WEBVTT NOTE IDER in-house training materials. Captions follow measured phrase audio timings. Hypothetical worked cases; figures are instructional examples. 00:00:00.000 --> 00:00:03.158 A lender does not simply ask whether a business reports a profit. 00:00:03.278 --> 00:00:09.199 The practical question is whether verifiable cash will be available on the dates that interest and principal 00:00:09.199 --> 00:00:11.637 fall due, including under a plausible downside. 00:00:11.757 --> 00:00:18.711 This clinic shows how to construct that repayment case and organise the evidence supporting it. All numerical 00:00:18.711 --> 00:00:24.029 amounts are hypothetical and expressed in millions of Ghana cedis unless otherwise stated. 00:00:24.149 --> 00:00:29.844 We will calculate debt-service capacity, test collection delays and distinguish collateral 00:00:29.844 --> 00:00:35.538 availability from operating cash. Keep an evidence register alongside your calculations. 00:00:35.658 --> 00:00:42.109 For every claimed source of repayment, identify the underlying transaction, its timing and the document 00:00:42.109 --> 00:00:45.980 that another analyst could use to verify it independently. 00:00:46.649 --> 00:00:53.390 Start the credit case with the use of funds. A seasonal inventory facility, a long-lived machine and 00:00:53.390 --> 00:00:56.959 a continuing operating loss create very different financing needs. 00:00:57.079 --> 00:01:02.443 Estimate the amount and duration of the cash gap before selecting a product or repayment schedule. 00:01:02.563 --> 00:01:07.898 The primary repayment source should follow the transaction being financed: customer collections for 00:01:07.898 --> 00:01:12.002 working capital or sustained operating cash for an investment loan. 00:01:12.122 --> 00:01:20.427 An asset offered as security does not remove the need to explain repayment. Compare maturity with the time 00:01:20.427 --> 00:01:24.579 needed to generate cash, and identify refinancing assumptions explicitly. 00:01:24.699 --> 00:01:30.818 A short facility that must repeatedly roll over can create material risk even when the annual profit 00:01:30.818 --> 00:01:32.617 forecast appears comfortable to management. 00:01:33.287 --> 00:01:39.580 Begin with earnings before interest, tax, depreciation and amortisation of one point eight million. 00:01:39.700 --> 00:01:44.605 Deduct cash tax of two hundred and forty thousand, maintenance investment of one hundred and eighty 00:01:44.605 --> 00:01:47.978 thousand and additional working capital of two hundred and eighty thousand. 00:01:48.098 --> 00:01:53.183 This leaves one point one million available for debt service under our analytical definition. 00:01:53.303 --> 00:01:58.884 Notice why reported earnings alone overstate repayment capacity: taxes, asset upkeep and customer credit 00:01:58.884 --> 00:02:05.261 compete for cash before lenders are paid. Define each adjustment and reconcile it to the model. 00:02:05.381 --> 00:02:11.992 In practice, loan agreements may use a different cash measure, include permitted adjustments or treat leases 00:02:11.992 --> 00:02:12.405 differently. 00:02:12.525 --> 00:02:18.316 Reproduce the contractual definition exactly when calculating covenant compliance rather than silently 00:02:18.316 --> 00:02:20.246 substituting this teaching example. 00:02:20.916 --> 00:02:24.756 Scheduled principal is six hundred thousand and interest is two hundred thousand, giving total debt 00:02:24.756 --> 00:02:26.036 service of eight hundred thousand. 00:02:26.156 --> 00:02:31.656 Divide one point one million of available cash by eight hundred thousand to obtain coverage of one point 00:02:31.656 --> 00:02:32.878 three seven five times. 00:02:32.998 --> 00:02:38.355 Interpret the ratio carefully: it compares a defined cash numerator with a defined payment denominator over 00:02:38.355 --> 00:02:43.377 the same period. It is not a probability of default or a guarantee of payment. 00:02:43.497 --> 00:02:49.631 Include all obligations required by the relevant agreement and reconcile them to the debt schedule. 00:02:49.631 --> 00:02:54.539 Check whether fees, lease payments or other facilities belong in the calculation. 00:02:54.659 --> 00:03:00.466 A seemingly strong ratio can be misleading when a major balloon payment has been left outside the period 00:03:00.466 --> 00:03:00.789 displayed. 00:03:01.459 --> 00:03:07.855 Suppose this fictional agreement requires coverage of at least one point two five times. With debt service 00:03:07.855 --> 00:03:11.617 of eight hundred thousand, required available cash is one million. 00:03:11.737 --> 00:03:17.410 Our base case therefore has only one hundred thousand of cash headroom above that threshold. This 00:03:17.410 --> 00:03:21.664 translation is more actionable than saying the ratio is comfortably above one. 00:03:21.784 --> 00:03:28.462 A collection delay, cost overrun or tax payment of slightly more than one hundred thousand could remove 00:03:28.462 --> 00:03:28.854 compliance. 00:03:28.974 --> 00:03:35.099 Distinguish covenant headroom from the bank balance and from undrawn credit: they measure different 00:03:35.099 --> 00:03:40.785 constraints. Also verify testing dates, cure provisions and permitted adjustments in the actual 00:03:40.785 --> 00:03:41.223 agreement. 00:03:41.343 --> 00:03:47.798 The threshold used here is illustrative, not a universal lending standard or a promise of acceptance. 00:03:48.468 --> 00:03:55.100 Create an evidence index that lets a reviewer move from the credit memo to the calculation and then to 00:03:55.100 --> 00:03:59.288 supporting documents. Reconcile management accounts with the ledger and available financial statements. 00:03:59.408 --> 00:04:05.317 Link customer balances to ageing, contracts and subsequent collections; link debt obligations to 00:04:05.317 --> 00:04:08.499 signed schedules and bank confirmations where available. 00:04:08.619 --> 00:04:16.228 Record reporting dates so that old statements are not presented as current evidence. For each unresolved 00:04:16.228 --> 00:04:20.984 difference, state the amount, explanation, owner and expected resolution date. 00:04:21.104 --> 00:04:27.898 Avoid filling gaps with invented professional sign-offs. A preparer's name confirms responsibility 00:04:27.898 --> 00:04:35.259 for preparation; an independent assurance conclusion requires actual work by an appropriately authorised 00:04:35.259 --> 00:04:35.825 professional. 00:04:35.945 --> 00:04:40.775 Clear exceptions are more credible than a polished pack that hides uncertainty. 00:04:41.445 --> 00:04:47.869 Now assume a coherent downside reduces available cash to eight hundred and eighty thousand. The illustrative 00:04:47.869 --> 00:04:51.081 minimum coverage remains one point two five times. 00:04:51.201 --> 00:04:58.167 Calculate the maximum total debt service consistent with that threshold. If interest remains two hundred 00:04:58.167 --> 00:05:00.954 thousand, calculate the corresponding principal capacity. 00:05:01.074 --> 00:05:06.418 Compare it with the current principal schedule of six hundred thousand and explain what action would be 00:05:06.418 --> 00:05:09.247 necessary before using a lower payment in the forecast. 00:05:09.367 --> 00:05:15.033 Do not assume the borrower can unilaterally change a signed repayment schedule. Pause the video and write 00:05:15.033 --> 00:05:17.366 the two calculations plus a short recommendation. 00:05:17.486 --> 00:05:23.034 Your reasoning should separate what the business can afford from what the existing contract actually 00:05:23.034 --> 00:05:25.253 requires on the agreed payment dates. 00:05:25.923 --> 00:05:31.387 Divide eight hundred and eighty thousand by one point two five: maximum total debt service is seven hundred 00:05:31.387 --> 00:05:32.297 and four thousand. 00:05:32.417 --> 00:05:39.247 After unchanged interest of two hundred thousand, the implied principal capacity is five hundred and four 00:05:39.247 --> 00:05:45.223 thousand. That is ninety six thousand below the existing six hundred thousand principal requirement. 00:05:45.343 --> 00:05:49.488 The present schedule would produce coverage of only one point one times. 00:05:49.608 --> 00:05:57.300 A revised schedule requires lender agreement and must be tested across every future period, including any 00:05:57.300 --> 00:06:00.184 larger final balance or extended maturity. 00:06:00.304 --> 00:06:06.236 Moving principal into the future changes interest and refinancing exposure, so our constant-interest 00:06:06.236 --> 00:06:09.430 calculation is only an initial sizing exercise. 00:06:09.550 --> 00:06:14.714 Document the proposed amendment rather than presenting affordable payments as an already approved 00:06:14.714 --> 00:06:15.111 arrangement. 00:06:15.781 --> 00:06:21.994 A borrowing base determines facility availability from eligible assets under agreed rules. In our example, 00:06:21.994 --> 00:06:28.622 seventy percent of eligible receivables of one point two million gives eight hundred and forty thousand. 00:06:28.742 --> 00:06:33.506 Fifty percent of eligible inventory of eight hundred thousand adds four hundred thousand. Deduct reserves 00:06:33.506 --> 00:06:38.587 of one hundred and forty thousand to obtain a borrowing base of one point one million. 00:06:38.707 --> 00:06:45.011 With nine hundred thousand already drawn, apparent undrawn availability is two hundred thousand, subject 00:06:45.011 --> 00:06:51.315 to facility limits and conditions. This is financing capacity, not additional operating cash generation. 00:06:51.435 --> 00:06:58.571 Verify exclusions for overdue or disputed balances, concentration, obsolete stock and prior security 00:06:58.571 --> 00:07:05.706 interests. Eligibility, valuation and enforceability must be assessed under the actual agreement and 00:07:05.706 --> 00:07:07.353 relevant local requirements. 00:07:08.023 --> 00:07:13.862 An annual coverage ratio can conceal a cash shortfall in the month a large principal payment falls due. 00:07:13.982 --> 00:07:20.629 Build a monthly cash schedule using actual sales seasonality, collection lags, supplier terms, payroll, 00:07:20.629 --> 00:07:22.527 taxes and debt dates. 00:07:22.647 --> 00:07:28.766 Roll forward the opening balance and show the minimum cash position before and after committed financing. 00:07:28.886 --> 00:07:35.356 Recheck borrowing-base availability in that weak month; the same downturn that delays collections may 00:07:35.356 --> 00:07:42.750 also make receivables ineligible and reduce the facility. That interaction is a common source of false 00:07:42.750 --> 00:07:43.213 comfort. 00:07:43.333 --> 00:07:48.656 Model contingency actions with realistic execution dates and costs. Selling inventory or obtaining new 00:07:48.656 --> 00:07:55.120 equity is not an immediate solution simply because a spreadsheet can enter the receipt in the required 00:07:55.120 --> 00:07:55.500 month. 00:07:56.170 --> 00:08:02.408 Choose stress scenarios from the business's actual vulnerabilities. A dominant customer's delay can 00:08:02.408 --> 00:08:07.687 reduce cash collections, worsen receivable ageing and shrink borrowing availability simultaneously. 00:08:07.807 --> 00:08:13.615 Currency depreciation can raise imported input costs while foreign-currency debt becomes more expensive in 00:08:13.615 --> 00:08:18.593 local terms. Floating interest can increase service when margins are already compressed. 00:08:18.713 --> 00:08:24.675 Document the mechanism, timing and evidence behind each combination instead of applying the same 00:08:24.675 --> 00:08:26.805 arbitrary percentage to every row. 00:08:26.925 --> 00:08:32.589 Test proposed mitigations against their own constraints: a price increase may reduce volume, while 00:08:32.589 --> 00:08:35.017 extending supplier terms may threaten supply. 00:08:35.137 --> 00:08:40.610 Present the residual shortfall after feasible actions and identify the point at which the business must seek 00:08:40.610 --> 00:08:43.508 lender engagement rather than waiting for a missed payment. 00:08:44.178 --> 00:08:51.149 A useful monitoring plan identifies deteriorating conditions before a formal covenant test fails. Track 00:08:51.149 --> 00:08:56.626 overdue receivables, contribution margin, order cancellations and forecast cash alongside the 00:08:56.626 --> 00:08:57.622 contractual ratio. 00:08:57.742 --> 00:09:03.550 Set internal warning thresholds with enough time to investigate and act; these are management controls, 00:09:03.550 --> 00:09:05.486 not replacements for the agreement. 00:09:05.606 --> 00:09:11.959 Assign responsibility for preparing each measure and for contacting the lender when a material issue 00:09:11.959 --> 00:09:17.042 emerges. Keep evidence of assumptions, calculations and communications in the credit file. 00:09:17.162 --> 00:09:23.751 Where a waiver or amendment is needed, distinguish a request from written approval. A borrower should never 00:09:23.751 --> 00:09:27.239 label a covenant compliant merely because management expects flexibility. 00:09:27.359 --> 00:09:33.391 Transparent early engagement supports a more credible response than optimistic numbers delivered after the 00:09:33.391 --> 00:09:35.115 problem has become unavoidable. 00:09:35.785 --> 00:09:42.364 For the second exercise, assume annual credit sales of seven point three million are earned uniformly over a 00:09:42.364 --> 00:09:47.116 three hundred and sixty five day year. Collections now take twenty additional days. 00:09:47.236 --> 00:09:52.971 Estimate the extra cash tied up in receivables and subtract it from the base available cash of one point 00:09:52.971 --> 00:09:53.575 one million. 00:09:53.695 --> 00:09:58.896 Keep scheduled debt service at eight hundred thousand and calculate the revised coverage ratio. 00:09:59.016 --> 00:10:05.016 State the assumptions that make the days-based calculation appropriate, including unchanged sales, no 00:10:05.016 --> 00:10:11.938 tax complications and no offsetting change in supplier credit. Pause now to complete the arithmetic. 00:10:12.058 --> 00:10:18.275 Then explain why a business can experience this deterioration even when the profit statement still 00:10:18.275 --> 00:10:21.590 reports the original level of sales and earnings. 00:10:22.260 --> 00:10:28.814 Uniform daily credit sales are twenty thousand: seven point three million divided by three hundred and sixty 00:10:28.814 --> 00:10:33.440 five. Twenty additional days therefore tie up four hundred thousand in receivables. 00:10:33.560 --> 00:10:36.393 Available cash falls from one point one million to seven hundred thousand. 00:10:36.513 --> 00:10:42.205 Dividing by scheduled service of eight hundred thousand gives coverage of zero point eight seven five 00:10:42.205 --> 00:10:46.475 times, meaning the defined available cash is insufficient for the scheduled payments. 00:10:46.595 --> 00:10:52.831 Profit can remain unchanged because the sales were already recognised; the deterioration is in collection 00:10:52.831 --> 00:10:58.652 timing. Investigate ageing, disputes and subsequent receipts, then update the monthly cash schedule and 00:10:58.652 --> 00:10:59.900 borrowing base together. 00:11:00.020 --> 00:11:06.341 In a seasonal business, replace this shortcut with invoice-level or monthly cohorts because uniform daily 00:11:06.341 --> 00:11:08.448 sales may misstate the exposure. 00:11:09.118 --> 00:11:14.052 The credit memo should make a clear financing recommendation while exposing the assumptions that 00:11:14.052 --> 00:11:15.109 could overturn it. 00:11:15.229 --> 00:11:21.883 State the purpose, amount, tenor and primary repayment source, then reconcile the requested structure with 00:11:21.883 --> 00:11:23.658 the operating cash cycle. 00:11:23.778 --> 00:11:31.399 Present base and downside coverage, monthly cash needs and collateral availability as separate analyses. List 00:11:31.399 --> 00:11:36.479 material exceptions and proposed conditions with accountable owners and dates. 00:11:36.599 --> 00:11:42.346 Distinguish information supplied by management from independently checked evidence, and identify any 00:11:42.346 --> 00:11:49.051 specialist legal, valuation or assurance work still required. Explain why the proposed mitigations are 00:11:49.051 --> 00:11:51.924 feasible and what risk remains afterward. 00:11:52.044 --> 00:11:58.079 A concise, traceable argument is more useful than a large attachment pack whose key figures cannot be 00:11:58.079 --> 00:12:01.274 connected to the recommendation or reproduced by another reviewer. 00:12:01.944 --> 00:12:08.377 For your applied work, select a borrowing request and reconstruct the cash available for repayment from the 00:12:08.377 --> 00:12:10.269 underlying accounts and operating assumptions. 00:12:10.389 --> 00:12:15.852 Reconcile the full debt schedule, calculate headroom under the actual definitions and test a plausible 00:12:15.852 --> 00:12:17.308 collection or margin shock. 00:12:17.428 --> 00:12:24.060 Build a monthly view and examine whether collateral eligibility weakens at the same time as cash. Prepare 00:12:24.060 --> 00:12:29.131 an evidence index, an exception log and a monitoring plan with named responsibilities. 00:12:29.251 --> 00:12:34.963 Complete the six questions and two applied tasks accompanying this clinic before reviewing a live case. 00:12:35.083 --> 00:12:40.992 The aim is to explain not only whether financing appears affordable today, but also which events would 00:12:40.992 --> 00:12:45.857 make repayment difficult, how those events would be detected and what action could follow.