A: Depreciation is really a proxy for the cost of replacing fixed assets.  Even though it is a non-cash charge, it is a proxy for a cash cost that does exist.  When we are considering Business Profit Coverage, what we are looking at is whether or not throe is enough Business Profit remaining in the business, if converted to cash, to service all of the interest bearing debt.  That is different from our cash flow statement and the Financing Gap ratio that we put into effect to control cash flow leakage from balance sheet management.  We put together that UCA cash flow statement and that UCA cash flow statement at Business Cash Income and cash after debt repayment does not include depreciation. 

Please recall that there are two conditions that have to occur to assure sufficient cash flow in the business to properly service the interest bearing debt:  One is that we have Business Profit, in which we maintain depreciation, that is sufficient to properly service interest bearing debt. And the second is that, while we have Business Profit that is sufficient to repay debt as scheduled, we also limit the movements in the balance sheet by that Financing Gap ratio; if that Financing Gap ratio does not change, or if it drops, from period to period, then we are assured of sufficient cash flow from business operations to satisfy the interest bearing debt service requirements.  That’s the key point.  There are two necessary conditions – one is sufficient profitability and the other is sufficient cash flow. 

To read more about the Financing Gap ratio, please see our blog on Identifying and Mitigating Repayment Risks (Session 7), posted February 24 in "Questions: Credit College - Commercial Business:"