In this article, we will discuss UCA cash flow—what it is, how to calculate it, and provide an example.
During the analysis of the cash flow from a company’s financial reports, there’s a high possibility that we may overlook important factors regarding cash inflow and outflow.
However, this problem can be solved by using the UCA cash flow model. So, let’s discuss it.
What is UCA Cash Flow
UCA cash flow is a company’s analysis report generated by financial software or manually to understand the company’s cash flow more accurately.
UCA reports gather data from the main three financial reports: the balance sheet, income statement, and cash flow statement.
For example, it retrieves items such as the cost of goods sold and operating expenses from the cash flow statement, while net sales come from the income statement.
The UCA cash flow report is mainly similar to the company’s cash flow statement because it uses the structure of the direct method. However, it is slightly different due to its detailed breakdown of changes affecting cash.
UCA stands for Uniform Credit Analysis, and as it sounds, this report is mainly used by the lending industry to find out a company’s ability to generate cash and its liquidity.
In short, when you apply for a loan, the lender will analyze your company’s UCA report to determine if you can approve the loan or not.
UCA Cash Flow Example and Calculation
Calculating UCA cash flow is not a difficult task; we need to add different types of activities and items in reports.
Here is the UCA cash flow statement of the American company South Texas Oilfield Equipment.
Using this example, we will calculate UCA cash flow step by step.
Step 1: Find out all cash inflow
The first section of the UCA report is the inflow of the company, which is basically called the receipt of where cash comes from.
These are generally net sales of the company, and the other one is accounts receivable.
It means a customer bought a product in the past on credit and paid now, so it will be categorized as cash inflow.
Also, remember, it’s possible that the company does not have cash the same as its generated sales. In fact, most of the time, companies have less cash compared to their sales.
The reason is when you sell a product or service on credit; it will be calculated as sales, but the company actually does not get cash.
On the other side, if accounts receivable increase by the next year, it means your sales generated more but on credit and did not get actual cash.
This activity is considered in the UCA cash flow statement so the lender will know how much actual cash the company got.
For example, if your company generated $100,000 worth of sales and your accounts receivable increased from $20,000 to $50,000, it means you got $70,000 cash from customers, and $30,000 sales became on credit.
Step 2: Collecting all cash outflow
Collect all sources where cash goes out from the company, which are generally referred to as cash outflow.
Generally, these components are cost of goods sold, accounts payable, and changes in inventory are categorised in.
It’s obvious that the company’s primary cash outflow will be the cost of goods. But here are two other elements too.
Change in Inventory:
Inventory is a list of items, equipment, and property, etc. If your inventory increases, then automatically the business’s outflow will increase.
Think like this, when you purchase items, material, and equipment for a company during the year, it will be calculated as an outflow of cash.
Accounts Payables:
Accounts payable is cash that you will pay your supplier. This is exactly the opposite of accounts receivable. It’s the same as your customer buying products on credit as you will also buy raw material and other things from your supplier on credit.
Step 3: Calculate Operating Cost
Operating costs are generally referred to as expenses that happen due to operating the business. In other words, these are expenses the company will pay to run its business.
This section will include these components:
- Selling, General, and Administrative Expenses.
- Changes in Prepaid Expense
- Change in Accrued Expense
- Change in Current Assets and Liabilities
Step 4: Find Out Taxes and Other Income
Taxes significantly affect the cash flow of the company. It’s necessary for lenders to add taxes during the UCA cash flow model calculation.
Also, most companies have more than one income source which contributes a little bit of cash inflow in the statement, so it should also be in the statement during UCA cash flow analysis.
Here are items to consider:
- Other Income
- Changes in Liabilities
- Income Tax Expense
- Changes in Deferred Income Tax
- Changes in Income Tax Payable
Step 5: Cash Financing Cost
The next section of the UCA statement is financial cost. A cost related to company financial activities is categorised as financing cost.
For example, interest payment of the loan, which was taken by the company.
Other financial activities which the UCA cash flow report includes:
- Dividends Withdrawal
- Change in Dividend Payable
- Interest Expense
- Change in Interest Payable
After that, at the end, the current portion of the long-term debt will be added to calculate cash after debt amortization.
So, in this way, professionals will add all other cash flow activities in the UCA report to understand more.
UCA Cash Flow Analysis
UCA cash flow analysis covers the result of the calculation of the UCA report. After every section, net calculations will help us figure out which gives lenders an idea about the company.
Inflow and outflow are the first two sections of the report. We will get cash from trading by subtracting outflow from inflow.
Subtracting operating costs from cash from trading to get cash after operation.
Then subtracting all of the taxes and adding other income to find out net cash after operation (NCAO). This analysis element of UCA cash flow will give an idea of how much operating cash the company has left.
In the last UCA report, there are financial costs and loan amounts, subtracting these items from NCAO leads to getting cash after debt amortization.
This will give lenders an overview of how much you are capable of borrowing.
The UCA cash flow statement also highlights cash flow negatives, which will attract the management team and suggest improvements.
Many tools provide the service of extracting data from the financial statements of the company, and they will generate UCA statement.
UCA cash flow helps calculate the cash flow ratio and compare liquidity with other companies.
Apart from that, using data from the UCA report, some tools are able to generate forecasts of the company’s cash flow.
UCA Cash Flow Coverage Ratio
UCA cash flow coverage ratio is almost similar to the cash flow coverage ratio, but it would be used for a specific version of the cash flow statement called UCA cash flow.
This ratio compares net operating cash flow to the company’s total debt service.
Here is the UCA cash flow coverage ratio formula:
\text{UCA Cash Flow Coverage Ratio} = \frac{\text{Operating Cash Flow}}{\text{Total Debt Service}}
This ratio is used by lenders to check if the company’s cash flow meets its obligations and also the ability to pay back the loan amount. A higher ratio is a good signal, whereas a lower ratio means the company is not generating enough cash to meet its debt service.
Conclusion
Understanding UCA cash flow becomes easy when you have a basic overview of the general statement properly.
I created a comprehensive guide about the cash flow statement with visual images to easily understand.
Cash flow statement: comprehensive guide
Check it out, and you will definitely find it very helpful.