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A.

In banking, we use cash flow analysis to determine lending decisions. Business loans are approved on the strength of the borrower’s ability to repay from income or cash flow and conversion of assets, rather than the refinancing or sale of collateral or capital.  After interviewing the business owner to get an idea of their needs, we request three years of tax returns and a recent profit and loss statement and two months of recent bank statements.  We pull a personal and business credit report. The information collected is used to create a personal financial statement and cash flow analysis.  The cash flow analysis along with the additional documents is used to determine the inherent risk lending to that business and to ensure business applicants are evaluated consistently and lending decisions are not putting the financial institution at an above average risk.

The cash flow analysis is not only used to determine lending decision during the approval process but a new cash flow analysis is created yearly for the annual business loan review.  A business loan review is required annually for the life of the loan. Negative changes to the cash flow analysis could cause the loan to be considered above average risk then it was during the approval process.  For example, businesses with Capital loans where cash flow is deficient and it appears that the loan cannot be repaid except by borrowing elsewhere or liquidating the business operations.

B.

Cash flow analysis provides understanding of a company’s operating, investing and financial activities and determines whether there is cash available to pay short-term obligations.  While a company may appear profitable, without evaluating the statement of cash flows it is impossible to tell the solvency of a company. Operating cash flow is the cash a company earns through services and investments, minus expenses. Net cash provided by operating activity tells whether a company can pay its obligations and invest in assets which will lead to higher earnings in the future.Investment cash flow shows cash coming in through sale of property, plant, equipment and securities and cash going out as a company acquires assets and equipmentFinancing cash flow shows whether a company is creating new long-term debt or whether they are taking on more debt.  This information could be used at any previous company where I’ve been employed. By evaluating operating cash flows a company can determine whether it is warehousing too much inventory, if they are being compensated for services rendered, and whether they have income to pay for liabilities if tough economic times arise in the near future. Investing cash flow will determine whether a company is selling off assets to pay debt or whether companies are acquiring new equipment to progress the company into the future. Financing cash flow will show whether a company is paying down old debt and incurring new long term debt.

I would advise past companies to review their statement of cash flows to gauge the economic future of a company. I would expect positive cash flow from services rendered, companies to be acquiring new assets as older equipment depreciates, and that the company is investing in the future through the purchase of  plant equipment and incurring long term debt