Resources for Lenders, Community Bankers & Finance Professionals

Cash flow from operations is viewed over a period of time to see if it is trending positively or negatively. As a lender, cash flow should be sufficient to support loan payments with a coverage buffer. Banks usually want this buffer or coverage ratio to be at least 1.2x higher than debt service requirements. High growth companies typically have negative cash flow from operations, as accounts receivable and/or inventory growth requires cash. As a company's growth rate stabilizes, cash flow tends to increase as working asset growth becomes less demanding. Stable and declining companies sometimes provide the highest cash flow as accounts and inventory shrink. It is extremely important to understand the components of cash flow from operations as it can be skewed in a period by an increase or reduction of a single component. A temporary increase or reduction in either working assets or liabilities at year-end can have a positive or negative impact on cash flow.