Q: I am trying to get my team to understand allocating business debt to the business, then applying cash flow after debt to the personal. Can you help?

A: Our Global Cash Flow webinar works through the construction of a global cash flow and the associated debt service coverage in several steps.

1- First we compute cash flow available to service debt and the associated DSC for a real estate development company - Fresno Properties - that is requesting a $3,100,000 term loan for acquisition of an apartment complex. The cash flow available for debt service is defined as net income for Fresno Properties + interest expense + depreciation and amortization expense minus distributions to the owner and guarantor.

2- Next we compute a first-step global cash flow for Fresno Properties and the associated DSC in which the owner's personal cash flow surplus after personal debt repayment is added to Fresno Properties' cash available to service debt. By so doing, the impact of distributions is neutralized. It has a negative impact on Fresno Properties' cash flow available to service debt but an offsetting positive impact on the owner's personal cash flow surplus.

3- Then we substitute the amount of highly liquid assets at the owner's disposal for his personal cash flow surplus and re-compute global cash flow and the associated DSC.

4- Next, we expand our definition of global to include three other companies under the control of Fresno Properties' owner and compute a global cash flow available to service debt for the four companies, which is the sum of each companies' cash available to service debt. To this sum we add the owner's personal cash flow surplus, which includes distributions and loans from all four companies, and recalculate global cash flow and the global DSC.

5- Finally, we substitute the owner's amount of highly liquid personal assets for his personal cash flow surplus and recalculate the global cash flow and the associated DSC. We rely on the amount of highly liquid personal assets as the better indicator of guarantor support in a crisis than the owner's personal cash flow surplus. The personal cash flow surplus implicitly assumes that the surplus is available to support company debt service in a crisis while, in fact, much or all of the surplus may have been spent or used for long-term, illiquid investments.

The ultimate question we address is whether support from the owner or from any of the other three related companies could meet a Fresno Properties' cash flow deficit.

Course overview: Global Cash Flow