5 States of Cash (5S0C)

Understanding how cash moves through a business cycle reveals both opportunities and risks in credit transactions.

1️⃣ 1st State: Bank Deposit

The cash first starts off in the bank.

2️⃣ 2nd State: Lending

The cash is then lent to the borrower.

3️⃣ 3rd State: Utilization

The borrower uses the cash to buy inventory.

4️⃣ 4th State: Accounts Receivable

After selling the inventory on credit, the borrowers receive AR.

5️⃣ 5th State: Collection

When the AR comes due, the borrowers collect cash. Using which, they can choose to service the loan to the bank.

The Risks in Changing the 5 States of Cash

⚠️ Disbursement Risk

Lending to the wrong borrower*

What it is: Funds given to fraudulent entities (e.g., 1MDB scandal)

⚠️ Diversion Risk

Funds used for unintended purposes*

What it is: Cash diverted for other causes, over servicing debts.

Red Flags: Repaying shareholders / ‘Consultancy fees’ to related parties

⚠️ Utilisation Risk

Inefficient or unproductive use of funds

What it is: Funds are used in ways that do not generate value (e.g., buying sports cars).

⚠️ Credit Risk

Default or delayed repayment

What it is: The risk that the borrower fails to repay the loan as agreed.

⚠️ Performance Risk

Failure to meet financial or operational goals

What it is: The inability to generate sufficient cash flow to repay debts.

📎 Download the Visual Guide –> : 5 States of Cash (5SOC)

🔗 Related Modules

Debt Capacity AnalysisEnterprise Value AnalysisDuPont Analysis

🏷️ Tags:

#CashFlow #CreditRisk #Lending #WorkingCapital #FinancialRisk #Banking #CreditAnalysis