DSCR - Much more than an indicator - Pt. 3

In the first two parts of this contribution we have seen the general principles underlying the construction of the DSCR, in its most classical formulation.

The DSCR also made its debut in the Crisis Code, in the version prior to its definitive entry into force in 2022, and more specifically in art. 13, which in its original version (then completely rewritten in the new version in force from 15/07/2022), in paragraph 1 stated as follows: “ Indicators of crisis are imbalances of an income, equity or financial nature, related to the specific characteristics of the company and the entrepreneurial activity carried out by the debtor, taking into account the date of incorporation and start of the activity, detectable through specific indices that provide evidence of the unsustainability of the debts for at least the following six months and the absence of prospects of business continuity for the current financial year or, when the residual duration of the financial year at the time of the assessment is less than six months, in the following six months. For these purposes, significant indices are those that measure the unsustainability of the debt burdens with the cash flows that the company is able to generate ”.

A central element of the Crisis Code is the alert and prevention system , aimed at the early detection of the state of crisis and the adoption of suitable initiatives to counteract the onset of the crisis itself, with a view to safeguarding business continuity .

All this through the adoption, by the company, of an organizational, administrative and accounting structure that is appropriate to the nature and size of the company.

Even though from 15/07/2022 art. 13 of the Crisis Code has been completely rewritten, eliminating any reference to the construction of such indices, it is considered useful to report the position on the subject of the CNCDEC which, in its own document of 20 October 2019, had proposed the adoption of specific warning indices, introducing a "hierarchical" system of application of the same, in successive steps, which saw the DSCR in a leading position compared to the others, to identify the business crisis.

According to the CNDCEC, the periodic verification of financial sustainability in the short term can be measured precisely through the DSCR, which indicates the ability to repay the debt , provided that the control bodies – due to the complexity of this indicator – do not consider the data used for its calculation to be unreliable.

Contrary to the DSCR in its "classic" version described so far, suitable for the banking and project financing world, the DSCR reformulated by the CNDCEC on the occasion of the Crisis Code is a prospective and 6-month DSCR , which arises from a treasury budget or from a forecast financial statement , depending on the type of approach.

In fact, precisely because of the complexity of its calculation, the CNCDEC had foreseen two alternative approaches, both based on 6-month forecast flows , but with these differences.

FIRST APPROACH : we are based on a 6-month treasury budget .

In the NUMERATOR we will have:

• the opening cash balances;
• the total cash inflows expected in the next 6 months;
• the expected liquidity outflows for the same period (with the exception of debt repayments in the denominator).

It should be noted that the numerator thus calculated also takes into account investment management and financial management; within the latter, the active flows deriving from unused credit lines are also relevant, the use of which becomes available within the reference time horizon; with reference to self-liquidating lines , however, they must be considered usable only for the part relating to trade credits which, on the basis of the agreed provisions, can be anticipated.

In the DENOMINATOR we will have:

• the contractually foreseen outflows for the repayment of financial debts (towards banks or other financiers). The repayment is intended as payment of only the capital portion contractually foreseen for the following six months (note: it is believed that there was an oversight since the interest portion must also be taken into account in the repayment! ).

SECOND APPROACH : it is based on a 6-month prospective financial statement (more complex to construct than the first approach!)

In the NUMERATOR we will have:

• initial liquid assets;
• the operating flows servicing the debt ( Free Cash Flow from Operations , FCFO ) of the following 6 months, determined on the basis of the financial flows deriving from operating activities by applying the OIC 10 principle, deducting from them the flows deriving from the investment cycle (for this purpose, the arrears referred to in the last 2 points of the denominator as determined below do not contribute to the calculation of the operating flows);
• the available credit lines that can be used in the reference time horizon (with reference to self-liquidating lines, these should be considered usable only for the part relating to trade credits which, on the basis of the agreed provisions, can be advanced).

In the DENOMINATOR we will have:

• the expected payments, for principal and interest, of the financial debt;
• the non-current tax or contribution debt , including penalties and interest, i.e. an overdue debt which has not been paid by the legal deadlines (and therefore has expired or is subject to instalments) and whose payment, also by virtue of agreed instalments and deferrals, falls due within the following 6 months;
• the outstanding debt towards suppliers and other creditors whose payment delay exceeds the normal physiological limits (in the case of debt deriving from repayment plans agreed by suppliers, the relevant part, including the related interest, which expires within the 6 months of reference).

Beyond the subsequent reformulation of art. 13 of the Crisis Code, which has decidedly dampened the appeal of the DSCR within this legislative text, there remains considerable interest in the DSCR as proposed by the CNDCEC, and this is especially true for the 1st approach which, by forcing the periodic construction of a treasury budget, allows the entrepreneur to achieve greater awareness of the numbers of his company, which in this way would be monitored in a constant and systematic way, something rather rare in the vast majority of micro-enterprises with a limited shareholder base or family-run.

In the fourth part of this article, a particular variant in the calculation of the DSCR contained in the practical test for the new negotiated composition of the business crisis will be analyzed.