Two analysts can look at the same twelve months of statements and produce coverage figures far enough apart to change a decision, and both can defend their arithmetic. The disagreement is never about division. It is about which deposits counted, which payments were obligations, and whether the owner was paid.
What separates a ratio that survives a committee from one that gets rebuilt is not precision. It is that each side of the ratio can be walked back to a page: the numerator to deposits in an account, the denominator to payments in a schedule or a statement.
Two numerators, and why mixing them fails
The accounting numerator. Net income, plus non-cash charges, plus interest and sometimes officer compensation above market, less distributions and unfunded capital expenditure. It rests on statements and a tax return, and it inherits every accounting choice the borrower made.
The deposit numerator. Operating receipts in the account, less cash operating costs. It rests on the bank, ignores accruals, and cannot see revenue that was invoiced but not collected, or costs that were incurred but not yet paid.
Each is defensible. What is not defensible is a numerator assembled from both — a tax-return net income with deposit additions on top — because the same cash is then counted on one side as profit and on the other as a deposit. State the basis in the heading of the column, and use one basis per column.
The denominator is a list
A debt service figure written as a single number is a claim that nothing was missed. A list is a claim that can be tested. Write it with the payment, the frequency and where the figure came from.
| Component | Source of the figure | Check that proves it |
|---|---|---|
| Term loan, amortising | Amortisation schedule or twelve statement debits | Payment × 12 equals the annual debits as printed |
| Equipment or vehicle note | Contract or the monthly debit | Amount and date match on every month of the period |
| Lease | Lease schedule or the monthly debit | Term remaining is stated, not assumed |
| Line of credit | Interest actually charged | Limit is not debt service; the payment is |
| Card settlement or merchant advance | Recurring debits, daily or weekly | Annualise by the observed frequency, not by twelve |
| Tax instalment agreement | The debit, plus the notice if available | Shown even though it is not debt; it competes for the same cash |
| Proposed facility | The terms being underwritten | Same amortisation basis as the existing debt |
Two of these rows are where memos go wrong most often: merchant advances annualised on the wrong frequency, and card settlements treated as operating costs when they are repaying a balance. Both change coverage by more than a fraction.
A worked example, both directions
Numerator, deposit basis (12 months)
Total deposits 1,248,000
less transfers between own accounts -183,000
less proceeds of borrowing -150,000
less refunds and reversals -22,000
= operating receipts 893,000
less cash operating costs -612,000
= cash available for debt service 281,000
Denominator
existing term debt 96,000
proposed facility 84,000
= debt service 180,000
Coverage (281,000 / 180,000) 1.56x
If the transfers had not been removed:
(281,000 + 183,000) / 180,000 2.58xThe ratio is displayed to two decimals for reading only; the amounts behind it are kept exactly as printed, because a committee that disagrees with the conclusion needs to re-add the same figures you did, not a rounded copy of them.
One eliminated transfer of 183,000 moves coverage from 1.56x to 2.58x. That is the entire argument for reconciling the numerator to the account: nothing about the division changes, and everything about the answer does.
Global cash flow: subtract the same cash twice
Where several entities and guarantors are combined, intercompany movements are income to one and expense to the other. Sum the entities without elimination and the group is larger than reality by exactly the size of the movement; subtract only one side and it is smaller. Both errors are common and neither is visible in the final ratio.
The practical rule: whenever two entities are combined, every line that names the other entity is a candidate elimination, and the elimination gets its own row with the amount and the two pages it appears on. In files where related-party rent is involved, decide once whether rent survives elimination and apply that decision to every file, because the two treatments produce materially different coverage.
Seasonality and the four numbers that go with the ratio
- The worst quarter. Annual coverage can be adequate while the first quarter is below one, which for a monthly repayment is the quarter that decides the deal.
- Negative days and lowest balance. Liquidity, not profitability, is what causes the default that shows up in a portfolio review.
- Owner draws in the period. The cash that actually left, not the salary that was booked.
- The largest single deposit and its source. If coverage depends on one payment, the file should say so before someone else notices.
When not to use us
- The file needs an audited or reviewed figure. Reconstructing cash flow from an account is not an assurance engagement and should never be presented as one.
- Most activity is off-bank. If revenue largely bypasses the account, the deposits are an incomplete record and the numerator built from them is not a lower bound — it is a different business.
- You want the ratio decided for you. The basis, the eliminations and the treatment of owner pay are credit judgements. Our job is to make the arithmetic underneath them checkable.
Where SheetParser fits
The reconciliation is the part we do: deposits totalled by month and by counterparty, transfers between the borrower's own accounts identified so they can be excluded rather than guessed at, refunds and reversal pairs matched, and recurring debits listed with the description as printed and the frequency made visible. Every figure carries the page it came from, so when the committee asks about the 183,000 the answer is a page rather than a conversation.
The judgement stays with you, which is as it should be: whether the management fee is eliminated, whether the advance is annualised weekly or daily, whether the owner's pay is at market. The tool does not choose, and it does not correct a figure to make a ratio look better. For the obligation hunt that feeds the denominator, see the SBA statement review; for the deposit side, deposit analysis.