For creditors, cash flow almost always trumps all other accounting-based measures. This is in stark contrast to investors who care more about current earnings measures because current earnings are a better predictor of future operating cash flows than current operating cash flows.
According James Adams, a senior analyst at Sageworks (provider of credit risk management), the following procedures are helpful in analyzing whether to advance a loan to a company:
1. Declining account balances in cash flow are a reliable leading indicator for predicting delinquencies.
2. Review tax documents in lieu of company-prepared statements because some borrowers might be tempted to overstate their income in order to qualify for a bigger loan. They are less inclined to do so on tax returns
3. The accelerated depreciation schedules used for tax returns result in more conservative asset valuations which is another reason to prefer tax documents over company-prepared statements.
4. As a general rule, strong balance sheets are also correlated with healthy liquidity positions.
5. Also important are credit reports, loan repayment history, cash balances, and new asset acquisitions.
http://daily.financialexecutives.org/how-banks-analyze-a-business-to-interpret-its-cash-position/
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