cash management strategies during economic turmoil_aicpa

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Cash Management StrategiesDuring Economic Turmoil!

Presented by

Robert Tormey, CPA, CTP

AICPA Controllers Workshop West 2009


Cash Management Strategies

The Rolling Forecast and Your Closing Calendar

Building the Financial Model

Prior Period Analysis

Cash Requirements vs. Expenses

Basics of Your Model – What Stakeholders Expect

Risk Mitigation Strategies & Unforeseen Events

Workout and Restructuring

Glossary of Terms (5)



Preparing for the Seminar

Review this Power Point in entirety prior the seminar.

Review the Glossary of Terms beginning on Page 18.

Review “Model 9-28 Deal” in pdf. Understand the

structure and elements of the model. Print it out. We will

refer to the model in the seminar.

Prepare your questions as seminar will be interactive.

Begin applying these ideas in your current environment.



The Rolling Forecast and Your Closing Calendar

Controller must drive predictability of the company‟s

earnings process, i.e. realization of its budget.

Rolling Forecast - a part of the monthly close process

Forecast is not Budget but a comprehensive revisiting

of all major budget assumptions for P&L purposes

and an extrapolation of all Balance Sheet trends.

Numerous issues mature during the operating year

that Budget process could only „assume‟.



Forecasts differ from budget because of changes in:

Insurance Renewals and Expirations, Headcount,

Facilities Leases and Expirations, Progress on

Initiatives, Regulatory Licenses, New Products and

SKU Rationalization, Customer Gains and Losses,

Variability of Commodity Prices, Interest rates, Credit

Conditions, Union Agreements, Price changes,

Balance Sheet Changes, Accounting Pronouncements, Pension

Gains, Losses and Actuarial Assumptions, Regulatory Setbacks,

Litigation, and Professional Fees issues, and on and on and on.



Building the Financial Model

Creating the Time

Reduce Time in the Closing Process (5 Days max!)

Automate Bank Reconciliations (often a time sink!)

Simplify, Automate, Recurring and Reversing, Estimates, etc.

„Analyzing‟ accruals vs. Rolling Forecast – prioritize!

Finding the talent or the product

Excel – Power User with Analytical/Operational Orientation

Outsourcing to local advisor

Software Products – Some good, may be cumbersome.




36 months of Trial balances (Chart of Accounts detail)

Trend Studies and Ratio Analyses

Income Statements

Balance Sheets

Statements of Cash Flows

Identify Drivers and Relationships




Income Statement and Balance Sheet Drivers

Use Income Statements to:

First Model business on an accrual basis-

Identify key relationships and ratio‟s between

Revenues and COGS

Sales and Accounts Receivable Build

Inventory Build and Accounts Payable

Other Expenses and Pacing

Seasonal Relationships



Cash Requirements vs. Expenses

Analyze Balance Sheet and Statement of Cash Flows

to determine what‟s happening on a CASH basis:

Borrowing Base Issues

Debt Amortization

Operating Plan of Company

Pacing of Inventory Build (if seasonal)

ASO and DPO relationships

Capital Expenditures



Basics of Your Model – What Stakeholders Expect

Actual and Projected ( rolling 12 month horizon) -

Income Statements – Budget to Actual

Balance Sheets

Statement of Cash Flows

Covenant Compliance Tests, Compliance Certificates

Graphics Package

Cash and Borrowing Availability

Management Discussion and Analysis



Risk Mitigation Strategies:

Forecast - Primary Risk Management Tool

Encourages management/stakeholders to take action.

Running out of Cash is not the disease.

Symptom of issues in the business to address.

Forecast acts as basis for involvement of

management, equity, lenders and outside

professionals on a timely basis.



Risk Mitigation Strategies- Problems and Solutions:

Accounts Receivable – Collections, Credit Insurance,

Credit Analysis, Outside collections firm.

Concentration Risks – Customer Diversification.

Declining Margins – SKU Rationalization, Customer

Profitability studies, Mix issues in Sales, Price increases,

Vendor and purchasing initiatives, plant rationalization.

Continuing Losses or Variances from Plan – Cost

Reduction, Four Wall Analyses of Retail outlets,



Risk Mitigation Strategies- Problem And Solutions:

Growth in Inventories – Reduce Purchases/Production,

“Just in Time with Vendors, Vendor Managed Inventory

Discipline, Purchasing Manager, Review Operating Plan.

Returns and Allowances – Review Quality Control with

Operations, Return Policies with Sales Force, Check for

„Channel Stuffing‟ or Commission Abuse.

Vendor Terms – Exhaust Terms Opportunities with

Vendors to Raise Needed Cash.



Risk Mitigation Strategies- Problem And Solutions:

Expense Control - Cost Containment initiatives in

Travel, Telephony, Merchant Services, Headcount,

Overtime, Personnel Rationalization, Tenant Broker to

negotiate with Landlord, facilities rationalization, reduce

dividends, reduce advertising, research and

development and re-consider new investment in

operating initiatives.



Unforeseen Events May Exhaust Cash Resources

Terrorist Attack – WTC, Air Travel Ceases.

Anthrax in the U.S. Mail.

War is Declared – U.S. Invades Afghanistan, Iraq, etc.

USDA bans sale of spinach.

Credit Markets Freeze – Home Sales and Construction.

Auto Makers File Bankruptcy.

State of California stops paying vendors, uses warrants.




Breach of Covenant or Monetary Default to Lender

Bank moves Company to Special Assets (Workout)

Special Assets Requires:

13 Week Cash Flow Discipline and Other Weekly Reporting

Operational Turn Around Proposal from Borrower

New Capital From Equity Sponsor or Guarantor

Freezes Revolver and Credit Facilities in many instances

May Sweep Company Bank Accounts or Accelerate




13 Week Cash Flow Discipline

Updated Weekly Report with 13 week horizon

Different from Integrated Financial Model

Comprise of:

Weekly Borrowing Base Reconciliation

AR and Collections Detail

Payroll and Other Disbursements Detail

Accounts Payable and Cash Requirements Report


Glossary of Terms

Financial Modeling Components

Key Financial Ratios

Cash Management

Credit Terms


Glossary of Terms

Financial Modeling Components AR Aging - Used with 13 week cash flow to anticipate receipts

Availability – Credit Available on Revolver, i.e. funds which can be borrowed by the

Corporation

Borrowing Base – or Collateral Base, defines what the bank is willing to lend against on

Accounts Receivable, Inventory or PPE

Bridge Analyses or Studies – Analysis of changes to revenue or costs between periods.

BS Drivers – Defines how the balance sheet behaves in terms of cash. Includes

Amortization of debt, collateral base advances and retirements, DSO‟s of Accounts

Receivable, working capital initiatives, Operating Plan, etc.

Covenants – Comes from Credit Agreement or possibly Regulatory constraints

Cross Aging - Limits use of Borrowing Base for customer concentration or aging risks.

Debt Amortization – Required payments of principal under credit facilities.


Glossary of Terms

Financial Modeling Components

Financials – Prior Period and Projected in Trial Balance Detail

IS Drivers – Defines behavior of Income statement items, i.e. Sales

Operating Plan – The plan of the business in non-financial terms, man

hours, machine hours, units produced, houses built, crops grown, etc.

Operational Initiatives - New Initiatives in the Operating Plan which

will have impact on the financial model, the balance sheet, the bridge

studies, i.e. plant closures, SKU Rationalization, new products, etc.

Payroll Masters – Payroll detail at the Departmental Level

Cash Requirements Report – Extracted from AP detail, defines Cash

Requirements by vendor by week going forward, for 13 week cash flow.


Glossary of Terms

Key Financial Ratios

EBITDA – Earnings Before Interest Taxes, Deprecation and

Amortization, usually on a TTM/LTM Basis

Fixed Charge Coverage Ratio – EBITDA divided by „Fixed Charges‟

typically Interest, Principal and Capex.

Interest Coverage Ratio – EBITDA divided by Interest Expense

LTM/TTM – Last Twelve Months or Trailing Twelve Months

Maximum Capital Expenditures – Constraint on Capital Expenditures

Minimum EBITDA – Minimum EBITDA which may be required under

Credit Agreement

Senior Debt Leverage Ratio – Senior Debt divided by TTM EBITDA


Glossary of Terms

Cash Management

BAI2 – File Architecture format used to support on line Bank Recs.

Book Cash - Cash balance on Company‟s books, may be different from

what Bank shows due to deposits in transit, checks outstanding, etc.

Concentration/ZBA – Sweeps Cash to central account.

Controlled Disbursement – Deposits Cash when checks presented.

DSO - Days Sales Outstanding in Accounts Receivable

Inventory Turn Over Ratio – COGS divided by Average Inventory

Operating Cycle – Duration of Inventory and AR. Length of time for

investment by company to come back in the form of cash.

Positive Pay – Notices Bank of checks issued by Company.


Glossary of Terms

Credit Terms

Altman Z Score – Score developed by Professor Altman to predict risk

of Bankruptcy of Company.

13 Week Cash Flow Model – Projection of Cash Flows and

Requirements of Company, first product required by Special Asset

Departments of Lenders when Company is in Workout

Restructuring – Changes to Capital Structure of the Company.

Turn Around – Improving the operational performance of the company.

Shared National Credit – Loans which are shared by multiple banks

under the SNC conventions of the Federal Reserve begun in 1977.

Zone of Insolvency – Company unable to meet obligations when due

cash management strategies during economic turmoil_aicpa

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