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Cash Management StrategiesDuring Economic Turmoil!
Presented by
Robert Tormey, CPA, CTP
AICPA Controllers Workshop West 2009
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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)
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Cash Management Strategies
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.
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Cash Management Strategies
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‟.
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Cash Management Strategies
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.
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Cash Management Strategies
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.
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Cash Management Strategies
Prior Period Analysis
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
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Cash Management Strategies
Prior Period Analysis
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
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Cash Management Strategies
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
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Cash Management Strategies
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
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Cash Management Strategies
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.
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Cash Management Strategies
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,
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Cash Management Strategies
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.
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Cash Management Strategies
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.
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Cash Management Strategies
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.
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Cash Management Strategies
Workout and Restructuring
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
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Cash Management Strategies
Workout and Restructuring
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
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Glossary of Terms
Financial Modeling Components
Key Financial Ratios
Cash Management
Credit Terms
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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.
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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.
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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
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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.
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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