Demystifying generated funds

Generally speaking, generated funds are the net profits plus the accounting expenses that do not result in an expenditure: they are the cash flows generated by operations.

In other words, they are calculated by taking net profits and adding total taxes (minus the taxes payable in the year), interest on short-term debt, and amortization.

Generated funds are the money that the company has generated from its day-to-day operations during the year. They are an important indicator for lenders and are used to calculate the company’s repayment capacity, which is one of the main criteria in whether or not to grant financing.

Repayment capacity is evaluated based on factors including the debt coverage ratio, which is calculated as follows:

Generated funds for the year
Capital payable during the year on long-term debt + interest

A positive ratio of 1.5, for example, means that the company’s day-to-day operations are generating enough to pay its debtors. For every dollar the company owes, it generates $1.5. Ideally this debt coverage ratio should be above 1.

If the ratio is less than 1, the company may struggle to pay back the sums it owes, and conversely, an overly high ratio shows that the company theoretically has sufficient cash flow to repay its financial obligations.

An overly high ratio compared to the industry average may also mean that the company is not using the loan sufficiently.


Borrowing can be a helpful way to boost growth or profitability.