Importance and Meaning of Global Cash Flow in Lending

Importance and Meaning of Global Cash Flow in Lending




Financial institutions use Global Cash Flow examination (GCF) to estimate the risk involved in group lending based upon the collective cash flow of the group obtaining a loan. When sourcing financing, you should be aware of some shared errors encountered in GCF examination. Mistakes such as these can cause a loan request to be denied and so care must be taken to avoid them.

1. Failure to combine business and personal financial statements into a single cash flow statement.

Technically, such a mistake would not already qualify the end consequence as a GCF examination; however, it does occur. In the event that this problem arises, the resulting GCF will be distorted. consequently, it is important to estimate all of the demands on all cash flow in order to determine the likelihood that the borrowing entity may experience problems repaying the loan, or possibly already go into into default. Simply gathering and evaluating the financial information of all of the individuals and groups participating does not average that a GCF examination has been performed; the information must be evaluated as a whole, and included as such into a proper GCF examination. A truly global examination combines all personal and business financial statements into a single GCF. When reviewing a GCF, always remember to look for the “net” in net cash flow.

2. Failure to recognize ‘double-counted’ income.

In the time of action of avoiding the first mistake, a shared oversight that the inexperienced analyst makes is in double-counting income. This usually happens when an analyst fails to deduct distributions to shareholders when giving a borrower credit for EBITDA. This problem can then be exaggerated if a shareholder or guarantor is given complete credit for earnings instead of distributions on 1040 Schedule E part II. In the event that a shareholder’s K-1 earnings are additional to that, the problem is intensified already further. situations like this highlight the need for accuracy and attention to detail when calculating GCF. Fortunately, correcting this kind of error is generally a simple procedure; noticing double-counted income is the real issue. By following accepted accounting principles, the vigilant financier can easily recognize when this problem has occurred.

3. Failure to use the appropriate tax forms.

Proper GCF examination relies on tax returns, and their supporting schedules, to determine the outcome. Since a comprehensive and accurate picture is what a GCF seeks to provide, the necessary documents can include anything from simple individual returns to combining multiple partnership with corporate tax returns in order to get a true picture of GCF. for example, K-1 forms, used to report a partner/shareholder’s distributed proportion of income, are basic in revealing applicable individual distributions and contributions. Without these, a true picture of cash flow cannot be established, and in such situations, the accuracy of cash flow can be questioned based on the reliability of using paper transactions which have no relation to real cash flow. When GCF miscalculations are made due to the omission of the appropriate tax forms and other financial information, serious doubts are raised which call into question a borrower’s ability to service the debt. Thoroughness is meaningful to verifying that all required tax forms have been included in preparing a GCF examination.

4. Failure to be consistent when performing GCF examination.

In order to keep consistent, one needs to make sure that they consistently use the same procedure to calculate GCF. To do otherwise will produce deviations in GCF examination which leads to unreliable risk management and unstable pricing. In addition, regulators are keen on locating inconsistencies, and once they notice these red flags, they will continue to examine further; possibly resulting in meaningful financial loss for the offending institution.

For these reasons, a uniform method of conducting GCF examination, based upon sound accounting principles, must be implemented in order to prevent errors of inconsistency. Spreadsheets are often found to be the source of such variances; consequently, creating a uniform spreadsheet is a meaningful step in eliminating discrepancies. Familiarity with the policies of the organization conducting a GCF examination is basic in sourcing financing.




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