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Which to use?

Do I use OBI or NIPB in Global Cash Flow?

Jennifer’s question:

Hi Linda, I had my first conflict on Operating Business Income (OBI) vs Net Income per Books (NIPB) today.  I normally start my cash flow with OBI.  On the tax return I was analyzing today, OBI = (568).  The company ended up with negative cash flow. 

Later I saw on Schedule K that the company had $709,000 in royalty income.  This isn’t reflected in the OBI, but is reflected in the NIPB.  The NIPB =  460,000.   

Now I am questioning which number to start my cash flows with going forward.  What do you suggest?

Linda’s answer:

Net Income Per Books will include things that OBI does not.

What I generally do is start with OBI but also, and always, review Schedule K for items that will not be in OBI when the entity is a pass-through.

That includes rental net profits, interest, some capital gains, and royalties in the income side. Also charitable contributions among other items on the expense side.

If the royalties showing on Schedule K are significant and recurring, I would definitely use them. You do not need to start with NIPB to do that.

Each bank and credit union will choose their own approach, start with OBI or NIPB. If it is a business tax return and you start with NIPB, you need to reconcile every item in Schedule M-1 to find non-cash and even some non-recurring items. If you start with OBI, you need to pick up what is on the Schedule K for pass-through entities as well as look to the Schedule M-1 for non-cash items.

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About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.