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Compute covenant headroom and flag it for counsel to confirm

  • For FP&A and financial analysts
  • You practice Catching mistakes and made-up facts
  • Time about 5 minutes
  • Level Advanced

About this exercise

You're preparing a covenant headroom line for the CFO. Write a prompt for plain text with lines starting "Net debt:", "Leverage:", "Covenant:", "EBITDA floor:", "Cushion:" and "Confirm:". Net debt is debt minus cash. The Confirm line says to check the definitions against the credit agreement with counsel before relying on the numbers. Facts only: no view on whether the company is safe. Under 90 words. No bullets or numbering.

Common mistakes when you ask AI for this

  • Using gross debt. The AI divides $4,500,000 by EBITDA and gets 3.75x. Try: Add: "Net debt = debt minus cash."
  • Answering 'are we safe?'. The AI says the company has comfortable headroom. Try: Add: "Facts only: do not say whether the company is safe."
  • Skipping the definition check. The AI treats the one-page note as the agreement. Try: Add: 'A "Confirm:" line: check definitions with counsel.'
  • Markdown extras. The AI adds bold labels, headings and a closing note. Try: Say: "Plain text, no bold. Output only the lines asked for."
  • Trusting the AI to count words. AI is bad at counting and runs past word limits. Try: Ask for fewer words than the real cap and keep each line short.

What a strong prompt includes

  • Names the six lines
  • Gives formulas
  • Adds the counsel check
  • Bans safety opinion
  • Caps length

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