Martin How MA (OXON), ACIB looks at Net Cash Flow

​Turnover is Vanity, Profit is Sanity…but Cash is King

Most business owners will be familiar with the above statement but how do you manage and track cash generation? If your finance team are not calculating Net Cash Flow as part of your internal reporting system do you need to be concerned? Lenders and also potential investors in your business will focus on profit but also the amount of cash that your business generates, and which is then available to service debt and pay dividends.

The Profit Statement

A Profit Statement will hopefully show that your business is generating a healthy pre-tax profit but recording a surplus of income over expenditure in any given accounting period is only part of the picture.

EBITDA (Earnings before Interest, Tax, and Depreciation & Amortisation) is a key comparative measure of earnings performance, adjusted for non-cash expense items and funding costs. Whilst often used as a yardstick in many Healthcare sectors for valuation multiples and reporting leverage, it does not answer the question of how much debt a business can actually service.

Debt Capacity

To calculate the level of debt that a business can comfortably sustain and repay we need to make some adjustments to the EBITDA number.

Firstly we should deduct any Tax and Dividends, remembering that these amounts will have been assessed and voted in the previous financial year but paid out in the current reporting period. We also have to take account of the fluctuating demands on Working Capital. For example, fees invoiced but not yet paid and included as Debtors in the Balance Sheet will be counted as Income in the Profit & Loss Statement ,but will not be in your bank account until the funds are actually collected. Any changes to payment terms for clients, combined perhaps with earlier payment of creditors or other current liabilities could have a significant impact on the amount of cash available for debt servicing.

Other calls on cash could be an acquisition, investment or more usually any net capital expenditure during the year that has not been fully funded by debt. Finally there are the capital reductions and interest paid on existing Bank Loans, Leasing & HP agreements and any withdrawal or reduction in loans made by other investors or the business owners themselves.

Having made these various adjustments to the reported EBITDA figure you will discover how much cash was generated or absorbed by the business during the period under review. Compare this number to the net movement in cash balances or short term overdraft balances at the respective year ends. If the business has absorbed cash then the cash balances in the business will have decreased or short term borrowings increased if you are running an overdraft. If cash has been generated can you reconcile this number back to an increase in your bank deposit or a reduction in short term borrowings?

How Lenders assess Serviceability

Most lenders will assess how much debt a business can service by reference to historic, current and future projected Net Cash generation. Typically a lender will want to see total scheduled debt repayments covered by at least 110% and ideally higher to provide a comfortable cushion.The lender may also test serviceability by using a sensitised cost of funds to factor in future potential increases in Base Rate or LIBOR. If you are planning an acquisition, extension or development project then this measure will also be used to calculate what additional debt the business may be able to service.


I would always recommend that a business incorporates a Cash Statement into the quarterly financial report. Dividend payments, Tax and Net Capital Expenditure are relatively easy to identify and record. Tracking movements in Debtors and Creditors to calculate working capital changes sometimes requires a little more work, but is well worth it to provide a comprehensive overview of cash movements. This then provides that insight into the negative and positive cash movements and how this affects the debt capacity of your business. If lending facilities are subject to Financial Covenants which include a Net Cash Flow measure then all the more important to have a comprehensive financial reporting pack and the means thereby to forecast future cash movements.

This paper is only designed to provide a very quick overview of what is a complex subject and if you require more information it is recommended that you approach your existing advisers or alternatively a specialist in corporate and commercial credit.

About The Author

Martin How MA (Oxon), ACIB, is a Medifinance Consultant.

Please email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 07507 657966

Martin was a senior manager in the financial services industry for over 35 years, leading commercial lending teams across a broad geography and working with a wide range of business sectors. Martin is an Associate of the Chartered Institute of Bankers and holds a Certificate in Credit and Certificate in Healthcare from the ifs School of Finance.

Martin How MA (OXON), ACIB talks Business Plans
Ian Mills talks Pharmacy


No comments made yet. Be the first to submit a comment
Already Registered? Login Here
Monday, 18 January 2021

By accepting you will be accessing a service provided by a third-party external to