--- name: cash-flow-statement-interpreter description: "Parses income statements, balance sheets, and cash flow statements to narrate the credit signals that matter for asset-based lending — operating cash flow quality, working capital swings, borrowing base collateral trends, leverage and coverage ratios, and liquidity runway — and flags the specific risks an underwriter must price or condition. Use when interpreting borrower financials for an ABL facility, sizing or monitoring a borrowing base, or diagnosing cash flow deterioration ahead of a credit decision." argument-hint: "[financial-statements] [facility-type]" allowed-tools: ["Read"] --- # Cash Flow Statement Interpreter ## Purpose Translate a borrower's three core financial statements into a credit narrative built for asset-based lending decisions — surfacing where cash is actually generated or consumed, how the collateral pool is trending, and which signals should drive advance rates, covenants, or a decline. Replaces line-by-line statement reading with a structured diagnosis tied directly to borrowing base and repayment risk. ## When to Use Invoke this skill when the user asks to: - Interpret a borrower's income statement, balance sheet, or cash flow statement for a credit decision - Assess operating cash flow quality and whether earnings convert to cash - Diagnose working capital swings affecting an ABL borrowing base - Evaluate liquidity runway, leverage, and coverage ahead of underwriting - Spot deterioration in collateral (AR aging, inventory buildup) from the financials - Build the financial narrative section of a credit memo ## Inputs Required Before starting, collect: - **Financial statements**: Income statement, balance sheet, and cash flow statement — ideally 2–3 periods (annual or interim) for trend analysis - **Facility type**: ABL revolver, term loan, or hybrid — and whether AR, inventory, or both back the borrowing base - **Reporting basis**: Audited / reviewed / compiled / internally prepared, and accrual vs. cash basis - **Industry**: Borrower's sector (affects working capital cycle and collateral conversion norms) - **Existing facility terms**: Current advance rates, covenants, and commitment size if monitoring an existing deal - **Known events**: Recent acquisitions, customer concentrations, one-time items, or addbacks management is claiming If only one period is provided, deliver point-in-time analysis and flag that trend signals are unavailable. If statement quality is unstated, assume internally prepared and caveat reliability accordingly. ## Instructions ### Step 1: Statement Quality & Reliability Check Before interpreting numbers, qualify them: - **Preparation basis**: Audited statements carry full weight; reviewed are moderate; compiled and internally prepared require haircuts and verification at field exam - **Reconciliation test**: Confirm net income flows from the income statement to the top of the cash flow statement, and that the balance sheet ties period-over-period (ending cash on the cash flow statement matches the balance sheet) - **Red flags**: Unexplained restatements, changing accounting policies, round-number suspicious entries, or balance sheet items that don't reconcile to the cash flow movements - State a reliability verdict (High / Moderate / Low) and what verification is needed before relying on it ### Step 2: Operating Cash Flow Quality Determine whether reported earnings are converting to actual cash: - **OCF vs. net income**: Calculate the ratio. OCF persistently below net income signals earnings backed by receivables or inventory rather than cash - **Earnings quality**: Identify how much of OCF is driven by genuine profitability versus working capital release (drawing down AR/inventory) or stretching payables - **Non-cash add-backs**: Separate depreciation/amortization (recurring, real capacity reinvestment need) from one-time or non-recurring items management may be inflating - **Cash conversion**: Express as (OCF ÷ EBITDA). Sustained ratios below ~0.7 warrant investigation into where cash is trapped ### Step 3: Working Capital & Borrowing Base Signals This is the core ABL diagnosis — read the working capital accounts as collateral: - **AR trend & quality**: Calculate Days Sales Outstanding (DSO) across periods. Rising DSO signals slowing collections, possible dilution, or concentration risk — directly erodes eligible AR. Note concentration if a single customer dominates - **Inventory trend & quality**: Calculate Days Inventory Outstanding (DIO). Rising inventory without matching sales growth signals obsolescence or overbuilding — reduces eligible inventory and net orderly liquidation value - **Payables**: Calculate Days Payable Outstanding (DPO). Sharp DPO extension can mask a cash crunch; supplier stretch is an early distress signal - **Cash conversion cycle**: DSO + DIO − DPO. A lengthening cycle means the borrower needs more working capital financing to fund the same revenue — pressure on the revolver - **Borrowing base implication**: For each collateral class, state whether the trend supports current advance rates or argues for tightening (e.g., AR ineligibles rising, inventory turning slower than appraised assumptions) ### Step 4: Leverage, Coverage & Liquidity Size the balance sheet risk and repayment capacity: - **Leverage**: Total Debt ÷ EBITDA and Funded Debt ÷ EBITDA. Note trend and compare to facility covenants if known - **Fixed charge coverage**: (EBITDA − Capex − Cash Taxes) ÷ (Interest + Scheduled Principal). Below 1.0x means the borrower cannot service obligations from operations - **Interest coverage**: EBITDA ÷ Interest. Compression signals thinning margin for error - **Liquidity runway**: Available revolver availability + unrestricted cash, measured against monthly cash burn if OCF is negative — express as months of runway - **Tangible net worth**: Flag if equity is thin, negative, or eroding period-over-period ### Step 5: Risk Synthesis & Credit Narrative Pull the signals into a decision-ready read: - **Top 3–5 signals**: Rank the most material findings by impact on repayment and collateral, each with the specific metric driving it - **Direction**: Is the credit improving, stable, or deteriorating — and at what pace - **Borrowing base verdict**: Whether the financials support, require tightening of, or argue against current/proposed advance rates and eligibility - **Recommended conditions**: Specific covenants, reporting frequency, field exam cadence, or reserves the analysis justifies - **Open questions**: What the statements cannot answer that requires management Q&A or field verification ## Output Format - **Structure**: Five sections following the diagnostic sequence; metrics presented in a comparative table where multiple periods exist - **Length**: 900–1,300 words - **Format**: Structured analytical memo — prose narrative anchored by a metrics table; risk synthesis as a ranked list - **Sections**: Statement Quality & Reliability → Operating Cash Flow Quality → Working Capital & Borrowing Base Signals → Leverage, Coverage & Liquidity → Risk Synthesis & Credit Narrative - **Tone**: Senior credit analyst — skeptical, evidence-led, decision-oriented; states a view rather than hedging ## Quality Checklist Before delivering output, verify: - [ ] Net income reconciles from income statement to cash flow statement, and ending cash ties to the balance sheet - [ ] DSO, DIO, DPO, and cash conversion cycle are calculated with the actual numbers — not described generically - [ ] Every working capital signal is tied explicitly to a borrowing base or advance-rate implication - [ ] Leverage and coverage ratios are stated as figures and compared to covenants when terms are provided - [ ] Risk synthesis ranks 3–5 signals by repayment/collateral impact, not in arbitrary order - [ ] A clear borrowing base verdict (support / tighten / decline) is stated rather than avoided ## Notes - The single most important ABL question is rarely profitability — it is whether the collateral is converting to cash at the pace the advance rates assume. Lead the working capital section accordingly. - Negative OCF is not automatically disqualifying for a growth-stage borrower drawing on a revolver to fund inventory build — but it must be matched by a lengthening, financeable cash conversion cycle, not by losses. - Internally prepared statements should never carry the same analytical weight as audited; when reliability is Low, frame all conclusions as preliminary pending field exam. - DPO extension is the most commonly missed distress signal — borrowers stretch suppliers before they ever miss a bank payment. --- ## How to use this skill This file is a Claude Code skill in [Anthropic's standard format](https://docs.anthropic.com/en/docs/claude-code/skills) — markdown with YAML frontmatter at the top. **Installing in Claude Code:** - `~/.claude/skills//SKILL.md` — auto-loads in every session anywhere on your machine (recommended for skills you'll use across multiple projects) - `/.claude/skills//SKILL.md` — auto-loads only when working in that project (recommended for project-specific skills) Restart Claude Code or open a new session to register. **Using in Claude.ai, ChatGPT, Gemini, or other AI tools:** 1. 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