How banks read your cash flow

Ask an owner whether the business can afford a loan and you will usually be given a profit figure. Ask a credit analyst the same question and they start somewhere else entirely: what came into the bank, what had to leave, and what was left over — month by month, not once a year.

They rebuild your cash flow rather than accept it

The analyst starts at operating profit, adds back depreciation, then subtracts the cash absorbed by working capital: the increase in receivables, the increase in inventory, less the increase in payables. Then tax. Then shareholder drawings. What survives that is what is genuinely available to service debt. For a company growing quickly it is often far smaller than profit, and sometimes negative. Growth consumes cash before it produces any, and a file that does not acknowledge this reads as naive.

Then they compare it with the repayment

The comparison is the debt service coverage ratio: cash available to service debt, divided by the interest and principal falling due in the same period. A ratio of 1.0 means everything the business generates goes to the bank and nothing is left for a bad quarter. Lenders want meaningful headroom above that, and more of it for longer tenors, cyclical sectors and unhedged foreign currency costs.

The working capital cycle decides the size of the facility

Days of receivables plus days of inventory, less days of payables, gives the number of days your money is tied up in the business. Collect in 90, hold stock for 60, pay suppliers in 30, and you are funding 120 days of trading. That figure against your daily cost of sales is roughly the working capital you need, and it is what the analyst will size the limit against. Ask for less and you will be back within the year. Ask for a great deal more and they will want to know what the surplus is for.

Credit turnover is the reality test

This is where files most often break down quietly. If the accounts show EGP 60 million of sales and total credits across your accounts amount to EGP 22 million, the analyst has two available conclusions: the sales are overstated, or most of your cash never touches the banking system. Neither one helps you. Routing collections through the lending bank is the single most effective thing an SME can do for its credit profile, and it costs nothing.

Drawings are read as a fixed cost

Withdrawals that move with the shareholder's needs, or that exceed profit in a weak year, tell the analyst that the owner is served before the lender. A stated, consistent drawing policy is worth more in a credit file than a higher profit figure.

Seasonality is assessed monthly

An annual view hides the month in which you are most exposed. If your peak funding need falls in the two months before a season, the limit has to cover that month rather than the average. Bringing a twelve-month cash flow to the meeting moves the conversation from whether to lend to how much, and when.

Currency

Costs in foreign currency against revenue in Egyptian pounds is now a standard part of any assessment. The analyst will test your cash flow against a weaker pound. Far better to present that test yourself, with whatever pricing power or hedging you actually have, than to have it applied to you with someone else's pessimistic assumptions.

None of this requires a finance department. A monthly record of what came in, what went out and what the closing balance was, kept for twelve months, answers most of the questions above. The businesses that keep it are consistently the ones that get the facility they asked for.