Question

With regard to the commercial lending decision tree, How does the UCA cash flow analysis improve the process?

Answer 1

UCA is Uniform Credit Analysis which presents a detailed cash flow analysis for credit officers at commercial banks.

Credit officers use a variety of tools to evaluate the credit worthiness of a borrower including but not limited to revenues, profits, cash flows, assets, liabilities etc. Ratio analysis, cash flow analysis, fund flow analysis, statement of capital expenditure, changes in owner’s equity and several other financial data is analysed.

However, the UCA cash flow presents come distinct advantages over the traditional cash flow analysis. It lets the credit officer to have confidence over:

1. Capacity of a firm to generate sustainable cash flows along its growth based on capital expenditures etc.

2. Profitability measures such as Gross cash margin or SG&A% since the UCA cash flow analysis begins with the revenues and adjusts for the working capital unlike the traditional cash flows that begins with net income figures and work its way backwards.

3. It also lets us analyse working capital ratios such as receivable days, payable period etc.

4. Credit officer may also want to perform a cash flow variance analysis than evaluating the ones standalone

5. It also lets us workout the core operating growth profile. Core operating growth comes from the key businesses of the company in the industry in which it primarily operates.

To conclude, cash flow analysis is a stronger measure to judge the repayment ability of a borrower than net profit or similar figures since these accounting measures can easily be manipulated using accounting treatments or other means such as delaying the payments etc.