Cash is king — or queen
May 18, 2020
Why and how to conduct effective cash flow forecasting now
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Disclaimer
► The views expressed by the presenters are not necessarily those of Ernst & Young LLP or other members of the global EY organization.
► These slides are for educational purposes only and are not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
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Housekeeping items
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moderatorToday’s
Kath CarterPartner, Global Transaction Advisory Services, Markets Accounts and Business Development Leader and EY Entrepreneurial Winning Women™ Global Executive Sponsor
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speakersToday’s
Briana RichardsPrincipal, Americas Transaction Advisory Services, Liquidity and Restructuring, Ernst & Young LLP
Nick BugdenSenior Manager, Americas Transaction Advisory Services, Liquidity and Restructuring, Ernst & Young LLP
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Current situation
• Reduced demand and output
• Economic uncertainty
• Depleted cash reserves
• Scenario analysis and cost saving measures
• Liquidity conservation to survive the now
• Planning for the next and beyond
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What is a cash flow forecast?
• Forecast of available liquidity• Often cash in bank and revolving loan availability
• Near term, typically 13 weeks • Sometimes dives into daily cash availability
• Direct cash flow, not GAAP accounting• Actual timing of customer receipts and supplier
disbursements
• Management tool• Used in conjunction with other planning tools
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What is a cash flow forecast?
• Typically built in a spreadsheet
• 14 columns for 13 weeks + total
• Number of rows varies by company and need
• Rolling cash balances
Week 1 2 3 4 5 6 7 8 9 10 11 12 13
5/15 5/22 5/29 6/5 6/12 6/19 6/26 7/3 7/10 7/17 7/24 7/31 8/7 Total
Receipts 3 3 3 3 3 3 3 3 3 3 3 3 3 39 A
Disbursements
Payroll (2) 0 (2) 0 (2) 0 (2) 0 (2) 0 (2) 0 (2) (14)
Suppliers (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (13)
Rent 0 0 0 (3) 0 0 0 (3) 0 0 0 0 (3) (9)
Debt service 0 0 0 0 0 0 0 (6) 0 0 0 0 0 (6)
Capex 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Total disbursements (3) (1) (3) (4) (3) (1) (3) (10) (3) (1) (3) (1) (6) (42) B
Net cash flows 0 2 0 (1) 0 2 0 (7) 0 2 0 2 (3) (3) A+B=C
Beginning cash 10 10 12 12 11 11 13 13 6 6 8 8 10 10 D
Net cash flows 0 2 0 (1) 0 2 0 (7) 0 2 0 2 (3) (3) C
Ending cash 10 12 12 11 11 13 13 6 6 8 8 10 7 7 D+C
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Cash flow forecasts are unique to each company
Week Ending
Forecast Week-> 1 2 3 4 5 6 7 8 9 10 11 12 13
($ in thousands) 11/9/2018 11/16/2018 11/23/2018 11/30/2018 12/7 /2018 12/14/2018 12/21/2018 12/28/2018 1/4/2019 1/11/2019 1/18/2019 1/25/2019 2/1/2019 13 Weeks
Beginning Cash Balance 14,002$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 14,002$
ReceiptsOperating Receipts 56,908$ 73,301$ 50,424$ 56,512$ 28,848$ 33,588$ 49,872$ 26,163$ 24,684$ 28,871$ 48,825$ 36,918$ 33,392$ 548,306$ Non-operating Receipts 20 350 20 20 20 20 1,000 20 20 20 20 20 20 1,570
Total Receipts 56,928$ 73,651$ 50,444$ 56,532$ 28,868$ 33,608$ 50,872$ 26,183$ 24,704$ 28,891$ 48,845$ 36,938$ 33,412$ 549,876$
DisbursementsTrade (51,235)$ (66,286)$ (45,399)$ (50,878)$ (25,982)$ (30,247)$ (45,785)$ (23,565)$ (22,234)$ (26,002)$ (43,961)$ (33,244)$ (30,071)$ (494,888)$ Payroll (78) (44) (296) (3,041) (666) (328) (856) (2,699) (121) (174) (281) (272) (2,254) (11,109) Barges / Charter - (1,258) (112) (751) (831) (473) (109) (495) (696) (183) (397) (13) (909) (6,227) Storage - (216) (476) - - (148) (549) - - - - (154) (772) (2,315) Other OPEX (46) (702) (685) (2,150) (1,759) (645) (1,252) (743) (794) (856) (654) (1,339) (2,284) (13,908) Interest - (39) - (144) (51) (92) (114) (75) (560) (153) (429) (2) (513) (2,171) Taxes - - - (247) - - - (630) - - - (230) - (1,107) Capex - (122) - - (252) - (40) - - - (263) - (81) (757)
Total Disbursements (51,359)$ (68,666)$ (46,967)$ (57,211)$ (29,541)$ (31,932)$ (48,705)$ (28,206)$ (24,405)$ (27,368)$ (45,985)$ (35,255)$ (36,883)$ (532,483)$
Net Cash Flow 5,569$ 4,984$ 3,476$ (679)$ (672)$ 1,676$ 2,167$ (2,023)$ 299$ 1,523$ 2,860$ 1,684$ (3,471)$ 17,393$
Cash before financing 19,571$ 14,984$ 13,476$ 9,321$ 9,328$ 11,676$ 12,167$ 7,977$ 10,299$ 11,523$ 12,860$ 11,684$ 6,529$ 151,395$
Borrowings -$ -$ -$ 679$ 672$ -$ -$ 2,023$ -$ -$ -$ -$ 3,471$ 6,845$ Repayments (9,571) (4,984) (3,476) - - (1,676) (2,167) - (299) (1,523) (2,860) (1,684) - (28,240) Change in ABL (9,571) (4,984) (3,476) 679 672 (1,676) (2,167) 2,023 (299) (1,523) (2,860) (1,684) 3,471 (21,395)
Cash Flow incl. Financing (4,002)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ (4,002)$
Ending Cash Balance 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$
Restricted cash - - - - - - - - - - - - - -
Available cash 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$
► Certain forecasts will be more complex (i.e., incorporate asset-based lending (ABL) facility).
► Companies may need multiple forecasts for distinct business units.
► Line items and structure can flex, as needed.
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Poll question 118 May 2020Presentation titlePage 10
What level of cash flow forecasting do you currently do?
[Select one] TextText
Text
A
B
C
D
None
Review of major funding needs in the next couple weeks
Weekly cash flow forecast for the next several months
Monthly forecast based on project financial statements
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• Cash is the lifeline of the business.• Pay employees
• Purchase goods or services
• Pay other creditors (e.g., banks)
• Pay owners or other investors
• Predict ability to generate sufficient cash to fund operations.
• The 13-week timeline allows for proactive action to address or mitigate liquidity issues.• Note that one quarter captures most types of
expenses
Why cash, and why 13 weeks?
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When to develop a forecast
• Declining cash balances
• Times of uncertainty• Potential financial strain or distress
• During transaction or reorganization• Near-term forecasting can optimize cash uses
• Required reporting to lenders• Often resulting from covenant breaches or
unforeseen drawdown requests
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Who is involved in the process?
• A thorough cash flow forecast will consider all aspects of the business:
• Management/strategy
• Finance and accounting
• Sales team
• Operations
• Human resources
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How to forecast cash flows
• Iterative process that improves every week
• Imperative to track actual cash flows
• Can be as broad or detailed as is necessary
Prepare weekly
forecast
Record and reconcile actuals
Perform variance analysis
Review methodology
and assumptions
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Getting started
• Before jumping into the weekly cash flow forecasting cycle, know the data and what level of detail is feasible• Identify operating bank accounts and other
liquidity
• Establish data sources for cash actuals
• Create a cash flow template with viable lines —receipts and disbursements
• Populate actuals for a reasonable historical period
• Review the latest balance sheet and budget
Review Forecast
Variance Actuals
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Initial weekly forecast
• What has happened
• Unwinding balance sheet accounts
• Accounts receivable: collections due from prior sales
• Accounts payable: payment of actual expenses based on terms
• Already incurred; timing may be controllable
• What will happen
• Underlying regular payments
• Payroll, rent, debt
• Generally fixed costs with very little flexibility
• What might happen
• Future activity that will convert into cash
• Future sales and vendor purchases
• Asset sales and capital expenditures
• Most controllable portion of the cash flows
Review Forecast
Variance Actuals
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Building blocks of a cash flow forecast
Week Ending
Forecast Week-> 1 2 3 4 5 6 7 8 9 10 11 12 13
($ in thousands) 11/9/2018 11/16/2018 11/23/2018 11/30/2018 12/7 /2018 12/14/2018 12/21/2018 12/28/2018 1/4/2019 1/11/2019 1/18/2019 1/25/2019 2/1/2019 13 Weeks
Beginning Cash Balance 14,002$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 14,002$
ReceiptsOperating Receipts 56,908$ 73,301$ 50,424$ 56,512$ 28,848$ 33,588$ 49,872$ 26,163$ 24,684$ 28,871$ 48,825$ 36,918$ 33,392$ 548,306$ Non-operating Receipts 20 350 20 20 20 20 1,000 20 20 20 20 20 20 1,570
Total Receipts 56,928$ 73,651$ 50,444$ 56,532$ 28,868$ 33,608$ 50,872$ 26,183$ 24,704$ 28,891$ 48,845$ 36,938$ 33,412$ 549,876$
DisbursementsTrade (51,235)$ (66,286)$ (45,399)$ (50,878)$ (25,982)$ (30,247)$ (45,785)$ (23,565)$ (22,234)$ (26,002)$ (43,961)$ (33,244)$ (30,071)$ (494,888)$ Payroll (78) (44) (296) (3,041) (666) (328) (856) (2,699) (121) (174) (281) (272) (2,254) (11,109) Barges / Charter - (1,258) (112) (751) (831) (473) (109) (495) (696) (183) (397) (13) (909) (6,227) Storage - (216) (476) - - (148) (549) - - - - (154) (772) (2,315) Other OPEX (46) (702) (685) (2,150) (1,759) (645) (1,252) (743) (794) (856) (654) (1,339) (2,284) (13,908) Interest - (39) - (144) (51) (92) (114) (75) (560) (153) (429) (2) (513) (2,171) Taxes - - - (247) - - - (630) - - - (230) - (1,107) Capex - (122) - - (252) - (40) - - - (263) - (81) (757)
Total Disbursements (51,359)$ (68,666)$ (46,967)$ (57,211)$ (29,541)$ (31,932)$ (48,705)$ (28,206)$ (24,405)$ (27,368)$ (45,985)$ (35,255)$ (36,883)$ (532,483)$
Net Cash Flow 5,569$ 4,984$ 3,476$ (679)$ (672)$ 1,676$ 2,167$ (2,023)$ 299$ 1,523$ 2,860$ 1,684$ (3,471)$ 17,393$
Cash before financing 19,571$ 14,984$ 13,476$ 9,321$ 9,328$ 11,676$ 12,167$ 7,977$ 10,299$ 11,523$ 12,860$ 11,684$ 6,529$ 151,395$
Borrowings -$ -$ -$ 679$ 672$ -$ -$ 2,023$ -$ -$ -$ -$ 3,471$ 6,845$ Repayments (9,571) (4,984) (3,476) - - (1,676) (2,167) - (299) (1,523) (2,860) (1,684) - (28,240) Change in ABL (9,571) (4,984) (3,476) 679 672 (1,676) (2,167) 2,023 (299) (1,523) (2,860) (1,684) 3,471 (21,395)
Cash Flow incl. Financing (4,002)$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ (4,002)$
Ending Cash Balance 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$
Restricted cash - - - - - - - - - - - - - -
Available cash 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$ 10,000$
Unwind of opening balance sheet trade debtors and creditors
Underlying operating payments, e.g., rent, payroll
Opening bank position per bank statements
Revolver/financing activity
One-off irregular payments, e.g., capex, loan repayments,
redundancy costs
Receipts and payments arising from forecast sales and purchases
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Example sources
• Balance sheet — current assets and liabilities
• Payroll calendar
• Annual budget
• Debt amortization schedules
• Discussion among management, including operations
• Other sources/considerations• Recent run rates
• Sales team projections
• Inventory forecasts
• Capital expenditure budget
• Contingency allowance for the unknown
Review Forecast
Variance Actuals
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Poll question 218 May 2020Presentation titlePage 19
What is the impact of COVID-19 on your 2020 revenues?
[Select one]
Text
TextText
Text
A
B
C
D
Severe
Major
Minor
Zero or positive
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Record and reconcile actuals
• Collect cash flow source data• Bank statements
• Payroll reports
• Check runs
• Collect data on latest balances• Accounts receivable/accounts payable
• Checks outstanding
• Organize into cash flow lines
• Check: beginning cash + activity = ending cash
Review Forecast
Variance Actuals
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Perform variance analysis
• Align prior week forecast and actuals
• Calculate the variance• Identify timing and permanent variances
Week 11
20-Feb through 24-Feb Variance
Forecast (1) Actual $ % Comments
Operating cash flows
Receipts
Operating receipts 6,897$ 6,832$ (65)$ -1%
Miscellaneous receipts - - - 0%
Total receipts 6,897 6,832 (65) -1%
Operating Disbursements
Payroll & Benefits (2,540) (1,977) 562 22% Bonus check timing
Raw materials (7,146) (4,680) 2,465 34% Select vendors providing limited terms
Freight out (523) (628) (105) -20%
Supplies / Repairs / Dies (698) (425) 272 39%
Utilities (791) (270) 522 66% Timing
Insurance - - - 0%
Taxes (379) (171) 208 55%
G&A / rent / cards (69) (35) 35 50%
Commission (5) - 5 100%
Contract / Professional services (60) (108) (48) -79%
Other disbursements (179) (26) 153 85%
Total operating disbursements (12,391) (8,321) 4,070 33%
Net operating cash flows (5,494) (1,489) 4,005 73%
Restructuring costs
Professional fees (100) (67) 33 33% Delay in receipt of professionals invoices
US Trustee fees - - - 0%
Adequate assurance - Utilities - - - 0%
Other restructuring costs - - - 0%
Total Restructuring costs (100) (67) 33 33%
Net cash flows (before financing) (5,594)$ (1,556)$ 4,038$ 72%
Financing cash flows
Adequate protection - Senior Secured - - - 0%
DIP loan interest / fees - - - 0%
Total Financing cash flows - - - 0%
Net cash flows (5,594)$ (1,556)$ 4,038$ 72%
Review Forecast
Variance Actuals
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Review and roll forward
• Review drivers of prior week variances
• Refine methodologies and assumptions • What is the appropriate detail level?
• Were all categories of spend captured?
• Roll forward the forecast, always looking at the next 13 weeks
• Determine whether proactive actions are required to maintain adequate cash availability
Review Forecast
Variance Actuals
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Insights/actions
• Scenario analysis• Model impact of external economic drivers
• Sensitize various options and outcomes
• Cash conservation• Defer capital projects
• Stretch payables
• Personnel actions (i.e., limited overtime, furloughs, reductions in force)
• Capital conversations • Raising funds (debt/equity)
• Covenant waivers
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Poll question 318 May 2020Presentation titlePage 24
What actions are you taking to extend your liquidity position?
[Select one]
Text
TextText
Text
A
B
C
D
Delaying payments to vendors
Offering discounts
Minimizing purchases
Furloughing employees
E
F
Borrowing funds/raising additional capital
All of the above
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Potential levers to enhance liquidity
Short term
Long term
• Stretch accounts payable
• Employee furlough
• Temporarily idle operations
• Consider wage and bonus deferment/cut
• Delay capital expenditures
• Defer marketing spend and related programs
• Draw on remainingcredit lines
• Offer temporary discounts to promote sales
• Eliminate/reduce 401(k) match
• Reduction in force
• Reduce inventory purchases
• Review AR and accelerate collections
• Expand ABL availability
• Tighten discretionary spending limits/approvals
• Implement hiring freeze
• Factor accounts receivable
• Eliminate/reduce dividend (if relevant)
• Tax stimulus/incentives (as available)
• Manufacturing/ops transformation
• Repatriate cash sitting in overseas bank accounts
• Reduce SG&A costs
• Raise new capital
• Sale or monetization of non-core assets (i.e., sale and leaseback)
• Footprint and SKU rationalization
• Liquidate aged inventory(if relevant)
• Procurement optimization
• Outsource/offshore admin back office
• Conduct zero-based budgeting exercise
• Reduce customer credit lines
• Apply vendor/supplier credits
• Offer early payment discounts
• Evaluate potential insurance claims
Focus here first … … and consider prepping for this
Business risk: Low Medium High
• Impact and risk will vary by sector and individual organization.
For more information,
please visit:Scenario planning webcast replay
COVID-19 resources
Thought Center
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