Cash Flow Available for Debt Services (CFADS)

Money can be particularly tight for businesses during growth phases. So, how can you and your bank manager be sure you’ll have the funds to keep things in your business moving next financial year? Measuring your cash flow is a good place to start, but the bigger question is ‘how?’ One effective method is by assessing your CFADS (Cash Flow Available for Debt Service) – a key metric that provides a clear view of your ability to meet debt obligations and maintain financial stability during growth.  This metric can be a vital tool for ensuring financial stability during times of growth.

How to Manage Cash Flow: From Basic Tracking to Smart Forecasting

The Risks of Not Measuring Cash Flow Properly

Many businesses measure their sales, leads and other activities, but fail to measure cash generation. Fast-growing businesses in particular can invest heavily in inventory and payroll before seeing the inflows. If you’re seeking financing, lenders will want solid evidence of actual cash generation. It can also become an issue if you need business finance, since banks will want solid evidence of cash generation.

Why EBITDA Isn’t Enough to Measure Cash Flow

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is often used as a quick proxy for cash generation. However, even high EBITDA doesn’t guarantee liquidity, and EBITDA itself cannot give the same results as other methods – such as CFADS. That’s because EBITDA ignores changes in working capital, capital investments, dividends, and tax payments – not to mention the timing of those cash flows.

What are CFADS?

Cash Flow Available for Debt Service (CFADS) represents the cash a company generates that remains to cover its debt obligations. It’s calculated after accounting for operating costs, taxes, and maintenance-level capital expenditures, but before interest and principal payments. CFADS is a cornerstone of project finance and helps determine critical coverage ratios like DSCR, LLCR, and PLCR (Corporate Finance Institute, Breaking Into Wall Street).

CFADS: The Most Effective Way to Measure Cash Flow

Arguably the best measure of cash flow is CFADS. We frequently see this used when raising finance for deals such as management buyouts. Banks often lend based on the strength – or covenant – of the business and are particularly focused on cash generation as they hope to be repaid. For example, before lending they will think about five things:

1. Financial risk – how leveraged is the business? In other words, how much capital has it borrowed with the expectation of higher profits?
2. Business risk – how sustainable is the cash generation? Is there any seasonality? Is there a history of bad debt? 
3. USP – what is special about the business that will help to protect its trading and cash generation?
4. Risk management plan – does the company have a plan B for managing cash if things go wrong?
5. CFADS – if ‘Cash is King’, then CFADS is the heir to the throne in the eyes of a banker. Banks will measure this against the debt and interest that the company needs to repay.

In this respect, it is worth taking a leaf from the bankers’ book and use some of their assessment techniques on your own business.

How to Calculate CFADS

The CFADS formula is quite simple and is defined as: EBITDA +/- changes in working capital +/- corporation tax +/- capex +/- dividends. You should compare this to your debt service obligations (i.e. your business’ bank and asset finance repayments, including interest). If CFADS is between one-and-a-half and two times greater than your debt obligations, then your cash flow should be healthy and secure, and you can rest easy.

The CFADS formula most commonly used in project finance is:

CFADS = EBITDA – Cash Taxes – ΔWorking Capital – Maintenance CapEx

This aligns with industry-standard modelling approaches (Breaking Into Wall Street). An alternative method begins with customer receipts and deducts operating disbursements, taxes, and capex (Corporate Finance Institute, British Business Bank).

Once calculated, compare CFADS to your debt service obligations (interest + principal). A DSCR (Debt Service Coverage Ratio) of at least 1.2× to 1.5× is often the minimum lenders require, depending on risk profile.

Weak CFADS

Reasons why you might have weak CFADS include:

• Sales growth (cash sucked into funding debtors) 
• Poor debtor collection
• Rising stock balances (perhaps because of slow-moving items)
• Uncontrolled WIP
• Your creditors need paying quickly, but you have slow-paying debtors

Overly strong CFADS

If your CFADS is more than two times your debt obligations, then you should be thinking about investment plans. For example, you could look at buying a business or planning tax strategies to extract cash from the business.  

Many business owners with strong CFADS simply leave the cash to build up on their balance sheet. This reduces financial risk of course – but overly large cashflow balances can make it difficult to secure entrepreneurs’ relief upon a sale of the business. So, it is important to reflect on an appropriate level of cash to hold if you are planning an exit strategy.

Actionable Takeaways

When dealing with cash flow calculations, PEM recommend the following:

• Use CFADS over EBITDA for forecasting debt servicing capacity.
• Aim for a DSCR of at least 1.2×, adjusting higher for risk.
• Evaluate LLCR to ensure viability over the debt term.
• Consider reinvesting or distributing surplus cash if CFADS is consistently strong – thoughtfully balancing tax and exit strategy.

For more advice and support on managing and accessing your cash flow, you can always speak with our helpful financial advisors.