State, other taxes
- Living expenses
= Cash available for debt service
Debt payments
Debt service coverage ratio
Debt repayment margin
141,238
141,238
11,351
11,087
65,000
53,800
23,332
2.31
30,468
112,539
112,539
21,668
7,934
65,000
17,937
21,892
0.82
-3,955
221,881
221,881
20,043
17,418
65,000
119,420
21,892
5.45
97,528
158,553
158,553
17,687
12,146
65,000
63,719
22,372
2.86
41,347
1040 - Ole & Lena
Total income
+ Other non-taxable income
- Non-recurring income
+ Non-recurring expense
= Recurring total income
- Federal income tax
- State, other taxes
- Living expenses
= Cash available for debt service
Debt payments
Debt service coverage ratio
140,598
140,598
16,872
11,037
75,000
37,689
26,913
1.40
143,922
143,922
17,271
11,298
75,000
40,353
26,913
1.50
144,394
144,394
17,327
11,335
75,000
40,732
26,913
1.51
142,971
142,971
17,157
11,223
75,000
39,591
26,913
1.47
FINPACK © Center For Farm Financial Management
University of Minnesota
Prepared by: Wynn Richardson
University of Minnesota
Slim Jim Sample Global Cash Flow Analysis: Global
Page 2
11/8/2013 9:05:14 AM
Actual $
Debt repayment margin
Global Debt Coverage
Business and personal cash available for debt service
- Business income included in personal income
= Net global cash available for debt service
Total debt payments
Total debt coverage ratio
FINPACK © Center For Farm Financial Management
University of Minnesota
2010
10,776
2011
13,440
2012
13,819
Average
12,678
578,570
110,117
468,453
254,654
1.84
637,324
84,156
553,168
277,321
1.99
745,798
191,571
554,227
284,123
1.95
653,897
128,615
525,283
272,033
1.93
Prepared by: Wynn Richardson
University of Minnesota
Navigating the Maze
•
•
•
•
Personal vs. Business debt coverage
Net vs. Gross
Recurring vs. Non-recurring
Earnings vs. Distributions
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Personal vs. Business
• Personal or Consumer debt coverage
measure is Debt to Income
– 40% is acceptable
– 36% is preferable
– Lower is better
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8
Personal vs. Business
• Business measure is Debt Coverage
Ratio
– 1.25% is preferable
– Higher is better
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Home Mortgage Example
• Desired Debt to Income  28 – 36%
• Equivalent Debt
Coverage Ratio  3.6 to 2.8
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9
Business Example
• Debt Coverage Ratio  1.5
• Equivalent Debt to Income  67%
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Personal vs. Business
• Merging personal and business,
FINPACK uses Debt Coverage Ratio for
global measure
• What is a “good” measure?
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What is a “Good” Measure?
• 40% Debt to Income
– 60% remaining for living expenses, taxes,
toys, etc.
• 1.25 Debt Coverage Ratio
– Business has covered expenses with some
cushion for taxes
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Net vs. Gross
• What is a “good” measure?
– Are you including personal living expenses?
• “Net” method  yes
• “Gross” method  no
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11
Net vs. Gross
• Net method similar to business range
1.25
1.50
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Net vs. Gross
• Gross method has higher ranges
1.75(?)
2.00(?)
– Adjust targets for “lifestyle”
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12
Recurring vs. Non-recurring
• Easy answer  Only include recurring
items
– What is recurring?
• Averaging over several years flattens
out highs & lows
– Non-recurring may be “normal”
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Recurring vs. Non-recurring
• Non-recurring items leads to more
questions
– What was done with the proceeds?
– Answer is likely not on tax return
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13
Earnings vs. Distributions
• 1040 Schedule E shows pass-through
entity income / losses
• K-1’s also shows guaranteed payments
and distributions
• Who wins?
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Earnings vs. Distributions
• Control
– Less than 30% or clear minority position
• Use K-1 net distribution
• Contingent liability (share of debt service)
– More than 70% or clear control
• Use entity earnings (Net profit + Depreciation +
Interest)
• Include entity debt service
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FINPACK is a great tool, but it
is no substitute for thinking!!!
Clark Garland
University of Tennessee
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