Cash Management is key to survival for any a troubled company. In fact, by its very definition a troubled company is troubled because it lacks cash — though the reasons for that can be many. It is said that “a rising tide floats all boats”. In the military they say, “amateurs talk strategy, professionals talk logistics”. In turnaround situations my favorite saying is “cash is king”.
One management report that is a particularly important in turnarounds is the “Cash Requirements Forecast”. This is a relatively simple report to prepare and one that provides senior management with a sound early warning tool to identify an impending cash shortfall. It can be used by companies of any size, in any industry and even by not-for-profits. Yet I am always astounded when I come across a new client company with an Accounting team that does not prepare this report.
I was once an interim CFO for a software development company. It licensed its software on a 90-day site license basis. For some quirk in the timing of the original sales of these licenses, most of the revenue was booked and collected in the first of a three-month cash flow cycle. When I began consulting to this client, they had no spending discipline whatsoever so by the third month of each quarter they were sputtering along on cash reserves barely able to make payroll. I implemented a daily Cash Requirements Forecast report. Every day I would have it updated and reviewed with the CEO to determine how we were going to collect Accounts Receivable faster, defer discretionary spending or work with vendors when necessary to delay Accounts Payable payments. That was a key report to keeping that company afloat.
The periodicity or frequency that such a report is updated and issued (i.e., the columns shown in the following example) could be monthly, weekly or daily depending on the severity of the circumstances. It should go out at least as far as one cash flow cycle; i.e., possibly ranging from surplus to deficit back to surplus. In the example of the software company, I prepared this report on a daily basis for the current month and took it out for two more months on a weekly basis to coincide with their three-month cash flow cycle, then on a monthly basis for a rolling 12 months. I’ve seen real estate developers prepare monthly reports that went out as far as five years to cover an anticipated real estate development project or development life cycle (of course we all know that the farther out it goes the less accurate it will be). More likely it would be prepared on a daily basis for the current month and then weekly or monthly for a period going out, say, for a rolling 12-month period. Figure 1 following presents a very high-level “Star Ship Enterprise” view of what this report looks like.
Figure 1: Cash Requirements Report
Financing available will usually take the form of a bank line of credit or in the case of private companies untapped capital calls available from, say, a group of private investors or partners. In an LLC this will probably be described in the operating agreement. Those should be shown separately as sources of cash that can be drawn down or repaid.
Naturally, a Treasurer or CFO preparing this report will also prepare a number of supporting schedules to refine and ensure the accuracy of the various receipts or disbursement estimates. That might include an aged Accounts Receivable trial balance to determine the timing of forecasted collections and an aged Accounts Payable trial balance to determine the timing of payments to vendors. Regardless of the added work that goes into refining the estimates, it would be inexcusable for a troubled company to try to manage without such a report. Senior management and the Board should insist on seeing that a Cash Requirements Forecast is used to ensure that potential cash shortfalls are identified early on while action can still be taken to mitigate those risks.
© 2016 The Fast Track Group, LLC.