In credit analysis, cash flow analysis primarily assesses a customer's ability to do what?

• A. Generate and manage cash.
• B. Pay outstanding debt from equity injections.
• C. Forecast market demand.
• D. Measure asset liquidity only.

Answer: (A)

Cash flow analysis in credit assessment focuses on the borrower's ability to generate and manage cash to meet obligations. It looks at how much cash is produced by operations, how it's used, and whether there is enough cash to cover debt service and other commitments as they come due. This is why generating and managing cash is the best answer: it directly reflects whether the borrower can sustain payments even if margins or profits fluctuate, since cash availability determines the ability to pay principal and interest when due.

Forecasting market demand, by contrast, concerns future sales prospects rather than the actual cash available to service obligations. Measuring asset liquidity only assesses how quickly assets can be converted to cash, not the ongoing ability to generate cash from operations. Relying on equity injections to pay debt ignores the borrower’s own cash-generating capability and cash management, which are central to repayment viability.