Financial Models: Daily, Weekly and Monthly Cash Flows
A financial model is the most important tool used in the turnaround, restructuring and/or refinancing of a troubled company. For this reason, our work with clients almost always requires us to build at least one, sometimes multiple, models.
We use financial models to assist management with business planning, including scenario evaluation; communicate the details of borrowing requirements from existing or prospective lenders; communicate the turnaround plan to stakeholders and demonstrate the requirement for payment deferrals or restructuring; demonstrate survivability to prospective purchasers of the business and other interested parties; and, for a host of other communication requirements that may arise during the course of a turnaround of the business.
There are generally three types of cash flow presentations or models, distinguished by their reporting frequency: daily, weekly and monthly. Each may be an appropriate tool depending on the severity of the cash shortage and the information to be conveyed to the user. Each type of model is prepared in a very different way and is used for different purposes.
A daily cash flow is usually a simple laundry list of every receipt and payment to be made each day. It is used in extremely tight cash environments by management teams seeking to make sure they meet payroll and that cheques clear the bank. In can also be used as a cash expenditure control tool where a turnaround advisor, CRO or some other person is required to approve all daily expenditures.
However, as a stakeholder communication tool, the daily cash flow is mostly unhelpful, or even harmful. The model fails to communicate turnaround strategies, financing opportunities or anything other than the fact that the company is micro-managing cash out of necessity. The daily cash flow may be a required management tool, but keep it internal to the organization.
A weekly cash flow, most often in the format of a 13-week rolling cash flow model, typically presents receipts and fixed and variable disbursements of the company, by category, by week. This format is invaluable for decision making because it allows the user to quickly scan across a three month period and to understand what cash outflows are fixed and where negotiation of payment terms or other restructuring may be effective.
The 13-week cash flow is not only indispensable to management of troubled companies, it is the primary tool required by lenders to these companies. Accordingly, 13-week cash flows should accompany all existing and prospective lender presentations. An example of a 13-week cash flow template is HERE.
A monthly cash flow is best prepared as a derivative of monthly projected balance sheets and income statements. For the accountants reading this, a monthly cash flow is really a Statement of Changes in Financial Position calculation. Using this approach, rather than creating a top down independent schedule, makes the cash flow dynamic so that changes to sensitive cash drivers, such as working capital assumptions, will automatically flow through the model and provide insight on the direction of cash balances far into the future. It also acts as an internal control function because it reconciles the cash flow with the balance sheet and P&L.
Monthly cash flows are required because turnaround plans, restructuring plans, repayment of debts and business valuations require a longer horizon than is offered by a 13-week cash flow. The model can range from several months to several years, depending on the plan to be communicated.
Posted by Scott Sinclair, Range Advisors
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