Cash Flow Analysis &

Projections
2019

Prepared by
Amr Mehesen
Course Objectives and Learning Outcomes
The main objective is to provide
credit trainees with the knowledge
and skills they need to assess
business cash flow.
repayment ability of the borrower.
Loans are repaid with cash and only
cash.
Learning Outcomes:
•The main dimension is to assess
strengths and quality of
client/sponsor cash flow.
•What is the purpose of cash flow
Statement ?
• The capability to distinguish between
operating, investing and financing
cash flows?.
• To be familiar with Six blocks format
Cash Flow Statement.
• TO be familiar with Debt service
coverage ratios.
• Develop Cash Flow Analysis Skills.
• Developing cash flow projections.
• Developing sensitivity analysis
(Stress Test Scenario).
Cash Flow : Lender’s perspective

“Numbers talk and analysts need to listen”

A simple quote from Mr. J. P. Morgan

“Lending is not based primarily on money or
property. No sir, the first thing is character”
What is the Cash Flow Statement?

• Before GAAP became a provider of the cash flow

statement , lenders worked out a similar statement
, known as “ the sources and uses of cash
statement”.

What are needed to prepare Cash Flow Statement ?

• Two consecutive balance sheets and the current
year’s income statement will be needed to prepare
the cash flow statement.
Basic Cash Flow Concepts
The Income Statement is not a Cash Flow Statement:
cash receipts and disbursements do not equal revenues
and expenses for two reasons:

i. Due to accrual accounting nature of the net income.

ii. A firm receives cash from sources that are not directly
related to the earnings process and therefore are not
included in net income. These include cash from
capital increase or bonds, new bank loans, selling fixed
assets, etc. Also, the firm disburses cash in
transactions not related directly to the earnings
process.
Cash Flow Statement’s Perspectives
• Borrowers , lenders, and accountants differ in how they
look at loan repayment.
• Borrowers feel that loans are repaid from profit or
collateral.
• Lenders know that cash, and ONLY cash repays loans.
• Accountants look at the long term profitability of the
company when evaluating loan repayment.
Purpose of Cash Flow Statement ( Lender’s perspective)
 The cash flow statement allows the lenders evaluate the
managerial decisions regarding cash.

 Help the lender predict whether and why a company would seek
a loan and whether it has the capacity to repay debt.

 Evaluate the size, composition, and stability of operating cash

flow.

 Determine how wisely and prudent the company manages its

cash

The analyst focuses on the company’s ability to produce cash

that is used to
 Repay debt
 Invest in fixed asset
 Support sales growth
CASH SOURCE AND USE

Source of cash Use of cash

Assets Decrease Increase

Liabilities Increase Decrease

Equity Increase Decrease

Cash Flow Analysis
In cash flow analysis you need to:
• Distinguish between profit and cash flow
• Understand the three categories of cash flow
 Operating
 Investing
 Financing
• Analyze the quality of the cash flow.
• Identify operating and extraordinary demands on cash
flow.
• Isolate historical cash flow available for debt service.
•Project cash flows that will be available for future debt
service.
Cash Flow Methods

There are different methods to submit Cash Flow

Statement such as :-
1. Direct Cash Flow Statement.
2. Indirect Cash Flow Statement.
3. Six Blocks Cash Flow Statement (Chase format).
4. UCA (Uniform Credit Analysis)Cash Flow Statement.
(It is called “Lenders’ cash flow statement”)

Each financial institution has its preferred method of

analyzing and presenting cash flow.
Cash Flow Methods

• Some institutions use the direct method and some

use the indirect method, yet others use a hybrid
method developed for their particular purposes.

• The Statement of Financial Accounting Standards

(SFAS) allows, under SFAS No. 95, either the direct
or indirect method. Regardless of the method, the
primary purpose of SFAS No. 95 is to provide
managers, investors, lenders and other interested
institutions with additional information about the
financial health of a company
Cash Flow Methods

• The beginning and ending balances of cash are

shown on the company's balance sheets for the
previous and current years, and the bottom of the
cash flow statement reconciles beginning cash
with ending cash.
• The relationship, stated in general terms, is as
shown below:

Beginning Balance Sheet Statement of Cash Flows Ending Balance Sh

31st Dec. 2014 31st Dec. 2015 31st Dec. 2015
Beginning Cash + Cash receipts - Cash Payments = Ending Cash
DIRECT VS INDIRECT CASH FLOW

What are the differences between direct and indirect

methods?
 Direct cash flow is known as the “top down” approach”.
Starts with net sales on the income statement and adjusts
the corresponding balance sheet account (sometimes
referred to as the “buddy accounts”).

 Indirect cash flow is known as the “bottom up” approach in

that it starts with the “bottom” line on the income statement
(net income after tax), adds depreciation and amortization,
and then adjusts for changes in balance sheet operating
accounts to arrive at Operating Cash Flow.
Direct Method Format
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers
Cash paid to employees
Cash generated from operations Summary of the previous items in this section
Interest paid
Income taxes paid
Net cash from operating activities Summary of the previous items in this section
Cash flows from investing activities
Purchase of fixed assets
Proceeds from sale of fixed assets
Net cash used in investing activities Summary of the previous items in this section
Cash flows from financing activities
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Principal payment under capital leases
Dividends paid
Net cash used in financing activities Summary of the previous items in this section
Net change in cash and cash equivalents Summary of all previous subtotals
Indirect Method Format
Cash flows from operating activities
Net income
Adjustments for:
Depreciation and amortization
Provision for losses on accounts receivable
Gain/loss on sale of Asset
Increase/decrease in trade receivables
Increase/decrease in inventories
Increase/decrease in trade payables
Cash generated from operations
Cash flows from investing activities
Purchase of fixed assets
Proceeds from sale of fixed assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Dividends paid
Net cash used in financing activities
From the net income line on the income
statement
Corresponding line items in the income
statement
From the change in the allowance for doubtful
accounts in the period
From the gain/loss accounts in the income
statement
Change in trade receivables during the period,
from the balance sheet
Change in inventories during the period, from the
balance sheet
Change in trade payables during the period,
from the balance sheet
Summary of the preceding items in this section
Itemized in the fixed asset accounts during the
period
Itemized in the fixed asset accounts during the
period
Summary of the preceding items in this section
Summary of the preceding items in this section
SIX BLOCKS Cash Flow Statement (Chase)

SIX BLOCKS FORMAT DIVIDES THE

CASH FLOW STATEMENT INTO SIX
GROUPS OR 'BLOCKS

NOPAT ( NORMALIZED OPERATING PROFIT AFTER TAXES)

COPAT ( CASH OPERATING PROFIT AFTER TAXES)
CACO (CASH AFTER CURRENT OPERATIONS)
CBLTU (CASH BEFORE LONG TERM USE)
CBF (CASH BEFORE FINANCE )
NET CASH FLOW
 SIX BLOCKS Cash Flow

2- CASH OPERATING PROFIT AFTER TAX (COPAT)

Balance Sheet Income
Statement
NOPAT
+ Depreciation (RS)Depreciation
+ Amortization (RS)Amortization
COPAT
3- Cash After Current Operations (CACO)
Balance Sheet Income Statement

COPAT
Working Investment Items
(WI):
 Accounts Receivable (Y1-Y2)
Net Inventory:
Raw Materials (Y1-Y2)
Work in Process (Y1-Y2)
Finished Goods (Y1-Y2)
Others (Y1-Y2)
Advance Payments (Y1-Y2)
Accounts Payables (Y2-Y1)
Accrued Expenses (Y2-Y1)
Down Payments (Y2-Y1)
WI
 Due from Sis Companies (Y1-Y2)
 Due to Sis Companies (Y2-Y1)
 Other Current Assets (Y1-Y2)
 Other Current Liabilities (Y2-Y1)
CACO
4-CASH BEFORE LONG-TERM USES (CABLTU)
Balance Sheet Income Statement
CACO
Financial Payments (FP):

- Interest Expense (SS) Interest Expense

 Interest Payable (Y2-Y1)

CPLTD - Y1 (Previous year).

Total FP

CBLTU
5. CASH BEFORE FINANCING (CBF)
Balance Sheet Income Statement
CBLTU
 Net Plant Net PP&E (Y1-Y2) (SS) Depreciation
Expenditures (SS) Sale of Plant
 Intangibles Net Intangibles (Y1-Y2) (SS) Amortization
 Marketable (Y1-Y2) (SS) Interest Income
Securities
 Investments (Y1-Y2) (SS) Dividends
Income
(SS) Investment G/L
 Non Current Asset (Y1-Y2)
 Non Current (Y2-Y1)
Liabilities
+/- Unusual Items (SS) Unusual items
+/- Sundry (SS) Sundry Expense
(SS)Sundry Income
+/- FX G/L (SS) FX G/L
CBF
6- Net Cash Flow

Balance Sheet Income Statement

CBF
 STD (Y2-Y1)

 LTD CPLTD Y2 + LTD (Y2-Y1)

 Grey Area Provisions (Y2-Y1) (SS) Provisions
 Net Worth Net Equity (Y2-Y1) (RS)Dividends
Declared
(RS)NPAUI
- Dividends Paid Dividends Payable (Y2- Y1) (SS)Dividends
Declared
Net Cash Flow
Description
Beginning Cash Balance Sheet Cash (Y1)
+/- Net Cash Flow Cash flow Statement
= Ending Cash Equal to Balance Sheet Cash (Y2)
 CASH Collected from Customers
Sales value are not the same as cash
collected from sales.

Sales EGP 500,000

Change in Recv. EGP (150,000)
Cash Collected from Customers
EGP 350,000
Cash Paid to Suppliers
Deduct your Cost Of Goods Sold (COGS)
Increasing Inventory is an outflow of cash, while
reducing it is a source of cash.
Change in accounts payables affect cash flow. This time
higher is better!

COGS USD (400,000)

Changes in Inventory USD (20,000)
Changes in Trade Payables USD 70,000
Cash Paid to Suppliers USD (350,000)
Important Notes on Six Block CFS
1.Change in Net Plant Expenditures (NPE)

(Beginning Net Fixed Assets –Depreciation Exp)- Ending Fixed Assets) +

(Capital Gain) / – (Capital Loss).

2. Dividends Paid
Dividends declared + ∆ Dividends Payable

Dividends decaled = Y2 R.E – (Y1 R.E+NPAUI) ∆ RESERVES

3. Change in Net Equity

( Ending Equity – Beginning Equity ) – NPAUI + Dividends Declared

4. Change in LTD value

( Ending CPLTD + Ending LTD) – Beginning LTD

Important Notes on Six Block Format
5- CPLTD is related to the previous year
6- Interest Expense is related to the current year

Block # 4 (Cash Before Long Term Use)

Consider ( FX gain or loss , sundry income or sundry
expense) that have been added back or deducted in
block # 1.

7- Change in Investment Value

( Y1 investment value + investment income or –
investment loss) – Y 2 investment value ).
Cash Flow Analysis
Block # 1,2 &3 (NOPAT, COPAT,CACO)
The objective is to
• Determine the operating cash flow drivers
• How the company is managing operating cash flow and
• Determine why the company is generating positive or
negative cash flow from operations.
• Is the operating cash flow is greater or lower than net
income?

Block #4 CACO
Is Cash after current Operations (real cash) enough to
meet the financial payments ? and the surplus will cover
the NPE or not as a conservative approach.
 Cash Flow Analysis
Block #5 CBLTU
•Help to know how much cash the company spent on CAPEX to
support the growth.
•Help to know how much cash company has spent on investment
or collected from sale of investments such as acquisitions, sale
of discontinued operations, sale of stocks or buy stocks.
•What about the sources of finance to fund the new investments
(from equity or operating cash flow surplus)?

Block #6 CBF
•This block is considered very important because it shows
where the financing cashflow are coming from?
Such as the increase / decrease in short term debt, new LTD,
how much cash the company has spent on dividends, capital
increase (is there fresh funds or cash diversion?
•Also, you can explore the source of finance to fund the
increased working investment and new CAPEX.
CASH SOURCES AND USES
Sources of Cash Uses of Cash

NOPAT Increase in Working

DEPRECIATION Investment Items
Decrease in Working Purchase of Fixed Assets
Investment Items

Sale of fixed assets &  Cash Pool  Repayment of debt an

Investments Payments of dividends

Income & Dividend Interest payments

Income
Increase in debt Taxes Paid

Increase in Equity Net Loss in operations

Analysis of operating cash flow
•Make sure to analyze what uses of funds are financed by
which sources of funds.

•Make analytical conclusions about the matching of

sources and uses of funds.

•It is preferable for your debt to be repaid out of

operating cash flows, rather than to be paid from
additional debt or the disposal of assets, especially
operating assets.

•If the company can pay its interest and CPLTD from
operating cash flow and have cash remaining, then the
lender is looking at a quality credit, so long as the
operating cash flow is sustainable.
Cash Flow Analysis

For funding purposes, the primary sources of cash

for operating and investing activities will be:
 Cash from operations.
 Cash from external financing (either debt or
equity).
 Drawing down on existing cash balances.
 Debt Service Coverage Ratios (DSCR)
There are two ratios that will help you evaluate cash flow:
 FCFNOPAT(1)= NOPAT – (Financial Payments + Dividends Paid)
 FCFCOPAT(2) = COPAT – (Financial Payments + Dividends Paid +
Plant Maintenance).

DSCR EBITDA = EBITDA

(Interest Exp. + Previous Year CPLTD)
Debt Service Coverage RATIOS

DSCR (1) NOPAT = NOPAT

(Interest Exp. + Previous Year CPLTD)

DSCR (2) NOPAT = NOPAT

(Interest Exp. + Previous Year CPLTD + Dividends Paid)

DSCR (1) COPAT = (COPAT–Plant Maintenance)

(Interest Exp. + Previous Year CPLTD)

DSCR (2) COPAT = (COPAT–Plant Maintenance)

(Interest Exp. + Previous Year CPLTD + Dividends Paid)

 CASH FLOW RATIO ANALYSIS

 A ratio of greater than 1:1 indicates no reliance

on external financing to make the required
payments.
 A ratio of less than 1:1 means that a company
must raise external financing elsewhere (under
its short-term line of credit, from new long-term
debt, or from shareholders) to service its
obligations to lenders and to stockholders and to
fund CAPEX requirements.
Cash Flow Analysis

 Ratios based on cash flow measure a firm’s ability to

service existing debt and its capacity for additional
debt.
 Coverage ratios are useful, especially in examining
trends, but must be supplemented by a study of
cash flow statements to identify where cash was
used—for example, working capital, debt
repayment, capital expenditures, dividends, or
treasury stock.
 Surplus cash flow is like an extra oxygen to breath
smoothly.
CASH FLOW Coverage RATIOs
When NOPAT is used ?
It is a conservative measure and mainly used in the trading
activities or manufacturer with fully depreciated assets.

When COPAT is used?

It is mainly used with the manufacturers provided that the
remaining life of fixed assets is long.

What is the difference between EBITDA and COPAT ?

 COPAT = EBITDA –TAXES Paid
CASH FLOW RATIO ANALYSIS

These ratios have severe limitations because:

 It implies that all net income has equal potential
 It does not account for major demands on cash flow
such as:
 Dividends
 Working Capital changes because of sales growth
or declining efficiency
 It implies that loan repayment will have a first claim
on cash flow.
Analysis of operating cash flow
It is important to distinguish between the two
types of cash flows included in this category:
Profits and cash Conversion cycles.
Cash flow derived from profit is dependent on
business fundamentals, whereas the cash
Conversion cycle is driven by swing factors.
• Positive operating cash flow can be
attributable to strong profit margins
(fundamentals).
• Changes in the swing factors reflect a
company’s ability to manage its working
investment or W.C items.
Analysis of Operating Cash flow
Analyzing cash flow means determining if there are
sufficient high-quality and continuous sources of funds to
meet all the financial demands placed on the cash flow,
while still leaving enough cash to repay your customer’s
obligations.

Take care,
Your customer can have positive cash flows but be in a
declining financial condition—a scenario that does not
bode well for debt repayment over the long-term.
However,
The opposite is also true, in that a growing company can
have negative cash flow but exhibit profitable operations.
In this case, you need to understand the nature of the
growth and assure yourself that management has control
of the expanding business.
Analysis of Cash flow
To analyze the demands on cash flow you should:
• Look carefully at the statement of cash flows and identify
the negative flows within each category.
• Consider whether each negative cash flow is a one-time,
irregular event or if it is likely to be repeated.
• Decide if the event or transaction producing the
negative cash flow is within the control of management.
• Compare historical demands with historical sources, and
expected future demands with expected future sources.
Analysis of operating cash flow
CASH FLOW PROJECTIONS
We are lending to businesses, not to financial
statements.
The analyst must think beyond the financial
statements by examining the bank’s position as a
lender.

Go beyond the statements, talking to management,

suppliers, competitors and others. “Good analysis
requires a creative and inquiring mind”.
competitors for cash are suppliers, shareholders,
employees and contingent creditors.
Analysis of operating cash flow
The following factors can contribute to “negative
operating cash flow”: (NOCF /CACO )
 Operating losses due to insufficient sales volume, poor
pricing of product, or poor cost controls.
 Inefficient management of Inventory and receivables.
 Growth in sales and current assets.(inventory build up)
 Seasonal factors (low season, high inventory; operating
cash flow is consumed)
 Changes in the business cycle (Cyclical
developments), recession, booming ….
 Transition period in a company’s life cycle.
Analysis of operating cash flow (continued)

 Transition period in a company’s life cycle.

A company’s profits and operating cash flow have

certain relationships depend on the stage of life cycle
in which it operates. That is, operating cash flow may
be positive or negative and higher or lower than
profits depending on whether the company is in the
start up , growth , maturity or decline stage of its life
cycle.
ANALYSIS OF INVESTING CASH FLOWS
This includes cash flow from investment activities, such as
 Buying and selling plant and equipment,
 Rental properties, Stock in affiliates or subsidiaries.

 Investing activities are negative for most companies

until they enter a declining stage in their life cycle, i.e.
they reinvest less than they dispose.
 If a company has positive investing cash flows, you
should determine if this is a one-time event or a trend.
 If the investing cash flow is negative, ask questions to
determine future requirements and explore the
lending opportunities.
ANALYSIS OF FINANCINGCASH FLOWS

Financing activities include external sources of

debt and equity such as

 Increase in short term debt

 New LTD
 Dividends paid
 Capital increase
Cash Flow Analysis
Examples of management decision that affect cash flow are :
 Credit or collection policies that result in accounts
receivable increase.
 The amount of inventory that is kept on hand to support
sales.
 Accounts payable policies that affect supplier relations
and cash requirements.
 Fixed assets additions that increase capacity;
replacements that improve operations.
 Debt structure – aggressive repayment versus the life of
assets.
 Dividends policy – excessive dividends to support an
owner’s lifestyle.
Analysis of Cash flow
TYPES OF CASH FLOW
• The most desirable cash flows are those from authentic
and repeatable revenues and related non-cash expenses.
They are the cash flows that improve margins of
protection because they are repeatable and they are the
result of the company’s economic earning power.

• The second most desirable sources are improvements in

asset efficiency and the proceeds of additional equity.
Improved efficiency might not also be repeatable, but it is
a sign of good management and enables the company to
improve its return on assets while maintaining the same
profit margins.
The proceeds from additional equity are not usually a
predictable recurring source of cash.
Analysis of Cash flow
TYPES OF CASH FLOW
• The least desirable sources are flows from additional
debt or from the sale of assets. Additional debt, while it
may have benefits for your customer, increases leverage,
can reduce profitability by adding to the interest burden,
and can reduce liquidity by adding to annual principal
debt service (all of which weaken your margin of
protection).

Sale of an asset may also have immediate onetime

benefits, but if it is an operational asset, it can reduce the
future earning power of your customer.
Analysis of Cash flow

Using the cash flow statement, the lender can

quickly answer the following cash flow questions:
 What is causing more cash to go out than come
to in? Purpose of the loan
 What has changed in the company’s business
operations? Repayment of loan.
 What is the possibility of these changes will
continue in the future? Risk of the loan.
 What is the proper loan structure? Term of the
loan.
Analysis of Cash flow

CASH FLOW QUALITY

Cash flow quality depends on the source and
repeatability of the cash flow. Cash flow sources
important to you are:
 Those that are sustainable and reasonably
predictable over the ensuing three to five
years.
 Those that increase your margin of protection
and indicate your customer’s economic
viability
CASH FLOW PROJECTIONS

The purpose of a projection

is to help determine whether your customer can repay your
institution’s debt based on reasonable estimates
about the company’s future operating strategy and
management’s ability to implement it.

Cash flow projections are:

•Quantitative assessment of the future financial

performance and financing needs of a company
•Forecast of a company’s ability to repay debt from its
internally-generated cash
•Test of the vulnerability of a company to possible risks that
may affect its repayment capacity
KEY PROJECTION REFERENCE POINTS

There are four key reference points that are used to build a
projection:
1. Past operating results of a company.
2. Objectives and goals of a company for the future as
defined by management and outlined in a business plan.
3. Likely impact of economic, competitive, and regulatory
factors on a company.
4. Supplemental action plans and alternatives available to
help management meet performance projections

Of these four reference points, the first one represents hard

data: the historical operating results. The other three points
represent a subjective assessment.
CASH FLOW PROJECTIONS
CASH FLOW DRIVERS
By understanding the quality and demands of cash flow, you
can utilize the following cash flow-related ratios to fine-tune
the analysis and stress test the company’s ability to repay
debt.
Not surprisingly, ratio analysis focuses on the business
fundamentals and the swing factors.

In combination, they are the primary determinants of cash

flow. Together, business fundamentals and swing factors are
sometimes called “cash flow drivers.” These are the critical
ratios that require “what if” analysis when reviewing any
projections for the company.
CASH FLOW PROJECTIONS
We analyze Business Fundamentals using four ratios that
evaluate the company’s key profitability components. We
analyze Swing Factors using three turnover ratios that relate to
the company’s efficiency in managing its working capital
assets.

Business Fundamentals
With the exception of sales growth, the following ratios are
measures of performance:
1. Sales growth
2. Gross profit margin
3. SG&A
4. EBITDA Margin
CASH FLOW PROJECTIONS
Swing Factors
Swing factors, are also called efficiency ratios. These
swing factors bring the cash flow effect of the current
section (working capital assets) of the balance sheet
into the focal point of the credit analysis.
 A/R DOH
 INV. DOH
 Adv. pay DOH
 A/P DOH
 D/P DOH
 CASH FLOW PROJECTIONS
• What about the owner’s plan for the future?
• How fast do they expect to grow, and how do they plan to
achieve this growth?

 Higher level of inventory is needed to support larger

sales, and higher sales will tie up more cash in
accounts receivables. Distinction is made; we will need
a plan to finance fixed assets and a plan to finance
trading assets.
 The relationship manger must temper the enthusiasm
of the client while maintaining a tone of support. We
can work towards that, but maybe not all in one year.
 The greater the debt burden, the greater is the drain
on cash and the greater is the risk of a cash shortage”.
CASH FLOW PROJECTIONS

Companies with low operating leverage, high

proportion of trading assets to total assets – are in the
best position to react to a drop in revenue because
trading assets are collected, both the investment in
assets and corresponding debt can be reduced.
Companies with high proportion of fixed assets are
more vulnerable to a revenue shortfall.

 High operating leverage is less risky- the borrower is

less likely to default, if majority of fixed assets are
financed by equity
Break even cash flow calculates the minimum sales level
required to service the debt service.
 CASH FLOW PROJECTIONS
(New Money Need)

Proj. Current Liabilities

Projected Known Proj. LT Liabilities
Total Assets Known Proj. Grey Area
Known beginning Net Worth
NMN

NMN= Projected Total Assets - Projected Known Liabilities & Equity items

NMN is the needed additional finance to fund the assets

growth or the expansion. There are two sources of finance
NMN = ∆ R.E + N.D.N

Projected NPAUI - dividends New Debt Need

CASH FLOW PROJECTIONS

This amount of NMN is very important to complete the

projections and balance the company’s balance sheet.

∆ RE=(NOP-NOI-(NDN×IR%))×(1-D)×(1-T)

NOI = Other Non -Operating Items

NDN = New Debt Need
IR = Interest Rate
D = Dividends rate = Payout Ratio
T = Taxes Rate
CASH FLOW PROJECTIONS

NPAUI Formula:

NPAUI=(NOP-NOI-(NDN×IR%))×(1-T)

Dividends = NPAUI X Div. Rate

Legal Reserve = NPAUI X 5%
Total Reserves = Historical Reserves+ (NPAUI X 5%)
SENSITIVITY ANALYSIS
The purpose and function of a sensitivity analysis are to:
 Identify and assess the key/critical financial variables.
These variables, when changed, will positively or negatively
affect the future financial performance of the company and
its ability to service debt.
 Identify what would cause the change in these critical
variables (external factors, management actions, and so
forth).
 Determine the amount of change in the drivers that can
occur without materially affecting your customer’s ability to
service its debt.
SENSITIVITY ANALYSIS

The primary reasons you should conduct a thorough

sensitivity analysis include:
 The analysis enables you to determine whether your
customer can repay its debt in less favorable business
and economic circumstances.
 It shows whether the amount of financing requested is
sufficient given all the demands on the company’s cash
flow.
 It indicates whether you have identified all the key
areas in your customer’s operations and financial
condition that need to be monitored throughout the life
of a loan, so that deterioration in these key areas does
not adversely affect its repayment.
SENSITIVITY ANALYSIS

The primary reasons you should conduct a

thorough sensitivity analysis include:

It determines, in the light of prospective changes, the

most reasonable loan structure.

 It enables you to say that all the possible

developments that might relate to the repayment of
your customer’s debt have been considered and
therefore the risk has been fully evaluated.
SENSITIVITY ANALYSIS

 You might consider doing both a “most likely” case as

well as a “pessimistic” set of projections to ensure that
the debt can be repaid even in the most difficult of
times as delineated by that pessimistic set of
projections.

 It enables you to say that all the possible developments

that might relate to the repayment of your customer’s
debt have been considered and therefore the risk has
been fully evaluated.
Thank You