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  • 1. Cash Flow Forecasting Speaker: David Johnson September 15, 2011 1

2. Session Overview Company Overview & Speaker Bio Forecasting Concepts Warning Signs Hypothetical Case: NoneSuch, Inc. Creating a Robust Forecast Q&A 2 3. Opening Words Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. Charles Munger, Vice Chairman Berkshire Hathaway 3 4. Company Overview ACM Partners is a Chicago-based boutique crisis management and investment firm serving companies and municipalities facing current or impending financial distress. The advisory services of ACM Partners are centered around the concept of crisis management. We define a crisis situation as one in which either the current state of affairs or the trend, left unaddressed, threatens the viability of a company. As crisis managers, we view our role as preserving and growing enterprise value. In short, a company in crisis is a melting ice cube, and it is our job to turn down the heat enough so that ice first stops melting, then begins to grow again. 4 5. Speaker Biography David Johnson is a finance professional with more than 10 years of experience in business plan development, business process optimization, restructuring, and turnaround. David earned his Master of Business Administration from the University of Chicago with concentrations in Accounting and Finance. With engagement experience spanning North America and involving companies ranging in size from pre-revenue start-ups to nearly $1 billion in sales, David has shown the flexibility to thrive in the dynamic situations that are a constant in turnarounds. 5 6. Forecasting Concepts A 13-week cash forecast (TWCF) is a tactical tool that allows all stakeholders to understand the actual sources and uses of cash on a weekly basis. A TWCF eliminates the noise in an income statement by focusing on cash receipts and disbursements. Instead of revenue, the focus is on cash receipts Instead of COGs and expenses, the focus is on disbursements by natural accounts (i.e. accounts that are intuitive: materials purchases, labor, rent, etc.) This approach removes many of the timing issues associated with the income statement and allows for an analysis of intra-month liquidity swings 6 7. Forecasting Concepts Cont. The granularity of a TWCF permits management and advisors to adjust the timing of payments to better manage cash flow. What receipts can be pulled forward? What disbursements can be delayed? The TWCF places the focus on the situation as it is, not as it should be. When do customers actually pay? When are vendors actually paid? By incorporating a working capital forecast for those companies funded with an asset based revolving line of credit, a TWCF provides a fairly comprehensive view into a companys total borrowings relative to borrowing base, and as such serves as an early-warning system for lenders that a company may be in an over-advance situation (i.e. borrowings exceed borrowing limit). 7 8. Weekly Cash Reporting Weekly variance reports can highlight issues with a forecast as well as ensure management accountability. Variance reporting is also valuable as a means of rebuilding trust between management and lender. 8 NoneSuch Inc. Variance Report ($ in 000s) Week Ending 7/9/11 Actual Budget Variance % Var Note Sales 1,608$ 1,636$ (28)$ -1.7% Unanticipated sales weakness Receipts Trade Receipts 1,673 1,701 (29) -1.7% Key customer delayed payment Cash Sales 159 164 (4) -2.7% Issue unclear, to be investigated Total Cash Receipts 1,832 1,865 (33) -1.8% Operating Disbursements Inventory and Material Purchases - - - N/A Critical vendor paid early, temporary variance Labor Costs 1,398 1,361 37 2.7% Variance is de minimus Real Estate Leases 196 196 0 0.2% Equipment Leases 300 300 - 0.0% Sales & Use Tax 80 80 - 0.0% Insurance - - - N/A Property and Other Taxes - - - N/A Professional Fees - - - N/A Capital Expenditures - - - N/A Critical repairs on machinery, permanent variance Other 63 60 3 4.8% Cost controls are lowering this item, permanent varience Total Operating Disbursements 2,037 1,997 40 2.0% Non-Operating Disbursements Interest - Revolver - - - N/A Other Bank Charges - - - N/A Professional Fees - Restructuring - - - N/A Retainer for legal counsel Accounts Payable pay down 17 15 2 10.0% Other - - - N/A Total Non-Operating Disbursements 17 15 2 10.0% Net Cash Flow (222) (147) (75) 51.0% 9. Forecast Dictates Options Turnarounds are about cash and time, and TWCFs provide turnaround professionals with the information to answer key questions. Are things getting better or worse? What is the peak cash need (and is it in excess of current funding available)? Is this a case of good company, bad balance sheet, or is this just a bad company? Is there time for an orderly sale process? A robust TWCF will answer these questions, and in doing so, guide key decision-makers on the appropriate course of action. Pursue a turnaround or liquidation Seek to reorganize (either out-of-court or in chapter 11) Liquidate (worst-case scenario) 9 10. Assessing Viability Turnaround Candidate TWCF shows a manageable peak cash need (i.e. lender or other stakeholder is willing and able to fund the burn) There is a clear short-term path to reach operating cash flow break-even Given a successful turnaround, company has a future with current stakeholders (i.e. owners equity not wiped out in plausible upside scenario, lender fatigue has not set in) Liquidation Candidate TWCF shows a peak cash need in excess of what lender or other stakeholder is willing or able to commit No clear path to reach operating cash flow break-even Owners equity wiped out in any plausible scenario, lender fatigue has set in, no interest from outside parties in going- concern sale 10 11. Restructuring (In vs. Out-of-Court) Out-of-Court Restructuring Stakeholders are in relative agreement on the value of their positions There are no substantial issues involving employees (current or former), landlords, tax liabilities, trade creditors, etc Non-DIP funding has been secured / is available to complete the turnaround Chapter 11 Bankruptcy Stakeholders are unable to agree on the value of their positions There are issues involving employees (current or former), landlords, tax liabilities, trade creditors, etc Non-DIP funding has not been secured / is not available to complete the turnaround 11 12. A Sale Process, But What Kind? In the last down cycle (2008-2010), many restructurings, especially chapter 11 filings, ended in a sale process. However, knowing that there will be an M&A component to a restructuring is not the same as knowing what type of sale process will be necessary. A distressed company could run out of liquidity prior to the close of a traditional sale process The TWCF will allow turnaround advisors and investment bankers match the tempo of a sale process to the amount of time available 12 13. Warning Signs Managing to a TWCF is not intuitive for most companies, and it is a rare management team that does not (initially) resent the intrusion of a turnaround advisor espousing what is, for them, a new and alien financial tool. With management teams unclear on the benefits and resentful of the intrusion, the task of acknowledging the need for, and recommending, a turnaround advisor generally falls to one of three groups: Capital Providers (bank and non-bank lenders and private equity firms) Investment Bankers Attorneys It is important for all of these parties to be aware of key warning signs that a TWCF is necessary. 13 14. Warning Signs Cont. 1. Sales Weakness: Due to the lag between sales and collections, the cash impact of missed sales targets could lag a drop-off by several months. This lag presents a valuable opportunity for a company and its stakeholders to proactively address a developing problem. 2. Input Cost Volatility: Increased demand from emerging market countries has driven substantial volatility in commodities prices in recent years. This high level of volatility represents a considerable risk to margins. 3. Ill-Fated Expansion Initiatives: In our current low / no growth environment, the temptation for companies to find some way, any way, to return to growth is strong. Occasionally these initiatives become considerable drains on liquidity and need to be acknowledged as such. 14 15. Case Overview NoneSuch is a construction supply company located in the Chicago metro area. While it had managed to weather the real estate downturn, it did suffer considerable gross margin erosion. Managements CY 2011 forecast showed another year of losses. The companys lender was initially satisfied that proper steps were being taken, and continued to monitor the situation while not insisting on a turnaround advisor. Beginning in June, however, NoneSuchs lender became concerned that the company was stretching vendors to conserve cash, and that the companys liquidity situation was deteriorating rapidly. The lender suggested, and NoneSuch retained, a turnaround advisor to create a TWCF and advise. 15 16. Financial Forecast NoneSuch management acknowledged weak business conditions, and their forecast showed losses. The companys lender was concerned that the liquidity situation was even worse. 16 NoneSuch Inc. Sales Forecast ($ in 000s) Period Q1 Q2 Q3 Q4 FY Sales 19,540$ 20,837$ 19,540$ 20,837$ 80,754$ Cost of Goods Sold 14,557 15,003 14,948 15,003 59,511 Gross Profit 4,983 5,834 4,592 5,834 21,243 Margin 25.5% 28.0% 23.5% 28.0% 26.3% SG&A 5,988 6,163 5,988 6,163 24,302 EBITDA (1,005) (329) (1,396) (329) (3,058) Margin -5.1% -1.6% -7.1% -1.6% -3.8% 17. 13-Week Cash Flow Forecast The high level of granularity inherent in a TWCF gives


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