As we all know, cash is the lifeblood of every business. When a business is healthy and growing, cash becomes almost an after-thought as credit is plentiful and collection of accounts receivable and payments to vendors are often on autopilot. However, when a business is in financial distress, managing cash becomes a critical activity for the entire C-suite, not just for the Chief Financial Officer.
Cash affects all aspects of a business. A business needs cash to pay employees, purchase inventory and raw materials, and pay for services, utilities, insurance, and interest and principal to lenders. A distressed business does not have sufficient cash to make payments to its creditors, so the business must start prioritizing who gets paid and how much they will pay. This creates a constant tug-of-war among the various departments within the company as department heads face the wrath of unpaid creditors.
To properly get through this type of situation, businesses in financial distress should prepare a 13-week cash forecast. This forecast acts as an essential tool to aid the C-suite in its decision-making processes, much as a vital signs monitor is used with a patient in the Intensive Care Unit. The forecast identifies periods where there are insufficient funds to make the normally scheduled payments, giving management time to adjust when and how much to disburse in payments.
The cash forecast also helps management assess the magnitude of the forecasted cash shortfalls and their cumulative effect so that they can then identify and implement strategies to generate additional liquidity.
Other strategies management may use to generate cash involve taking a more focused look at the tasks already being performed. This may involve collecting accounts receivable, reinforcing terms for sales discounts, offering payment discounts, and eliminating or reducing unnecessary spending.
Outside of their normal operations, management may need to seek additional funding to generate liquidity. They may also choose to sell off non-essential assets, such as idle machinery and equipment, liquidate excess inventory, enter into sale/leaseback transactions, or perhaps attract investor capital.
One mistake I have seen occur, over and over again, is keeping department heads insulated from the company’s cash problems. The entire C-suite needs to be involved in managing cash, as no department is spared from the problems created by a cash shortage.
The 13-week cash forecast is a helpful process for both management and the company’s lenders as lenders are almost always going to require a 13-week cash forecast when the company has defaulted on its loan. Further, the lender may also require the company to adhere to the forecast with certain tolerances. The lender will also want to see comparisons of actual results to the forecast at the end of each week or each month with narratives for the larger variances.
This actual-to-budget report should not place an undue burden on the company, as the company should already be preparing and evaluating a weekly actual-to-budget report and adjusting its activities accordingly.
As a restructuring expert, I utilize the 13-week cash forecast very often with the clients I serve as it is an invaluable diagnostic tool when it comes to helping management operate a financially distressed business. When properly used, this forecast can help management avoid additional disruptions caused by surprise cash shortages.
On the flip side, when management fail to avail themselves of a 13-week cash forecast, it only exacerbates the harried environment that exists in a financially distressed company, causing material shortages, customer flight, and employee turnover, among other repercussions.
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