Q: Address why it is okay to consider the "loans" from his companies to be a part of Mr. Schumacher’s available personal cash flow since he will eventually have to repay the loans at a later period.

A: The company loans to Mr. Schumacher represent cash advanced to him during the period and are accounted for as a personal cash inflow for him during that timeframe. If he does indeed repay the loan at a later date, that cash payment to the company will be accounted for as a personal cash outflow that reduces his personal cash revenue for that period.

It’s useful to note that company loans to owners are frequently converted to distributions or withdrawals by a simple set of accounting entries rather than actually being repaid by the owner. Therefore, we always need to combine the change in loans to owners with distributions made during the same period to arrive at the cash flow impact (cash in/out for the company and cash in/out for the owner) created by this combination of events.

Q: Do you think personal living expenses should be deducted in all personal cash flow calculations?

A: Yes. In the context of creating a meaningful Global Cash Flow statement, it’s important to define the owner/guarantor’s cash flow surplus/deficit as an amount net of all cash inflows and outflows. Personal cash living expenses, cash taxes, and required personal debt service reduce total personal cash revenues in establishing the net personal cash flow potentially available to support the company. In this way we have a much clearer view of personal cash flow available to the owner/guarantor to be used in support of the company’s debt service.

It's essential to estimate and deduct living expenses since living expense are a big consumer of personal cash flow. Note that living expenses are extremely difficult to determine. They are usually very general estimates never documented by the guarantor and are equally difficult for a lender to estimate. This is one of the critical weaknesses in constructing and using a personal cash flow statement to estimate guarantor support.

The other critical weakness is the assumption that the cash flow surplus we compute in this way remains available to service non-personal / outside company debt. Verifying that the calculated net personal cash flow is available calls on us to reference a guarantor's liquid personal assets as presented on the personal financial statement.

Q: How did you come up with $25,184,185 in total guarantees for Mr. Schumacher?

A: The $25,184,185 total guarantees or business loans for which Mr. Schumacher is responsible was calculated as follows: 1) No guarantees identified for Clovis Supply, Ltd. 2) As Managing Member of Fresno Properties, LLC Mr. Schumacher is personally responsible for $2,228,517 of interest bearing debt owed by the company as indicated and implied by information of Schedule K-1 (Form 1065) from Fresno Properties. 3) Footnotes #2 and #3 to Modesto Services, Inc. financial statements indicate that Mr. Schumacher guarantees a $250,000 line of credit and $710,160 of long term debt for a total of $960,160. 4) As General Partner of Sequoia Properties Mr. Schumacher is personally responsible for $21,995,508 of interest bearing debt owed by the company. The total of these items is $25,184,185.

Please review the written solutions and take a look at Slide 37 that consolidates our research of the company financial statements and footnotes for additional information.

Q: Can you add interest expense and depreciation to help cash flow?

A: Yes. Interest expense is an “add-back” in defining Business Cash Flow used in calculating the Debt Service Coverage Ratio. Both depreciation and amortization are non-cash expenses that are also “added-back” in calculating Business Cash Flow.

Note also that interest expense is then added to the current portion of long term interest-bearing debt to define required debt service for the period. Required debt service calculated in this way is then compared to Business Cash Flow to determine surplus/deficit cash flow and establish the Debt Service Coverage Ratio.

Here’s the complete formula for calculating Business Cash Flow:

• Net Income + Interest Expense + Amortization Expenses + Depreciation Expense – Distributions – Loans to Owners

Recognize that Business Cash Flow in this context is simply EBITDA adjusted for Distributions and Loans to Owners.

Q: Can you please explain again why we use Mr. Schumacher’s Available Cash of $272,000 rather than his 2014 Available Personal Cash Flow of $1,757,955 in calculating Global Cash Flow?

A: The $272,000 Available Cash is the “proof of the pudding”. The residual $272,000 Available Cash is all that remains in the form of liquid assets of the $1,757,955 personal Cash Flow Surplus he enjoyed in 2014. We’re unsure of how the Surplus was used, but we do know that it’s gone. Some of it went to Clovis Supply in the form of new loans netting $641,122, some may have been part of the $125,000 loan to yet-to-be-identified Valley Construction, and some may have been consumed by Mr. Schumacher.

The key point to recognize is that only $272,000 is available to Mr. Schumacher in the form of assets that can be readily liquidated in the event he needs to provide immediate financial support to any of the four companies he controls.