Guest Opinion: Mistakes in Global Cash Flow Analysis
As global cash flow has become more of a necessity than an option, the majority of financial institutions are now performing some type of combined ratio analysis. The issue lies in the fact that there are several methods of global cash flow analysis being used. And some lead to erroneous conclusions. Once regulators and the economic environment made GCF analysis imperative, financial institutions started implementing some form of GCF calculation to satisfy credit risk management pressures, even if it was not the most accurate method available. It is vital for financial institutions to review their GCF analysis to ensure they are lending safely and productively.
Global cash flow analysis is used to assess the combined cash flow of a group of people or entities to get a global picture of their ability to service the proposed debt. Global cash flow is looking at the business’s cash flow, the owner’s cash flow and the cash flow of all related people and businesses and combining them in the proper way to arrive at global cash flow ratios such as debt service coverage ratio that will be the basis of a credit decision. It is no longer enough to simply look at the business by itself and the guarantors by themselves because owners and their businesses are becoming more and more comingled every year.