A major part of the anatomy of a turnaround is the weekly cash flow. A deceptively simple exercise, it presents a powerful tool for supporting complex management decisions. Applied during a restructuring process in a myriad of circumstances, it can serve as a basis for valuation from free cash flow or the foundation of a plan of liquidation. The usefulness of a weekly cash-flow analysis is agnostic to the subject business or industry.
An essential element of any in-court or out-of-court restructuring process, not only is the cash-flow analysis a tool to manage the overall business, but it can be wielded more specifically to manage cash, inventory, accounts receivable, and accounts payable, as well as bank debt and, where applicable, availability. Understanding the flow of cash tells management how much money the company has to spend in any given week, based on its other financial activities, and, accordingly, management uses this information to facilitate decisions about how best to operate the company.
The construction of the cash flow analysis begins with the scheduling of all necessary disbursements and the timing of such disbursements; the same process is used for sales, collections, and inventory management (either purchased or produced). Once all the schedules are pulled together and summarized, the task of understanding the inflows and outflows begins. Then, in collaboration with management, begins the process of adjusting the timing and availability of funds based upon how the business actually operates. The outcome is a final weekly cash flow. With the weekly cash flow finalized, management can use it to compare against actual performance of the business, adjusting future weeks for changes, and rolling out additional weeks of operations as needed.
A good example of the value of this exercise as a decision-making tool is inventory management. A simple decision to reduce inventory has far wider implications than just that. For a manufacturer, it could mean a curtailment in production, decreased payroll and benefits, and reduced overhead costs; for a distributor it could result in the liquidation of inventory on hand or a reduction in future purchases. By projecting operating receipts and disbursements, and then comparing actual results to the projection on a weekly basis, a cash flow analysis allows management to evaluate performance and make changes more swiftly. Rather than depending on month-end financial results to be reported, with this information, management is able to make corrective actions to affect financial results in a timely fashion.
By analyzing stores, product lines or divisions, the cash flow assists the debtor in understanding which parts of the business are performing, and which are not. Clearly the goal is to eliminate or rehabilitate unprofitable operations, and strengthen or minimally preserve the core profitable business segments. Management can use the analysis in making decisions about closing certain locations or terminating product lines or divisions, project how the changes will be implemented, and measure the results accordingly.
In addition to assisting in the restructuring of the company, weekly cash flow reporting can help various creditors understand how the company is performing, measure the debtor’s progress through the proceeding, and analyze potential recoveries. This basic tool, as the foundation of a discounted cash flow valuation of a company, is one of the three standard methodologies to measure enterprise value. By managing to increase cash flow, a company can increase its value in a meaningful way. Analyzing the detail and pinpointing the “cash burn” of retail locations, product lines, or divisions and making the necessary changes increases free cash flow and the value of the company. Again, the monitoring of the weekly cash flow creates a powerful tool that management can use to make the necessary operating changes to the company and increase its value.
During a bankruptcy proceeding, the weekly cash flow projection is the centerpiece of cash collateral and DIP financing pleadings. When a company considers filing for bankruptcy protection, it must determine how the process will be financed. Can the company operate within the constraints of cash collateral, or does it need to seek debtor-in-possession financing? The answer to this question is informed by a cash flow analysis modified to account for the business impact and unique costs of a bankruptcy. The answers as to when and how much financing, and careful scrutiny of the cash flow’s underlying assumptions are critical to obtaining needed funding and successfully managing a bankruptcy process to its conclusion. All parties are keenly focused on measuring results against the initial budgets underpinning the Court’s granting of cash collateral usage or DIP financing, but they also aid the debtor’s preparation of monthly operating reports, required by the Court.
At times, maximizing recovery value for creditors necessitates the liquidation of some or all of the assets of a company. Even in this instance, the weekly cash flow, or liquidation budget, is utilized to measure recoveries for the company’s secured and unsecured creditors. The timing and associated costs of liquidation activities affect recoveries; therefore they need to be well planned and communicated to parties-in-interest. As specific assets are being liquidated, the results can be tracked and managed. If liquidation costs are running too high, this can be quickly identified, monitored and more carefully managed. Decisions as to when to close locations, production facilities or warehouses can be modified. Nimbleness is required and the cash flow implications of alternative paths of action should be forecasted to guide the liquidation. Monitoring of the liquidation scenario is key in maximizing the result for the creditor constituents. Whether it is inventory liquidation, accounts receivable collections, or the sale of equipment or real estate all can be measured as part of a weekly cash flow analysis, and the recoveries can be revised based on actual results.
Adaptable for any industry, the weekly cash flow can be helpful for multi-divisional and international companies as well. While described as a “simple tool,” the weekly cash flow can be as complex as the business requires. It can be broken down by location (for retail stores), product lines (for manufacturer), divisions and country locations. While the tool shouldn’t become cumbersome and unwieldy to use, incorporating greater detail helps refine the cash profitability analysis and information utility for management in its quest to decide which changes to the business are necessary. Some analyses detail disbursements by vendor (in supporting schedules) and others detail receipts by customers. Especially when cash is tight and active vendor management to maintain a consistent source of supply is essential, such level of detail helps companies develop effective supplier payment schemes. Alternatively, knowing when customer payments aren’t received when expected, signals management that collection efforts to garner scarce cash resources need to commence. For those companies that must wire or ACH funds to vendors, it is helpful to detail the manner in which various types of disbursements affect the float of cash. A wire clears the bank on the day initiated; an ACH clears the bank the day after initiated, and a check could take 5-7 days to clear the bank. All forms of disbursements and receipts need to be tracked and accounted for in the analysis.
Cash flow projections aren’t static analyses; they are dynamic and require constant management and updating. As noted before, tracking actual results and comparing them to the projections, thereby creating a variance report to understand what’s transpired in the business, is indispensable. However, so is “rolling out” or adjusting projected flows, and projecting additional weeks. Operating results need to be measured and action plans need to be adjusted as results become available. For those companies which have never used a weekly cash flow, management’s eyes are opened to new, and sometimes surprising, insights into business operations. These include the timing of sales during a month or season (e.g., sales may be disproportionately concentrated at the end of the month or season), customer cash receipts (e.g., receipts may be skewed to a given week during the month), or completion of production.
As results are reported and additional weeks are added to a weekly cash flow, it is vital to make sure that all projected activities are adjusted based on the most recent week(s). This may sound basic, but it’s amazing how often original projections are perpetuated without giving due consideration to the implications of immediate past performance. For example, if a company records an additional $1MM of cash receipts from receivables in a given week, management must examine whether this cash is the result of incremental sales from prior weeks, or having collected receivables earlier than projected. If the latter is the case, then future receipts must be adjusted. If the company continually either exceeds or falls short of its weekly sales forecast, future receipts need to be adjusted accordingly. If customer receipts are continually falling short of expectations, it may indicate that additional collection efforts could be required. Additionally, if actual disbursements occur in the week prior to the one projected, then future disbursement must be adjusted accordingly. Management relies on the best and most current information to make critical decisions. Keeping the cash flow accurately updated is a key activity during a restructuring process, sale process or liquidation, as it provides management with the insight needed to facilitate decisions which help maximize value for creditors and shareholders.
There are additional factors that can complicate a company’s weekly cash flow. If a company invoices based on an annual contract and receipts are received on a sporadic basis, managing cash can become more difficult, giving yet another reason to implement the discipline of a weekly cash flow. In a recent assignment of an educational facility, students were invoiced monthly, but payments were received inconsistently. The school had a line of credit and drew down on the line as the receivables continued to age. As a result of the inconsistent collections, the line of credit had lots of peaks and valleys. The school did not operate using a weekly cash flow. Once a weekly cash flow was established, management gained a better understanding the inflows of receipts, and put more focus into accounts receivable collections. This focus paid off and the school was able to operate for two years on its own cash flow and did not require a working capital line of credit. In this case, the weekly cash flow was extremely powerful, as management was able to rid itself of debt and better manage its cash flow and operations.
These illustrations underscore the importance of a basic yet powerful tool used by restructuring consultants all the time. In a recent review of the business plan and operations of a company which designed, sourced and distributed several different product lines to retailers, one of the top items on the information request list was a weekly cash flow forecast. This was a business in which annual revenue was approximately $250MM and sales were very seasonal, with the majority of sales occurring July through December. Yet the company had never produced a weekly cash flow report. Not only did they not produce a weekly cash flow, but they were three months behind in producing financial statements. How is it that a company of that size doesn’t manage its cash position? The company was out of season, low on cash and not able to pay its debts as they came due. Vendors stopped shipping new products and fill rates to retailers decreased. The company struggled for several months until the shareholder infused cash into the business. During this stressful time, the company never implemented a weekly cash flow. The weekly cash flow would not have prevented the cash shortfall from happening (this was the result of other problems from within the business), however, it would have assisted management in knowing the timing, and the amount of the cash shortfall, and provided an analysis of the working capital assets.
Another company with a seasonal business (with two seasons), knew it would run out of cash by the end of the second season, only prepared a weekly cash flow at the insistence of their outside consultant. In this company, which provides services over a short time period does not recognize its revenue when invoiced, but rather equally over the time of the contract. In this instance, the monthly operating statement differs materially from the cash flow and balance sheet, and the cash flow should be monitored closely. With management’s involvement, the weekly cash flow was prepared and continues to be monitored. Corporate leaders now make decisions based on the weekly update and review of the cash flow.
These are just a few of examples of how a weekly cash flow analysis can be a powerful tool and assist management in making decisions about how to operate the business, while maximizing value for the shareholders and creditors. Daily decisions in a restructuring process, for a company trying to increase the value of the business in a potential sale or in liquidation scenario, can be made easier with the use of the weekly cash flow. While the majority of companies still don’t use the weekly cash flow as part of their daily management decisions, the adoption of a tool that is both simple, and very powerful should become a “best practice” for all management teams.