CFADS: cash flow available for debt service, with a small business example

Short answer: CFADS, cash flow available for debt service, is the cash a business has left over to pay its lenders (interest and loan repayments) after running costs, tax actually paid, the money tied up in stock and customers, and the spending needed to keep its equipment going. The usual formula is CFADS = EBITDA − tax paid − increase in working capital − maintenance capital spending, plus or minus any one-off items the lender agrees to. Lenders divide it by the year’s interest and principal to get the debt service cover ratio (DSCR), and they size new loans from it. A brewery with £140,000 of CFADS and £68,000 of yearly repayments has a DSCR of 2.06 times, but whether it can borrow £180,000 more or only about £49,000 depends on one detail: whether the lender takes the owners’ dividends off first.

The CFADS formula

Line	What it is
EBITDA	Profit before interest, tax, depreciation and amortisation
less tax paid	The tax actually paid in the period, not the tax charge in the accounts
less increase in working capital	More cash tied up in debtors and stock, less owed to suppliers (a decrease adds back)
less maintenance capital spending	Replacing worn-out equipment, vehicles and fittings, to keep the business as it is
plus or minus agreed adjustments	One-off costs or income the lender agrees to leave out
= CFADS	The cash available to pay interest and loan repayments

What is not taken off: interest and loan repayments (they are the debt service CFADS has to cover), and usually spending on growth that the new loan itself pays for. “Debt service” means interest plus principal for the year, on every loan, hire purchase and equipment finance agreement.

The term comes from project finance, where cash pays out in a fixed order (running costs, tax, debt, then owners) and CFADS is the cash at the debt line. Small business lenders use the same idea, sometimes called cash available for debt service (CADS), but many take the owners’ drawings or dividends off too, because owners of small businesses rarely leave the cash in. Some UK and Australian lenders call the resulting ratio cash flow cover.

A worked example: a brewery in Glasgow

These figures are made up. Fiona and Callum own a limited company that brews beer and sells it to pubs and shops. Their pay is through payroll, so it is already in the costs. Every figure is in pounds without VAT.

Year to March 2026	£
Sales	1,200,000
EBITDA	210,000
less depreciation	(40,000)
less interest on the existing loan	(18,000)
Profit before tax	152,000

Brackets are minus figures.

CFADS, starting from EBITDA

	£
EBITDA	210,000
less corporation tax paid in the year (last year’s bill, paid 9 months after the year end)	(34,000)
less increase in working capital: more stock and pub accounts as sales grew	(12,000)
less maintenance capital spending: replacement kegs and a pump	(24,000)
CFADS	140,000

Depreciation is not taken off: it is an expense with no cash leaving, and the real replacement spending is the £24,000 line.

The same figure from the cash flow statement

Lenders often check CFADS against the cash flow statement, and the two routes should agree:

	£
Net cash from operating activities (152,000 + 40,000 depreciation − 34,000 tax − 12,000 working capital)	146,000
add back interest paid, which Xero has in operating activities here	18,000
less maintenance capital spending	(24,000)
CFADS	140,000

Debt service cover today

The existing loan costs £18,000 of interest and £50,000 of principal a year: £68,000 of debt service.

Lender’s definition	CFADS (£)	DSCR
CFADS as above (project finance style)	140,000	140,000 ÷ 68,000 = 2.06x
After the directors’ £40,000 of dividends (common with small business lenders)	100,000	100,000 ÷ 68,000 = 1.47x

Both pass a typical covenant of 1.25 times, but the headroom is very different.

How much more can the brewery borrow?

Fiona and Callum want a canning line, paid for with a new loan over 5 years at 8%. A lender that requires 1.25 times will allow total yearly debt service of up to CFADS ÷ 1.25:

	Before dividends	After dividends
Most debt service allowed (CFADS ÷ 1.25)	112,000	80,000
less the existing loan	(68,000)	(68,000)
Room for new repayments, a year	44,000	12,000
Monthly repayment that fits	3,666.67	1,000.00
Largest new loan at 8% over 5 years	about £180,800	about £49,300

The same brewery, the same year: the definition of CFADS changes what it can borrow by nearly four times. If the canning line costs £150,000, the second lender will say no unless the directors take less out, the term is longer, or part is paid from cash. Ask which definition the lender uses before you apply, and put it in writing.

How to work out CFADS from Xero

1. EBITDA. Run Accounting › Reports › Profit and Loss for the last 12 months (or the last financial year if the lender tests that). Add interest, depreciation and amortisation back to Net Profit, and add back income tax if your file has it as an expense. The EBITDA calculator does this step.
2. Tax paid and working capital. Run the Statement of Cash Flows for the same dates. It shows the change in debtors, stock and creditors, and tax payments (how to read it). Or start from “Net Cash Flows from Operating Activities” as in the second table above, adding back interest paid if your interest account sits in that section.
3. Maintenance capital spending. Look at the fixed asset accounts or the investing section of the same report, and split replacement spending from growth spending. Xero cannot tell them apart, so keep a short note of what each purchase was.
4. Debt service. Add a year of interest and principal on every loan and finance agreement. The loan statements are the most reliable source; in Xero, principal is the fall in each loan balance on the Balance Sheet.
5. Divide. CFADS ÷ debt service is the DSCR. Do it again with the new loan’s repayments added, which is the figure the lender will look at. The debt service coverage ratio calculator works out the ratio, the room left at 1.25x and the largest new loan that fits.

Menu names move between Xero releases and regions, so search Xero Central for the report name if your screen differs.

Common mistakes

• Using the tax charge instead of tax paid. CFADS is cash. A growing company often pays less tax in the year than the accounts charge, and a shrinking one more.
• Leaving out working capital. Growth ties up cash in stock and customers. A business can grow EBITDA and still have less cash to pay the bank.
• Treating depreciation as maintenance spending. It is a rough guide at best. Use what you actually spend, or expect to spend, to keep the equipment working.
• Taking off the interest twice. If you start from net cash from operating activities, interest paid may already be in it. Add it back, because CFADS is before debt service. In audited accounts it depends on the standard: IAS 7 currently lets a company put interest paid in operating or financing activities, and from annual periods beginning on or after 1 January 2027 IFRS 18 moves it to financing for most businesses, so the operating figure rises with no change in the cash.
• Counting growth spending the new loan pays for. Taking the canning line itself off CFADS would make the loan look unaffordable for the wrong reason.
• Forgetting the owners. For a sole trader or partnership, the owners’ pay is not in the Profit and Loss. A lender will take drawings off, so do the same.

Common questions

What is CFADS? CFADS stands for cash flow available for debt service. It is the cash a business generates after running costs, tax paid, changes in working capital and maintenance spending, before paying interest and loan repayments. Lenders use it to work out how much debt a business can carry.

How do you calculate CFADS? Start with EBITDA, take off tax actually paid, take off any increase in working capital (or add a decrease), and take off maintenance capital spending. For example, 210,000 of EBITDA less 34,000 tax, 12,000 working capital and 24,000 maintenance spending gives CFADS of 140,000.

Is CFADS the same as EBITDA? No. EBITDA is a profit figure before tax and before any spending on equipment or working capital. CFADS takes those cash costs off, so it is usually well below EBITDA. Lenders size loans on CFADS because tax and equipment have to be paid before the bank.

What is the difference between CFADS and DSCR? CFADS is an amount of cash. DSCR, the debt service cover ratio, is CFADS divided by the year’s debt service (interest plus principal). CFADS of 140,000 and debt service of 68,000 give a DSCR of 2.06 times.

Is CFADS before or after dividends? In project finance it is before dividends, because the owners are paid only after the lenders. Many small business lenders take dividends or drawings off first, which gives a lower figure and a lower ratio. The loan agreement sets the definition that counts.

What is the difference between CFADS and free cash flow? They are close. CFADS usually takes off only maintenance spending and the tax actually paid, while unlevered free cash flow takes off all capital spending and tax as if there were no debt. See unlevered vs levered free cash flow for the free cash flow version.

Know where the cash is going before the lender asks

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