How to Calculate Cash Flow to Creditors [2024]

Cash flow to creditors refers to the amount of cash that a business has available to meet its debt repayment obligations and other financial commitments to creditors such as suppliers, vendors, lenders, and bond holders. Creditors, especially lenders, are keenly interested in a company’s ability to generate enough cash flow to service its debt. So when analyzing a company for potential investment or lending, cash flow to creditors is an important metric.

Calculating cash flow to creditors involves determining the company’s net cash flow sources and uses with a focus on obligations owed to outside parties. The analysis centers on the cash that will be available to meet scheduled principal and interest payments as well as other commitments coming due within a set timeframe, usually the next 12 months.

How to Calculate Cash Flow to Creditors [Step-By-Step Guide]

Follow these key steps to determine a company’s projected cash flow to creditors:

1. Calculate net income

Start with the net income from the income statement for the last 12 months. Then add back any non-cash expenses like depreciation and amortization which reduced accounting profit but did not impact cash flows. This adjusted net income number converts accrual accounting net income to a cash basis.

2. Determine operating cash flow

Make additional adjustments to net income by changes in working capital accounts to determine cash from operations. Examples include changes in accounts receivables, inventory, accounts payable which impact cash flow but are not captured by accrual net income. Increases or decreases in these accounts impact cash available to creditors.

3. Subtract capital expenditures

Subtract any funds used for investment in new equipment, property, technology or other fixed assets. These capital expenditures use cash but are not included in operating cash flows. This step reveals how much cash is available after essential reinvestment for operations and capacity.

4. Include debt proceeds and repayment

Add cash received from new borrowing or debt issuance which provides additional cash to service existing creditors. Include scheduled repayments of existing debts as these must be paid from available cash flow. Tracking repayment ensures enough cash remains for other needs.

5. Include dividends and share issuances

Subtract any cash allocated to dividend payments to shareholders or cash received from issuing new shares which does not need to be repaid. Tracking these adjustments ensures an accurate view of net cash obligations to creditors.

6. Include acquisitions and asset sales

Account for any impacts from merger & acquisition activity or asset sales. Acquisitions funded with cash or new debt repayment resulting from asset sales will change the cash position and must be reflected to accurately calculate cash flow to creditors.

7. Project next 12 months

Take the last 12 months as a base and make forward-looking adjustments for any major known changes to projections expected in the next 12 months that would materially impact cash flow available for creditors. This could include launching a new product, investment plans, taking on additional debt, or paying off existing debts.

Once all these adjustments are made, the final number represents the net cash flow projected to be available to meet creditor obligations over the next 12 months. This is an important benchmark of short term liquidity and the company’s financial flexibility.

Analyzing Cash Flow to Creditors:

With the projected cash flow to creditors calculated, analysis involves comparing this cash availability versus the level of debts coming due for payment over the next 12 months.

Key aspects to analyze:

  • Is projected cash flow enough to cover all mandatory debt repayments coming due including interest? If not, where will additional cash come from and what tradeoffs might be required?
  • Does the business have adequate cash reserves to supplement any projected shortfalls in cash flow available for creditor obligations or smooth out short term fluctuations?
  • How does projected cash flow for the upcoming year compare historically? Is there a steady coverage margin or has liquidity been declining?
  • Do loan covenants have any minimum cash flow requirements? Is the projected cash flow measure compliant with these terms?
  • For high growth companies, is cash flow being continually reinvested into operations shortchanging creditors? How dependent is additional growth potential on having access to cash flow that might otherwise service debts?

This analysis reveals the margin of safety in projected cash flow to service debts versus risk of financial distress if cash becomes constrained. The results can influence major financing decisions weighing priorities balancing operations, investment plans, shareholder returns against the need to satisfy creditors.

Ultimately the goal is having sufficient cash flow cushion to meet obligations to creditors and lenders while allowing flexibility to operate and grow the business.

Examples and Sample Calculations:

Let’s walk through sample cash flow to creditors calculations for two example companies to demonstrate applying these concepts in practice:

1. Example Company A

Net Income$5 million

+ Depreciation – $1 million

+ Amortization – $0.5 million

Adjusted Net Income = $6.5 million

+ Decrease in Accounts Receivable – $0.5 million

– Increase in Inventory – $1 million

+ Increase in Accounts Payable – $0.3 million

Operating Cash Flow = $6.3 million

**- Capital Expenditures ** – $1.5 million

+ New Debt Issued – $0.5 million

– Debt Principal Repayments – $1 million

– Dividend Payments – $0.5 million

Cash Flow to Creditors = $3.8 million

In this example, Company A has $3.8 million in projected cash flow available to meet creditor commitments in the next 12 months after accounting for various cash adjustments from operations, capex, and financing activities. This level of liquidity would cover $1 million of scheduled debt repayments.

2. Example Company B

**Net Income **- $10 million

**+ Depreciation & Amortization **- $3 million

**+ Decrease in Accounts Receivable **- $2 million

+ Increase in Accounts Payable – $1 million

– Capital Expenditures – $5 million

– Acquisition Funded by Debt – $10 million

Cash Flow to Creditors = $1 million

In this example, Company B spent heavily on capex and an acquisition funded by new debt resulting in only $1 million in projected cash flow to service $10 million in new debts from the acquisition for the coming year. This tight coverage ratio of 10% would make creditors cautious about exposure without adjustments.

These examples demonstrate how changes in operations, new investment, and financing decisions can quickly alter the cash flow available to meet obligations to creditors from year to year. Careful tracking and projections are essential to manage liquidity risk.

Best Practices for Managing Cash Flow to Creditors:

Here are some best practice guidelines companies can follow to responsibly manage cash flow to creditors:

  • Set a minimum cash flow to debt coverage ratio target (e.g. 1.25x) and maintain cushion to this threshold
  • Forecast cash flows out 2-3 years not just 12 months to identify risks early
  • Run stress test scenarios on projections with different assumptions
  • Keep a target minimum cash reserve as a buffer for unexpected cash needs
  • Match cash flow timing to debt repayment schedules when possible
  • Maintain open dialogue with creditors to align on projections
  • Develop contingency plans identifying sources to raise additional liquidity if required

Proactively managing cash flow projections and liquidity ratios ensures creditors remain comfortable with the margin of safety to meet obligations as they come due. This protects access to critical credit facilities and avoids potential disruptions to operations from financial distress.


Calculating and analyzing cash flow to creditors is a vital discipline for any finance team to actively monitor and manage. The steps outlined above walk through how to determine the cash flow available for debt servicing obligations following certain adjustments from reported net income and operating cash flow numbers per the financial statements.

Comparing projected cash flow to upcoming debts coming due over 12 months provides critical insight into near term liquidity. And running different scenarios makes clear how changes in business plans and investment decisions can alter cash flow available to creditors.

By upholding best practices around cash flow forecasting, stress testing, and maintaining open dialogue with creditors, companies avoid tempting situations of excessive financial risk that can jeopardize operations.

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