Why the UCA Cash-Flow Format Is Preferred (2)

The UCA cash-flow format was designed primarily with the lender in mind. A major advantage for the lender is that it focuses on net-cash income to determine whether the company is liquid on an operating basis. A current ratio or a quick ratio tries to answer that question from a static balance-sheet point of view by relating current assets to current liabilities. But bankers also need to know the answer from an operating perspective. That is to say, did the enterprise cover all cash operating costs and outflows and pay interest on its debt from internally generated fuel? If the net-cash income line on the UCA cash-flow statement is positive, the answer is yes. The same is true of the net cash from operations lines on the other two
cash-flow statement formats.

A lender is even more interested in there being a clear enough and large enough expectation of a “yes” at the net-cash income line over the coming periods to ensure debt repayment as scheduled. If net-cash income isn’t positive in the historical analysis, there may be little reason to think it will be in the future. Most first-rate lenders today expect to see reasonable business projections that show positive net-cash income adequate to service proposed debt. Another key focus of the UCA format, but one not satisfactorily
covered in either of the other formats, is the line called cash after debt amortization. This shows whether the company was able to repay debt as scheduled from internally generated sources.