Calculating living expenses in a global cash flow analysis
Sageworks recently hosted a webinar, Global Cash Flow Analysis: What, When, Why, and How, which featured David Matricciano, owner of DM Analytics LLC, and Chuck Nwokocha, director of advisory services at Sageworks. They discussed best practices, adjusting for double counting, and inconsistencies with spreadsheet-based programs. During the presentation, several questions were asked by attendees. In this post, Nwokocha answers questions about calculating living expenses in a global cash flow analysis.
Q: What is the best and most supportable way to calculate living expenses?
A: The most supportable way is to be consistent. Some institutions utilize a base formula, starting with a floor and a ceiling. For example, assume a floor of $12,000 for basic expenses of $1,000 per month for two people. If the borrower has a mortgage, the amount would be added on top of this. If they do not, rent payments are added based on averages for the area. Additionally, a specified amount, generally $2,000 to $5,000 is added for each additional family member. In this example, an annual calculation of living expenses for a family of four would look like this: $12,000 + $5,000 + $5,000 = $22,000 (plus any rent/mortgage payments). Other institutions use a flat amount, such as $25,000. Regardless of the method, it is important to be consistent.
Q: What percentage of living expenses should be used if the borrower has no reported wages on their tax return?
A: Some institutions use a percent of Adjusted Gross Income (AGI) to calculate the living expenses, which generally ranges from 8% to 18%. However, it is important to figure out the assumptions that are included in the cost of living expenses. For example, does it include rent or mortgage payments and car notes? Also, it is important to check that the AGI includes any income in addition to wages, such as social security, capital gains, pensions, real estate, and business income. This is especially important when the borrower has reported little or no wages.
For more information on global cash flow analysis, a recording of the webinar presentation and slides are available here.
Sageworks, a financial information company that provides risk management solutions to financial institutions, hosts webinars in its monthly 2013 webinar series. These free, educational webinars are led by banking industry experts who bring unique market intelligence, insights and best practices to our financial institution clientele. Access archived webinar recordings and sign up for future webinars here.