Cash Flow Analysis & Projection Modeling II

A good lender is always conscious that he/she ‘lends into the future’. Repayment of credit extended will almost always be from the future cash flows of the borrower. Financial projections and models allow a lender to have a view about probable business performance of the borrower based on the company/borrower’s historical performance and assumptions about the future. Financial projections and modelling is a key analytical and credit decision making tool used especially for medium to long-term lending where the facility structure is not complex in nature.

COURSE CONTENTS

Principles of Cash Flow Analysis and liquidity

• Accrual accounting versus cash flow – a review
• A Three-Layer Approach to Cash Flow Analysis

Financial Drivers of Cash Flow

• Sources and uses of cash – sales, working capital management, cost management, etc.

Non-Financial Drivers of Cash Flow

• Four Critical Management Areas and its impact on cash flow

The Use and Benefits of Projections Modeling

• Best Case/ Most Likely Case/ Downside Case scenarios

Developing Scenarios and Hypotheses in constructing cash flow forecasts.

Projecting the Income Statement, the Balance Sheet and cash flow forecasts

Sensitivity Analysis

• What is Sensitivity Analysis and how to apply the principles in projections?
• What to Test and How

Developing loan covenants and risk triggers as means of establishing an effective monitoring regime.

LEARNING OBJECTIVES

• Apply a structured approach to cash flow analysis highlighting historical performance as a bridge to future outlook
• Identify the key financial and non-financial drivers and the extent to which they impact cash flows.
• Evaluate cash flows provided by the borrower and be able to identify assumptions that are plausible, aggressive, or conservative
• Apply key business drivers to develop reasonable forward-looking assumptions on both external and internal operating environments.
• Construct financial statements projections (Balance Sheet, Income Statement and Cash Flows) using historical qualitative and quantitative information of a business.
• Perform sensitivity analysis to assess how changes in the variables will affect future borrowing needs and repayment ability
• Use understanding gained in projections and modelling to assist structure appropriate facilities and relevant protection and control mechanisms.

Cash Flow Analysis & Projection Modeling II