Cash conversion determines how much debt the line can carry

The denominator must follow a dated debt roll-forward. GFT proposes separate rows for opening principal, drawings, scheduled principal repayment, capitalised interest where applicable, other permitted adjustments and closing principal. Interest should use the balance and timing convention actually assumed. Cash fees belong in an explicit row rather than disappearing into the interest rate. Payment dates, accrual dates and the model's reporting periods must align. A model that calculates coverage annually should still retain the cash movements needed to meet each contractual due date.

The paper's illustrative scenario A assumes XAF 500 million of senior debt, an annual interest rate of 8 percent, six annual equal-principal instalments, no grace period and no fees. Interest is charged on each year's opening balance and paid at year end alongside principal. The example contains no construction period or intra-year drawdown. Its first-year principal payment is 500 divided by 6, or XAF 83.333 million, and first-year interest is 500 multiplied by 0.08, or XAF 40 million. Total senior service is XAF 123.333 million, rounded for display.

An illustrative second-year opening balance of XAF 416.667 million follows from the first principal payment. Interest then becomes approximately XAF 33.333 million, giving service of XAF 116.667 million. This decline is a property of equal-principal amortisation and the assumed opening-balance interest convention. It is not an annuity schedule with constant total payments. Calculate subsequent periods from unrounded balances and adjust the final instalment for any contractual rounding rule, so a display-rounding residue does not become a fictional outstanding loan.

Grace also needs a precise meaning. A principal holiday with interest paid creates a different early cash requirement from an interest holiday with capitalised interest. Capitalisation increases the balance that later interest and principal must cover. GFT recommends presenting those alternatives as changes to the debt schedule, while keeping the underlying operating case unchanged. A longer tenor can redistribute payments but cannot convert a permanently negative operating cash stream into a self-repaying enterprise. The earlier financing gap still needs an identified bearer.

The scenario's illustrative senior-only calculation excludes any cash payment on subordinated capital. That exclusion is a scope limitation, not an assumption that such capital is free. The actual model must show whether subordinated interest is paid, deferred or capitalised, when principal becomes due and whether distributions are blocked. IFC lists instruments including profit-participating loans, convertible loans and preferred shares. Their different forms reinforce the need to inspect actual cash rights rather than infer them from an equity-like name.[S30]

In a transaction model, reconcile commitment fees, arrangement fees, insurance charges, mandatory reserve funding and any other documented payments to the agreed covenant and the overall cash waterfall. A payment excluded from a senior DSCR definition still reduces available cash somewhere. Lease obligations require consistent treatment between the earnings measure and the service schedule. GFT's recommendation is to expose both the contractual test and total unavoidable cash payments. The simplified example deliberately makes no claim about market rates, lender pricing, taxes on interest or available repayment terms.

Project IRR describes the return on the project's selected pre-financing cash-flow series. Equity IRR describes the return on the sponsor's selected contributions and distributions after the modelled financing flows. Net present value discounts a defined cash-flow series at a declared rate. DSCR compares period cash available with period debt payments. Closing unrestricted cash measures remaining payment capacity at a date. GFT recommends defining each measure alongside its currency, timing and cash boundary before comparing cases. They answer different questions and should never share an unexplained numerator.

An illustrative terminal receipt of XAF 300 million in a distant final period can improve a valuation without contributing anything to an earlier XAF 55 million cash deficit. A refinancing assumption has the same limitation until a lender, conditions and draw date support it. The model should display the business case without terminal proceeds beside the valuation case that includes them. A reviewer can then distinguish repayment generated during operation from value dependent on a future sale or financing event.

GFT proposes testing distributions only after scheduled operating payments, required maintenance, debt payments, restricted reserve movements and documented distribution conditions. A positive annual equity cash-flow total is insufficient if the proposed transfer occurs before customer settlement. Where the financing definition allows distributions despite an operational funding need, management still needs a separately stated liquidity judgement. Conversely, cash restricted for debt service may exist in a bank account while remaining unavailable for wages. Show unrestricted and restricted balances separately.

A reported return should disclose whether the equity cash series contains assumed residual value, unpaid shareholder balances, release of reserves or new equity subscriptions. GFT recommends flagging multiple sign changes before interpreting an IRR and retaining the dated cash series for inspection. The repayment conclusion should stand on the scheduled operating cash and obligations. Valuation can inform a sponsor's decision to take risk; it does not demonstrate that the borrower can pay an identified creditor on the required date.

Every material input should have a unit, currency, price basis, timing convention, responsible role, evidence location and uncertainty classification. GFT proposes distinguishing executed terms, supplier quotations, observed operating records, management estimates and illustrative assumptions. A selected assumption should retain both its supporting record and the reason for selection. Uncertainty should attach to the input that creates it, rather than becoming a final arbitrary adjustment to debt capacity. Historic observations remain historic when copied into a current forecast.

Exhibit 9 specifies a proposed routing architecture. The exhibit is illustrative: it assigns responsibilities and calculation destinations, not measured maturity scores. Production assumptions affect quantities and costs; collection assumptions affect receivables and cash dates. A utility price affects operating costs, while an equipment replacement affects a maintenance schedule. Routing the assumption to its first economic consequence makes double counting easier to detect and helps the reviewer trace a stressed cash balance back to an operating cause.

Keep nominal prices with nominal cash flows and a discount convention consistent with them. A constant-price case should identify its base period and avoid silently escalating selected costs. Currency conversions need an explicit rate basis and date; they must not turn an unverified purchasing assumption into an observed local price. For an input with insufficient evidence, GFT recommends showing the assumption's sensitivity and the record needed to replace it. No exchange rate or inflation forecast is supplied by this chapter.

Before handing the model to a financier, GFT recommends checking that accepted production reconciles to stock movements, dispatches reconcile to the revenue condition, invoices reconcile to receivables, and collections reconcile to receipts. Check that opening cash plus inflows less outflows equals closing cash in every period. Reconcile the debt roll-forward independently and ensure every reserve transfer has an equal and opposite availability movement. A balanced balance sheet alone does not establish these timing links.

GFT also recommends testing the model's direction of response before interpreting its outputs. Later collections should increase receivables or reduce cash until the receipts arrive. Higher scrap should reduce accepted output or raise the resources needed to fulfil an unchanged order. A larger principal repayment should reduce closing debt and cash together. When an assumption produces the opposite effect, inspect signs, circular references and duplicated formulas before debating the business forecast. These directional checks complement reconciliation; a model can balance while routing an economic effect to the wrong period.

Finally, retain a change log connecting each material revision to its supporting record and approval role. A buyer's informal expression of interest should not silently replace an executed payment term. A production trial should not become a full-year acceptance record. GFT recommends reporting the evidence gained, the uncertainty remaining and the cash consequence of that uncertainty together. That makes the model useful to an operating team as well as a credit reviewer.

The handover should preserve the selected base case, the downside using the same contractual schedule, the formula logic and the unresolved evidence list. Record which assumption change causes the earliest payment failure and which responsible role can obtain better evidence. The deliverable is a reviewable capacity range conditional on explicit inputs. It is not a promised financing amount or evidence of lender approval. Further capital decisions should use updated production and collection records, preserving the original assumptions so improvement can be demonstrated rather than asserted.