Credit analysis
Global cash flow analysis: a working guide
How global cash flow analysis combines a business, its owners and their other interests into one coverage view, what to include and where double counting hides.
Global cash flow analysis asks whether the people and entities behind a loan, taken together, generate enough cash to service all of their obligations, not just the one being underwritten. It exists because a small business and its owner are rarely separable. The owner draws from the business, guarantees its debt, owns the building it rents and holds interests in other entities that pay or consume cash.
This guide sets out what goes into a global cash flow, how the pieces are combined without counting the same dollar twice, how the result is read against global debt service, and where the analysis most often goes wrong. The method is described in general terms. The definitions belong to the lender’s credit policy.
What goes into a global cash flow
The business comes first, as a spread on the lender’s own accounts with adjustments recorded. Each guarantor follows, from the personal return and a personal financial statement, with income read by source rather than as a single adjusted gross figure. Rental properties are read as operating statements. Other entities in which the guarantor holds an interest are read from their K-1s and, where the exposure is large, from their own returns.
| Source | Cash flow comes from | Debt service comes from |
|---|---|---|
| The operating business | Earnings before interest, taxes, depreciation and amortization, adjusted per policy, less taxes paid and the distributions counted elsewhere | Its existing debt and the proposed loan |
| The guarantor personally | Wages, net Schedule C income, interest and dividends, and the distributions actually received from pass-through entities | Mortgages, consumer debt, guarantees being paid, and living expenses per policy |
| Rental real estate | Net rental income before depreciation and interest, by property | Each property’s mortgage payment |
| Other pass-through entities | Distributions received, or the owner’s share of cash flow where the owner controls the entity | The entity’s debt where the guarantor is liable for it |
| Related-party flows | Rent, management fees and loans between the entities, identified and netted | None; they are eliminated so nothing is counted twice |
Obligations are gathered the same way: the business’s debt schedule and the proposed loan, the guarantor’s mortgages and consumer debt from the credit report and the personal financial statement, each property’s mortgage, and any debt of another entity the guarantor has guaranteed.
Where the same dollar gets counted twice
The central discipline is to count each dollar once. An S corporation’s income appears on the business return and again on the owner’s personal return. The analyst takes the business’s cash flow at the entity level and the owner’s distributions out of it, never both. Rent the business pays to the owner’s real estate entity is an expense of one and income of the other, and nets to zero in the combined view. A guaranteed payment is compensation to the partner and a deduction to the partnership.
The same applies to debt. A loan the business carries and the owner guarantees is one obligation, not two. The analysis lists each obligation once, under the entity that pays it, and marks the guarantees so a reader can see the contingent exposure without adding it to the denominator.
Reading global coverage
Global debt service coverage divides the combined cash flow by the combined debt service, both as the lender’s policy defines them. A result above the policy minimum supports the loan. A result near it invites the question of which source carries the coverage. A business with coverage below one and a guarantor whose wages carry the global ratio above it is a different credit from one whose business covers its own debt.
For that reason the global figure is read beside its parts. The business’s own coverage, each guarantor’s personal coverage and the property-level coverage of each rental are kept visible, and the global ratio is the summary of them rather than a replacement.
Personal living expenses and taxes
A guarantor’s cash flow is overstated if the cash they need to live on is ignored. Policies handle this by deducting an estimated living expense, a percentage of income or a stated allowance, and by deducting the personal taxes actually paid as shown on the return rather than the liability computed. Whichever method the policy chooses, it is stated and applied the same way to every guarantor.
Distributions deserve the same care. A guarantor who reports pass-through income but received no distributions has no cash from that source in the period, and the analysis uses the distributions on the K-1, not the income.
Common errors
The most common errors are mechanical. Periods that do not match, with a business on a fiscal year combined with a guarantor on a calendar year. Income counted at both the entity and the owner. Rent between related parties left in on both sides. A guarantor’s contingent liabilities added to debt service as if they were being paid. Each produces a global ratio that looks precise and means nothing.
The second class is judgmental: counting a guarantor’s liquid assets as cash flow, treating a one-time gain as recurring income, or including an entity the guarantor does not control as a source of cash. The analysis should say what was included, on what basis, and why.
Global cash flow in SpreadSpace
SpreadSpace keeps each business, guarantor and property as its own entity with its own documents and periods, reads K-1s with their issuer, recipient, income and distributions, and brings the borrower’s businesses, guarantors and current bank activity into one global cash flow review, where an analyst can open a difference on the original page and decide how it belongs. Debt service coverage is kept for the business, for each guarantor and globally, and a proposed annual debt service can be entered to produce a pro forma ratio with the assumptions visible.
Every figure opens the page it came from, add-backs set by a credit officer are applied on every spread, and the finalized analysis reaches the origination system in its own account codes.