Cash flow and income analysis are critical tools for lenders in assessing the financial health of a borrower and determining their creditworthiness.
Income verification is the way in which a lender determines if a borrower can make payments on a loan such as a mortgage, auto financing or student loans. Cash flow analysis, on the other hand, is the examination of a company’s different cash inflows and outflows, giving lenders a detailed picture of its financial health.
The main goal of cash flow and income analysis is largely the same: To evaluate a borrower’s ability to generate sufficient income to meet their financial obligations, including loan repayments. This analysis helps lenders make informed decisions about whether or not to extend credit and at what interest rate and loan term.
Manually analyzing cash flow and income can be time-consuming and labor-intensive, often involving sifting through large amounts of financial data and documents. This can lead to errors or omissions, which can increase the risk of lending to borrowers who may not be able to meet their financial obligations. Without automation, the process of cash flow analysis can take days or even weeks to complete.
By leveraging automated tools, lenders can streamline these processes, more accurately analyze a borrower’s income and cash flow and make informed lending decisions that minimize risk.
How do you analyze cash flow?
Income verification is a critical step in the analysis process, helping lenders determine if a borrower has the financial capacity to make loan payments. This process involves verifying the borrower’s income by reviewing various financial documents, including bank statements, pay stubs and tax forms. By analyzing these documents, lenders can assess the borrower’s income stability, employment status and overall ability to repay the loan.
Differently, cash flow analysis is a comprehensive examination of a borrower’s income and expenses over a period of time to determine their ability to repay a loan. This process involves reviewing various financial documents, including income statements, balance sheets and cash flow statements, with the goal of determining the borrower’s ability to generate sufficient cash inflows to meet financial obligations.
Without the aid of automation, the process of analyzing cash flow can be very manual and time-consuming. It typically involves collecting and organizing financial data, calculating financial metrics and interpreting the results to assess the borrower’s creditworthiness. The most time-consuming aspect of the process is often the manual entry and verification of financial data, which can be prone to human error and inconsistency. These risks can lead to inaccurate assessments of a borrower’s financial health, potentially resulting in lending decisions that are not in the best interest of the lender.
With automated tools like Ocrolus, lenders can streamline the cash flow analysis process, reducing the time and resources required to accurately assess a borrower’s financial health. Automated income verification software enables lenders to quickly and accurately collect and analyze financial data while detecting fraud and documents that have been tampered with, reducing the risk of errors and inconsistencies. This ultimately helps lenders make informed lending decisions and decrease the overall risk associated with lending.
What trends should you assess when analyzing cash flow data?
When analyzing cash flow data, lenders should assess various trends and outliers to determine the financial health of the borrower, such as:
Revenue Trends:Lenders may assess revenue trends to determine the growth or decline of a borrower’s business. A significant decline in revenue may indicate that the borrower is struggling to generate sufficient cash inflows to meet their financial obligations.
Expense Trends:Lenders may also assess expense trends to determine the borrower’s ability to manage their costs effectively. A significant expense increase may indicate that the borrower struggles to manage their cash outflows.
Seasonality:Many businesses experience seasonal fluctuations in revenue and expenses and lenders should account for this when analyzing cash flow data. For example, a retailer may experience high revenue during the holiday season but lower revenue during other times of the year.
Outliers:Lenders should also look for outliers in the data, such as unusually high or low revenue or expenses. These outliers may indicate a significant event, such as a one-time windfall or an unexpected expense, that could impact the borrower’s ability to meet their financial obligations.
Debt Service Coverage Ratio:Lenders may also calculate the debt service coverage ratio (DSCR), which measures the borrower’s ability to repay their debt obligations. A DSCR of less than 1 may indicate that the borrower is struggling to generate sufficient cash inflows to meet their debt obligations.
Generally, lenders should look for trends and outliers that may impact the borrower’s ability to generate sufficient cash inflows to meet their financial obligations. By identifying these trends and outliers, lenders can make informed lending decisions and minimize the risk of default or non-payment.
Why Automation is Key to Improved Speed and Accuracy of Income and Cash Flow Analysis
Automation is essential for improving the speed and accuracy of income and cash flow analysis for lenders. It offers several benefits, including the ability to quickly and accurately classify and capture large volumes of documents and data, generate detailed financial insights and analytics and gain a better understanding of the seasonality of a borrower’s cash flow.
By eliminating manual data entry and analysis, automation reduces the risk of errors associated with human data entry, improves accuracy and frees up resources for higher-value tasks, such as making informed lending decisions and managing customer relationships.
Lenders can leverage cash flow automation solutions to gain valuable insights into a borrower’s financial health and make informed lending decisions that minimize risk and improve loan portfolio performance. By reducing manual effort, improving accuracy and providing detailed financial analytics and insights, automation helps lenders to streamline the income and cash flow analysis process and make faster, more informed lending decisions.
Ocrolus Cash Flow and Income Analysis Automation for Lenders
Ocrolus is a leading automation solution for income and cash flow analysis, leveraging advanced document capture technology including robotic process automation (RPA) and AI-powered document automation as part of a comprehensive platform for evaluating cash flow and credit risk.
What sets Ocrolus apart is its ability to quickly and accurately capture large volumes of data from a variety of sources, including bank statements, pay stubs and tax forms. This data is then analyzed and presented in a clear, actionable format that enables lenders to make informed decisions related to a borrower’s ability to repay a loan.
Ocrolus streamlines the process of analyzing cash flow data by providing lenders and financial institutions with faster, more accurate insights into borrower financial health from a variety of sources. By combining customer bank statements with bank data feeds, Ocrolus enables lenders to make sense of cash flow analytics from multiple sources to make informed decisions.
With a more detailed picture of a borrower’s income and cash flow, lenders and financial institutions can identify potential risks and outliers, minimize risk, improve loan portfolio performance and ultimately build stronger, more profitable customer relationships.
Cash flow and income analysis is a critical component of lending and understanding borrower financial health. Automated solutions like Ocrolus provide lenders with a faster, more accurate way to analyze cash flow data, reducing the risk of errors associated with manual data entry and providing valuable insights into borrower behavior.
By streamlining cash flow and income analysis with intelligent document automation technology like Ocrolus, lenders can make smarter lending decisions, improve loan portfolio performance and better manage risk.
Book your demo to discover how Ocrolus’ helps lenders make accurate income and cash flow analysis to efficiently manage risk, avoid fraud and make informed decisions.