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International Center For Environmental Finance

Learn how to measure cash flow for loan programs and determine borrowing capacity based on cash available for debt service, loan term, and interest rate.

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International Center For Environmental Finance

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  1. International Center For Environmental Finance Series B – Course #1 Measuring Cash Flow

  2. Measuring Cash Flow Cash Flow is a major factor in all loan programs.

  3. Measuring Cash Flow • Cash Flow is the amount of funds remaining after payment of all operating expenses. • The amount of Cash Flow determines how much money can be used to service (repay) debt. • Cash Flow is a major factor in determining how much money can be borrowed.

  4. How Much Can be Borrowed? Borrowing capacity is a function of three numbers: • Cash available for debt service. • Term of loan. • Interest rate.

  5. Borrowing Capacity Example #1 IF: Cash Available for Debt Service = $150 Term = 5 years Interest Rate = 10% You can borrow $500

  6. Borrowing Capacity Example #1 Interest @10% = $50 Principal Payment = $100 ($500/5 years = $100) _______ Annual Debt Service Payment = $150

  7. Borrowing Capacity Example #2 IF: Cash Available for Debt Service = $150 Term = 10 years Interest Rate = 5% You can borrow $1000

  8. Borrowing Capacity Example #2 1st Year Interest 5% = $50 Principal Payment = $100 ($1000/10 years = $100) _______ Annual Debt Service Payment = $150

  9. Cash Available For Debt Service Regular Cash Income Regular Cash Expense Cash Available for Debt Service

  10. Regular Cash Income Actual Cash Received For Continuing Services.

  11. Regular Cash Income We can summarize the Regular Cash Income concept with a simple formula: Total Cash Income Non-recurring Cash Income Regular Cash Income

  12. Examples Of Non-recurring Cash Income • One time connection fees. • Grant from a donor. • Sale of a piece of property or equipment.

  13. Regular Cash Income • Occurs regularly. • There is historical data. • Can be used to predict future income.

  14. Regular Cash Income Example Tariff Income Number of Households = 30,000 Average Household Water Consumption = 10m3 Tariff = 2$/m3 Regular Tariff Income =$600,000 (30,000 x (10x2))

  15. Regular Cash Income Barter Transactions? What if a utility accepts $100,000 of fish to discharge an $80,000 invoice and gives the fish to its employees in lieu of $90,000 of salary?

  16. Regular Cash Income Rules For Barter Transactions • $80,000 treated as non-cash income (not included in regular cash income). • $90,000 treated as reduction of cash expenses.

  17. Regular Cash Income Credits? • Only as reductions in expenses and decreases of current liabilities. • Only if they are pursuant to binding, legal agreements.

  18. Regular Cash Expenses • Cash payments for goods and services to be used in the current year.

  19. Regular Cash Expenses We can summarize Regular Cash Expenses with a simple formula: Total Cash Expenses Non-recurring Cash Expenses Regular Cash Expenses

  20. Examples Of Non-current Year Expenses • Purchase of a new machinery with a 20 year service life. • Purchase of Land.

  21. Examples Of Current Year Expenses Labor =$50,000 Supplies =6,000 Insurance =5,000 Maintenance =3,000 Rental cost =11,000 Utilities =4,000 Travel =20,000 Property Tax =30,000 Total Current Year Expenses =$129,000

  22. Regular Cash Expenses Credits? • Only if they offset current liabilities. • Only if they are pursuant to binding, legal agreements

  23. Examples Of Credit Payments • Credit to acquire goods or services. • Credit to offset current liabilities (utilities, rent, etc.). • Credit for services to a Government to offset taxes.

  24. Regular Cash Expenses Regular Cash Expenses do not include Non-Cash Expenses.

  25. Non Cash Expenses Depreciation Depreciation is the annual notional decline in a value of an asset with a multi-year service life.

  26. Non Cash Expenses Depreciation $5,000 truck with a 5 year service life means annual depreciation of $1,000 Initial Cost/Service Life = Annual Depreciation

  27. Regular Cash Expenses Regular Cash Expenses are Total Cash Expenses minus Non-Cash Expanses, or: Total Expenses Non Cash Expenses Regular Cash Expenses

  28. Cash Available For Debt Service (CADS) Once we have calculated both Regular Cash Income and Regular Cash Expenses we can easily calculate cash available for debt service, or: Regular Cash Income Regular Cash Expenses Cash Available for Debt Service

  29. Cash Available For Debt Service Cash available for debt service shows the amount of money that can be used to pay annual debt service on projects

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