Q: Why is traditional cash flow so popular if it has so many problems?
A: It is popular because it is so easy to construct. In addition, many lenders may not be aware of the Uniform Credit Analysis (UCA) cash flow statement or may not take the time to understand it.
Q: Is it ever the case where traditional cash flow is negative, but UCA cash flow is positive? If so, is it common?
A: It can certainly happen. The cash impact of a loss can be more than offset by a decrease in accounts receivable or inventory – or some combination of the two – plus an increase in accounts payable or accrued liabilities – or, again, some combination of the two.
Such events are not necessarily common, but they do occur more than we might suspect. The moral of the story is to always confirm or refute the messages from either of the two cash flow proxies – traditional cash flow and EBITDA – by reference to a UCA cash flow statement.
Course overview: Minimum Financial Data for Assessing Borrower Risk