UPDATE – September 27. 2019

This post was picked up by certain news feeds and it was incorrectly attributed to Scott Sinclair, rather than Sinclair Range. For the record, Olga Jilani provided this content – and did a great job. She also carried the Martinis With Scott episode, giving me a well needed week off! Thanks, Olga.


Original Post

We’ve have discussed at length various steps to financing a troubled company: first admitting that you are in trouble and proceeding to take steps to make yourself attractive to potential lenders.  The topics we have covered to date have been softer in terms of human resource management, strategic planning and lender communication.  The next step would be to put your plan into financial projections through monthly and weekly cash flow models.

The financial model is the most important tool in the turnaround/restructuring and subsequent financing of a troubled company.  We are great believers in the mantra that throwing more money at a troubled situation – especially one without a detailed plan on how to use these funds – is not the solution.  Financial models do just that: create a detailed outline of the use of funds and instill trust in the lender that the management team understands the business strategy, can execute it and is committed to regularly and thoroughly evaluating their financial performance.  For this reason, we always build at least two models, a monthly model and a 13-week cash flow, for our clients when undertaking a restructuring and/or financing.

Accurately describing an Excel spreadsheet without an example is a fool’s errand.  You can find an example of a monthly model HERE and a 13-week cash flow model HERE to follow along with the YouTube episode and this post.

The monthly model includes three financial statements: balance sheet, income statement and cash flow.  We always start with the income statement and work from the top down: revenue to net income, breaking out each of the revenue sources and costs line by line on a separate Excel tab.  As operators, we build a model that can then be updated to actual figures when statements become available.  This way, we can asses the company’s monthly performance against the projection (budget) on key performance indicators and discuss what we did right, what we did wrong and whether we need to adjust our outlook – and how this will impact our cash demands.  (To learn more about key performance indicators or KPIs, refer to a previous blog post HERE or our episode Martinis with Scott dedicated to the topic HERE.)

The balance sheet line items are largely driven by the assumptions made about components of P&L: how many days does it take to collect accounts receivable, how many days do suppliers extend accounts payable, what expenses have we prepaid, what is the depreciation of our assets?

A monthly cash flow is best prepared as a derivative of monthly projected balance sheets and income statements.  For the controllers and CFOs 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.

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.

We cannot stress enough that financial models are not standalone documents that are just included as part of a funding package.  We often encounter companies that have models that are outdated, do not tie into the strategic plan they are communicating to lenders and investors, or show a projected decline of profits and cash flows – rendering these models useless in the grand scheme of the restructuring.  In short, they do nothing to create trust with lenders and move the company forward to profitability.  We cannot stress enough that they are tools of a larger plan that should be regularly updated and reviewed. They are not standalone documents – they are the gateway to management discussions and an opportunity to reflect on quantitative results and share them with other stakeholders, specifically investors and lenders.

No restructuring scenario goes exactly as planned and lenders who have been through this many more times than entrepreneurs expect this.  However, they also expect the management team ahead of them to recognize, if not anticipate, these hurdles and have a plan to overcome them.  Financial models illustrate management’s understanding of their company, the challenges it faces and the financial requirements to overcome them.

Financial modeling may seem tedious and, believe it or not, we have encountered instances where companies believe it to be unnecessary.  Being able to evaluate operational performance quantitatively is invaluable tool to not only companies in trouble and start ups, but a key piece to building trust with funding partners.

Want some more detailed discussion? Check out Episode 20 of Martinis With Scott. Remember to subscribe to Martinis With Scott on YouTube, Apple Podcasts and Spotify.