When it comes to the risk of default, Moody’s found that during COVID-19, American businesses had a 7.8 percent chance of defaulting. This is compared to a low of 4 percent in 2021, but lower than the current 9.2 percent risk of default, according to a March 2025 report by the rating agency.
Also known as cash flow available for debt service, CFADS determines how much cash is available to service debt obligations. It looks at different cash inflows/outflows to show both internal (owners and managers) and external audiences (investors) how efficient (or not) a business is in its ability to produce cash flows and manage its debts without defaulting.
While one method businesses use is balancing client sales, it is also common to look at various accounting entries, including Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The results of CFADS are often used by financial analysts when creating coverage ratios, including the project life coverage ratio (PLCR), the debt service coverage ratio (DSCR), and the loan life coverage ratio (LLCR). It can sometimes take the place of EBITDA in certain circumstances. It’s important to note that the three coverage ratios show how well a plan is able to service and not default on debt throughout the entire project’s period.
For example, the DSCR = CFADS / Scheduled Debt Service (Interest + Principal Obligations)
Once this is calculated based on the company’s project specifications, if the result is greater than 1, then it signifies and gives greater confidence to internal and external audiences that the company will be able to meet its milestones and final payments.
The most efficient formula for calculating CFADS is as follows:
EBITDA – Taxes – Positive or Negative Result of Working Capital – Capital Expenditures for Maintenance Only
$200,000 (EBITDA) – $30,000 (Taxes) + $20,000 (assuming there’s a negative $20,000 change in working capital) – $40,000 (assuming the capital expenditure investing in maintenance)
CFADS = $150,000
Sometimes the calculation includes dividends, which need to be factored into the calculation. This example assumes it is not part of the calculation.
Interpreting Results
It’s important to understand that a more detailed analysis helps all audiences determine if the projected cash flow is available for different claimants of the business. While most of the calculations are done via the waterfall model, it’s important to analyze it based upon senior and junior debt, along with equity. If a company declares bankruptcy, senior debt holders are the first priority to be made whole (or as whole as possible, depending on the circumstances). Senior debt is collateralized or secured with company assets that are sold off during bankruptcy. From there, junior debt holders are next in line, followed by convertible note holders, then preferred stockholders, and finally common stockholders.
While this calculation is only one part of the way internal and external stakeholders can measure a company’s financial health, with the chance of more firms defaulting on debt, it’s another tool in a financial analyst’s toolbox.
Alan F Burke CPA
Cash Flow Available for Debt Service (CFADS)
May 1, 2025 · Blog, General Business News
⏱ 3 min read
When it comes to the risk of default, Moody’s found that during COVID-19, American businesses had a 7.8 percent chance of defaulting. This is compared to a low of 4 percent in 2021, but lower than the current 9.2 percent risk of default, according to a March 2025 report by the rating agency.
Also known as cash flow available for debt service, CFADS determines how much cash is available to service debt obligations. It looks at different cash inflows/outflows to show both internal (owners and managers) and external audiences (investors) how efficient (or not) a business is in its ability to produce cash flows and manage its debts without defaulting.
While one method businesses use is balancing client sales, it is also common to look at various accounting entries, including Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The results of CFADS are often used by financial analysts when creating coverage ratios, including the project life coverage ratio (PLCR), the debt service coverage ratio (DSCR), and the loan life coverage ratio (LLCR). It can sometimes take the place of EBITDA in certain circumstances. It’s important to note that the three coverage ratios show how well a plan is able to service and not default on debt throughout the entire project’s period.
For example, the DSCR = CFADS / Scheduled Debt Service (Interest + Principal Obligations)
Once this is calculated based on the company’s project specifications, if the result is greater than 1, then it signifies and gives greater confidence to internal and external audiences that the company will be able to meet its milestones and final payments.
The most efficient formula for calculating CFADS is as follows:
EBITDA – Taxes – Positive or Negative Result of Working Capital – Capital Expenditures for Maintenance Only
$200,000 (EBITDA) – $30,000 (Taxes) + $20,000 (assuming there’s a negative $20,000 change in working capital) – $40,000 (assuming the capital expenditure investing in maintenance)
CFADS = $150,000
Sometimes the calculation includes dividends, which need to be factored into the calculation. This example assumes it is not part of the calculation.
Interpreting Results
It’s important to understand that a more detailed analysis helps all audiences determine if the projected cash flow is available for different claimants of the business. While most of the calculations are done via the waterfall model, it’s important to analyze it based upon senior and junior debt, along with equity. If a company declares bankruptcy, senior debt holders are the first priority to be made whole (or as whole as possible, depending on the circumstances). Senior debt is collateralized or secured with company assets that are sold off during bankruptcy. From there, junior debt holders are next in line, followed by convertible note holders, then preferred stockholders, and finally common stockholders.
While this calculation is only one part of the way internal and external stakeholders can measure a company’s financial health, with the chance of more firms defaulting on debt, it’s another tool in a financial analyst’s toolbox.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
For many high-income earners and those approaching retirement, a Roth IRA conversion represents a strategic financial move that can significantly impact long-term wealth preservation. This approach allows you to restructure your retirement savings in a way that could potentially reduce your overall tax burden while creating more flexibility in your golden years.
Understanding Roth IRA Conversions
A Roth IRA conversion is when you transfer funds from traditional tax-deferred retirement accounts – such as a 401(k) or Traditional IRA – into a Roth IRA. While this transaction triggers an immediate tax obligation on the converted amount, it eliminates future taxation on both the principal and all investment growth, provided you follow IRS guidelines. The IRS website offers comprehensive information on the specifics of this process.
The primary advantage lies in strategic tax planning: paying taxes now at a potentially lower rate than you might face in the future.
Traditional vs. Roth: Understanding the Tax Timing Difference
When saving for retirement, the choice between traditional and Roth accounts fundamentally comes down to tax timing:
Traditional 401(k): Contributions reduce your current taxable income, increasing your take-home pay today. However, all withdrawals in retirement will be subject to ordinary income taxes, potentially at higher future rates.
Roth 401(k): Contributions are made with after-tax dollars, reducing your current take-home pay. The significant benefit comes later: tax-free withdrawals throughout retirement.
To illustrate, consider a $10,000 contribution while in the 24 percent federal tax bracket:
With a traditional 401(k), your take-home pay only decreases by $7,600 because you save $2,400 in immediate taxes.
With a Roth 401(k), your take-home pay decreases by the full $10,000 as you’re paying taxes upfront.
While traditional accounts offer immediate tax relief, Roth accounts provide tax-free income during retirement and important flexibility that extends beyond just avoiding income taxes.
The IRMAA Factor: A Hidden Retirement Expense
One often overlooked aspect of retirement planning is IRMAA – Income-Related Monthly Adjustment Amount. This Medicare surcharge applies to higher-income retirees, increasing their Medicare Part B and Part D premiums substantially.
For 2025, married couples filing jointly with income exceeding $206,000 could face premium increases of hundreds of dollars monthly. By strategically converting traditional retirement funds to Roth accounts before retirement, you can potentially keep your future taxable income below IRMAA thresholds, avoiding these additional healthcare costs entirely.
The Long-Term Impact: Required Minimum Distributions
Without implementing Roth conversions, retirement accounts can accumulate substantially larger taxable balances. By age 75, Required Minimum Distributions (RMDs) from traditional accounts can be three times higher than for those who gradually converted assets to Roth accounts.
These larger RMDs can create cascading financial challenges:
Pushing income above Medicare IRMAA thresholds
Significantly increasing Medicare premiums by thousands annually
Creating higher tax burdens for surviving spouses who must file as single taxpayers
Early Roth conversions – performed strategically during years with stable tax rates – can dramatically reduce future taxable income while creating greater financial flexibility throughout retirement.
Legacy Planning Benefits
Roth IRAs offer substantial advantages for estate planning. The accounts pass tax-free to heirs (provided the five-year holding requirement is met). For surviving spouses, Roth IRAs provide financial security without RMD concerns. When both spouses have passed, beneficiaries inherit completely tax-free income.
Is a Roth Conversion Right for You?
While powerful, Roth conversions aren’t universally beneficial. Consider this strategy if:
You anticipate higher tax rates in your future
You have several years before RMDs begin (typically at age 73)
You have sufficient savings to cover the conversion taxes without depleting the retirement accounts themselves.
You want to minimize potential IRMAA surcharges or tax implications for a surviving spouse.
Conversions tend to be most advantageous when you can maintain a reasonable tax bracket (24 percent or lower) during the conversion process.
Conclusion
When approaching Roth conversions thoughtfully and as part of a comprehensive retirement strategy, you can potentially create more tax-efficient income streams, avoid Medicare premium surcharges, and leave a more valuable legacy for your loved ones.
Alan F Burke CPA
Strategic Roth IRA Conversions: Maximizing Retirement Income While Minimizing Taxes
May 1, 2025 · Blog, Tax and Financial News
⏱ 4 min read
For many high-income earners and those approaching retirement, a Roth IRA conversion represents a strategic financial move that can significantly impact long-term wealth preservation. This approach allows you to restructure your retirement savings in a way that could potentially reduce your overall tax burden while creating more flexibility in your golden years.
Understanding Roth IRA Conversions
A Roth IRA conversion is when you transfer funds from traditional tax-deferred retirement accounts – such as a 401(k) or Traditional IRA – into a Roth IRA. While this transaction triggers an immediate tax obligation on the converted amount, it eliminates future taxation on both the principal and all investment growth, provided you follow IRS guidelines. The IRS website offers comprehensive information on the specifics of this process.
The primary advantage lies in strategic tax planning: paying taxes now at a potentially lower rate than you might face in the future.
Traditional vs. Roth: Understanding the Tax Timing Difference
When saving for retirement, the choice between traditional and Roth accounts fundamentally comes down to tax timing:
Traditional 401(k): Contributions reduce your current taxable income, increasing your take-home pay today. However, all withdrawals in retirement will be subject to ordinary income taxes, potentially at higher future rates.
Roth 401(k): Contributions are made with after-tax dollars, reducing your current take-home pay. The significant benefit comes later: tax-free withdrawals throughout retirement.
To illustrate, consider a $10,000 contribution while in the 24 percent federal tax bracket:
With a traditional 401(k), your take-home pay only decreases by $7,600 because you save $2,400 in immediate taxes.
With a Roth 401(k), your take-home pay decreases by the full $10,000 as you’re paying taxes upfront.
While traditional accounts offer immediate tax relief, Roth accounts provide tax-free income during retirement and important flexibility that extends beyond just avoiding income taxes.
The IRMAA Factor: A Hidden Retirement Expense
One often overlooked aspect of retirement planning is IRMAA – Income-Related Monthly Adjustment Amount. This Medicare surcharge applies to higher-income retirees, increasing their Medicare Part B and Part D premiums substantially.
For 2025, married couples filing jointly with income exceeding $206,000 could face premium increases of hundreds of dollars monthly. By strategically converting traditional retirement funds to Roth accounts before retirement, you can potentially keep your future taxable income below IRMAA thresholds, avoiding these additional healthcare costs entirely.
The Long-Term Impact: Required Minimum Distributions
Without implementing Roth conversions, retirement accounts can accumulate substantially larger taxable balances. By age 75, Required Minimum Distributions (RMDs) from traditional accounts can be three times higher than for those who gradually converted assets to Roth accounts.
These larger RMDs can create cascading financial challenges:
Pushing income above Medicare IRMAA thresholds
Significantly increasing Medicare premiums by thousands annually
Creating higher tax burdens for surviving spouses who must file as single taxpayers
Early Roth conversions – performed strategically during years with stable tax rates – can dramatically reduce future taxable income while creating greater financial flexibility throughout retirement.
Legacy Planning Benefits
Roth IRAs offer substantial advantages for estate planning. The accounts pass tax-free to heirs (provided the five-year holding requirement is met). For surviving spouses, Roth IRAs provide financial security without RMD concerns. When both spouses have passed, beneficiaries inherit completely tax-free income.
Is a Roth Conversion Right for You?
While powerful, Roth conversions aren’t universally beneficial. Consider this strategy if:
You anticipate higher tax rates in your future
You have several years before RMDs begin (typically at age 73)
You have sufficient savings to cover the conversion taxes without depleting the retirement accounts themselves.
You want to minimize potential IRMAA surcharges or tax implications for a surviving spouse.
Conversions tend to be most advantageous when you can maintain a reasonable tax bracket (24 percent or lower) during the conversion process.
Conclusion
When approaching Roth conversions thoughtfully and as part of a comprehensive retirement strategy, you can potentially create more tax-efficient income streams, avoid Medicare premium surcharges, and leave a more valuable legacy for your loved ones.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Bad debt expense is an important concept that businesses must account for when it comes to their financial reporting. Regardless of the timeframe a company accounts for, it helps companies determine what portion of their receivables are collectible and what portion are not – and therefore, a bad debt expense. Depending on the receivables’ amount, this bad debt expense can take the form of either the allowance method or the direct write-off method.
Direct Write-Off Method Explained
While a company can see its receivables increase quickly, collections of these receivables might not be possible in the future due to client defaults. The direct write-off method is recommended for accounts with nominal amounts in question. A company’s receivables account sees an immediate write-off with this method. This lowers a company’s revenue, reducing net income. When it comes to accounting for it properly, the journal entry for the direct write-off method is as follows:
Description
Debit
Credit
Bad Debt Expense
$500
Accounts Receivable – ABC Business
$500
Description: Uncollectible ABC Account
Therefore, the journal entry would debit $500 to the Bad Debt Expense and credit $500 to the Accounts Receivable for the ABC Account.
Allowance Method
When it comes to more substantive or material amounts, businesses are inclined to use the Allowance Method because it’s set up to interact well with contra asset accounts that offset accounts receivable. Reported on the balance sheet, a contra asset account has an opposite balance to accounts receivable, and the journal entry is as follows:
Assets
Cash: $500,000
Accounts receivable: $300,000
Less: Allowance for doubtful accounts: $25,000
Equipment: $200,000
Less Accumulated Depreciation: $5,000
Building: $100,000
Less Accumulated Depreciation: $15,000
Since there’s zero impact on income statement accounts, contra accounts are advantageous for companies to use since the revenues aren’t lowered from a direct loss that bad debt expenses can cause with other methods.
When it comes to the Allowance Method in action, the three components are as follows:
First Step: Assess the uncollectible receivables
This is done by either determining the percentage of sales or by the percentage of receivables.
Percentage of Sales Method
This is usually determined by taking a percentage of either net or total credit sales. It’s generally dictated by past trends (both internal and macro economy forecast). For example, 2 percent of $10,000,000 = $200,000.
Percentage of Receivables
This method works by looking at the aging schedule for receivables, including those that are due but not yet late. For example, the receivables that are not late but not yet paid can have a low percentage for the particular bucket. Each successive and later bucket of unpaid receivables would require a higher percentage estimated as uncollectible.
Second Step: Journal entries are notated by entering the bad debt expense as a debit and the allowance for doubtful accounts as a credit.
Third Step: After an account is considered permanently uncollectible, the last two entries are as follows:
Description
Debit
Credit
Bad Debt Expense
$250
Allowance for Doubtful Accounts
$250
Description
Debit
Credit
Allowance for Doubtful Accounts
$250
Accounts Receivable – ABC Business
$250
Conclusion: The Importance of Calculating Bad Debt Expense
When it comes to determining a company’s results, it is required in their financial statements. If a company does not include this information, their assets could be inflated, potentially leading to overstating their net income. Calculating bad debt expense also helps companies determine which customers have defaulted on past bills, while at the same time highlighting customers that pay on time.
When it comes to accounting for bad debt expense, businesses that are experts at the two methods can effectively navigate the needs of internal and external audiences.
Alan F Burke CPA
How to Account for Bad Debt Expense
May 1, 2025 · Accounting News, Blog
⏱ 3 min read
Bad debt expense is an important concept that businesses must account for when it comes to their financial reporting. Regardless of the timeframe a company accounts for, it helps companies determine what portion of their receivables are collectible and what portion are not – and therefore, a bad debt expense. Depending on the receivables’ amount, this bad debt expense can take the form of either the allowance method or the direct write-off method.
Direct Write-Off Method Explained
While a company can see its receivables increase quickly, collections of these receivables might not be possible in the future due to client defaults. The direct write-off method is recommended for accounts with nominal amounts in question. A company’s receivables account sees an immediate write-off with this method. This lowers a company’s revenue, reducing net income. When it comes to accounting for it properly, the journal entry for the direct write-off method is as follows:
Description
Debit
Credit
Bad Debt Expense
$500
Accounts Receivable – ABC Business
$500
Description: Uncollectible ABC Account
Therefore, the journal entry would debit $500 to the Bad Debt Expense and credit $500 to the Accounts Receivable for the ABC Account.
Allowance Method
When it comes to more substantive or material amounts, businesses are inclined to use the Allowance Method because it’s set up to interact well with contra asset accounts that offset accounts receivable. Reported on the balance sheet, a contra asset account has an opposite balance to accounts receivable, and the journal entry is as follows:
Assets
Cash: $500,000
Accounts receivable: $300,000
Less: Allowance for doubtful accounts: $25,000
Equipment: $200,000
Less Accumulated Depreciation: $5,000
Building: $100,000
Less Accumulated Depreciation: $15,000
Since there’s zero impact on income statement accounts, contra accounts are advantageous for companies to use since the revenues aren’t lowered from a direct loss that bad debt expenses can cause with other methods.
When it comes to the Allowance Method in action, the three components are as follows:
First Step: Assess the uncollectible receivables
This is done by either determining the percentage of sales or by the percentage of receivables.
Percentage of Sales Method
This is usually determined by taking a percentage of either net or total credit sales. It’s generally dictated by past trends (both internal and macro economy forecast). For example, 2 percent of $10,000,000 = $200,000.
Percentage of Receivables
This method works by looking at the aging schedule for receivables, including those that are due but not yet late. For example, the receivables that are not late but not yet paid can have a low percentage for the particular bucket. Each successive and later bucket of unpaid receivables would require a higher percentage estimated as uncollectible.
Second Step: Journal entries are notated by entering the bad debt expense as a debit and the allowance for doubtful accounts as a credit.
Third Step: After an account is considered permanently uncollectible, the last two entries are as follows:
Description
Debit
Credit
Bad Debt Expense
$250
Allowance for Doubtful Accounts
$250
Description
Debit
Credit
Allowance for Doubtful Accounts
$250
Accounts Receivable – ABC Business
$250
Conclusion: The Importance of Calculating Bad Debt Expense
When it comes to determining a company’s results, it is required in their financial statements. If a company does not include this information, their assets could be inflated, potentially leading to overstating their net income. Calculating bad debt expense also helps companies determine which customers have defaulted on past bills, while at the same time highlighting customers that pay on time.
When it comes to accounting for bad debt expense, businesses that are experts at the two methods can effectively navigate the needs of internal and external audiences.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
When it comes to the risk of default, Moody’s found that during COVID-19, American businesses had a 7.8 percent chance of defaulting. This is compared to a low of 4 percent in 2021, but lower than the current 9.2 percent risk of default, according to a March 2025 report by the rating agency.
For many high-income earners and those approaching retirement, a Roth IRA conversion represents a strategic financial move that can significantly impact long-term wealth preservation. This approach allows you to restructure your retirement savings in a way that could potentially reduce your overall tax burden while creating more flexibility in your golden years.
Bad debt expense is an important concept that businesses must account for when it comes to their financial reporting. Regardless of the timeframe a company accounts for, it helps companies determine what portion of their receivables are collectible and what portion are not – and therefore, a bad debt expense. Depending on the receivables’ amount, this bad debt expense can take the form of either the allowance method or the direct write-off method.