For a moment, let’s leave aside the regulatory obligations, often experienced as “stomachache” by entrepreneurs and managers: what is the purpose of correlating cash flows to the service of financial debt?
First of all, let’s clarify the acronym: Debt Service Coverage Ratio (DSCR) expresses the foreseen ability to repay financial debts, as the ratio between cash flows and debt portions to be paid, period by period.
In the example in the figure, 2020 appears to be a “virtuous” year, with a DSCR greater than 1: in fact, in the table we see a cash flow of 1.2 M €, sufficient to honor a repayment of 1 M € of debt, with a margin of 200 thousand euros (20%).
Conversely, 2021 appears to be a problematic year: forecasts indicate the generation of 1.4 M € of cash, against 2 M € of debts to be honored, with a DSCR clearly lower than 1: the Management will have to take measures to avoid the “Iceberg” and direct the ship to a safe harbor.
Could an informed and information-based decision-making process (not feelings!) help the maneuver?
I think so.
Antonio Rinaldi
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