TMA Chicago/Midwest Chapter. Liquidity Forecasting and Management: Does Your 13-Week Cash Flow?

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2 TMA Chicago/Midwest Chapter Liquidity Forecasting and Management: Does Your 13-Week Cash Flow? October 9, 2013

3 Workshop Leaders Brian Bonaviri, Grant Thornton LLP Carlin Adrianapoli, FTI Consulting Mark Iammartino, MorrisAnderson

4 Introduction

5 Managing Liquidity Cash is king. Creating and managing liquidity in a turnaround is essential to achieving desired outcomes. A 13-week cash flow model is the most commonly used tool to forecast and manage a company s short-term receipts and disbursements. Very useful even for healthy companies without liquidity constraints Helpful in developing long-term cash forecasts such as budgets Model becomes the basis for key reporting to management and lenders and typically undergoes constant revision and updating through the duration of the case

6 Limitations of the Model Checkbook accounting; reflects actual and projected cash movements and generally ignores accruals. Net cash generation or usage does not equal net income or loss Weekly basis may not coincide with financial statement reporting periods Line items represent activities significant to liquidity management and may not correspond with normal reporting structures More difficult to regularly obtain and present actual results from management Sometimes only portions of the business are modeled (i.e. exclude foreign subs)

7 Who Develops the Model YOU develop the model as the turnaround professional. Be original; do not rely on a model created by the company or prior turnaround professionals Heavy input from client personnel critical Cannot develop the model from the office or from a conference room Numerous interviews with client personnel necessary to obtain information; rarely does one person have sufficient scope and detail to be a single point of contact Client contacts will likely range from executives to clerical

8 Key Components Cash receipts from all sources Customer payments on receivables and cash sales Refunds, royalties, rebates, insurance proceeds etc. Borrowings Cash disbursements to all sources Vendor payments on payables and cash disbursements (e.g. CIA/COD) Payroll, rent, utilities, taxes, interest etc. Debt repayments Professional fees Borrowing base / covenant compliance Often requires working capital rollforwards Key debt terms such as facility limits, advance rates, DSCR s

9 Exercise

10 Company X Background Company X achieves roughly $1 million in annual sales and has a $100k revolving line of credit to fund its day-to-day operations The Company is concerned will its $100k revolver provide sufficient short-term liquidity? To assess the situation, the Company has engaged you to develop a thirteen week cash flow What do you do?

11 Company X Receipts All of Company X's receipts (except due to the revolver) are from trade sales Company X does NOT receive royalties, grants, or any other receipts How would you forecast receipts? Two buckets Unwind AR: Review all outstanding invoices New sales: Forecast new sales and collection timing on the sales in this case, by DSO

12 Company X Disbursements Key disbursements: Unwind AP: Review all outstanding invoices New purchases: Forecast new purchases and timing of payments in this case, by DPO Payroll and benefits Rent Taxes and insurance Capital expenditures Other

13 Company X 13-Week Cash Flow Results? Company X will require additional financing to get through the next thirteen week period Without preparing the thirteen week cash flow, management would not have known that By proactively forecasting its liquidity needs, management is more knowledgeable and better prepared

14 Exercise Wrap-up

15 Sounds Easy? It s not as easy as it sounds. Obtaining data can be difficult; this is a new way of reporting for many companies and rarely does one person have all the information Accurate modeling of variable receipts and disbursements can be difficult, such as hourly labor or commodity-based inputs like corn Nuances in understanding timing of cash flows Payroll may be paid on a Monday, but need to be funded by the prior Thursday Payment float may be important for companies really tight on liquidity Bankruptcy and crisis situations change normal patterns Vendors may require deposits or cash in advance, customers may take additional deductions, employee productivity may suffer

16 What It Looks Like Training Exercise Weekly Cash Flow - Consolidated ($000) Week-ended 26-Jan 2-Feb 9-Feb 16-Feb 23-Feb 2-Mar 9-Mar 16-Mar 23-Mar 30-Mar 6-Apr 13-Apr 20-Apr 27-Apr Act / Fcst Act Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Fcst Total Week Weeks Sales - 2,439 1,612 1,707 1,528 1,972 1,274 2,204 1,583 1,934 1,088 1,587 1,612 1,536 22,075 I. Receipts Scheduled A/R Receipts 1,760 2, , ,652 Projected A/R Receipts ,509 1,609 1,598 1,750 2,183 1,687 1,614 1,115 16,697 Past-Due A/R Receipts Cash Initiatives / Other (5) (3) (3) 118 (3) - (7) (4) (7) - (0) 85 Total Receipts 1,760 2, ,193 1,595 1,943 2,631 1,615 1,610 1,743 2,179 1,680 1,622 1,115 22,434 II. Disbursements Scheduled AP Disbursements 1,610 1, ,223 Projected AP Disbursements ,305 1,300 1,353 1,706 1,264 1,401 1,310 10,882 Payroll & Taxes ,869 Benefits CapEx (18) (18) (18) 669 Debt Service ,080 Other Disbursements 41 (21) (261) (199) 295 (395) 5 (54) (353) 472 (72) Total Disbursements 1,989 1,882 1,653 1, ,705 1,459 1,324 1,612 1,714 2,005 2,065 1,550 2,276 21,458 III. Net Cash Flow (229) 992 (1,019) (23) , (3) (385) 72 (1,162) 976 IV. Borrowing Base Beginning Non-Gov't A/R 5,324 5,324 4,394 4,717 5,125 5,417 5,393 4,127 4,650 4,643 4,889 3,972 3,896 3,886 5,324 Plus: Shipments (Net) - 1, , , , , ,260 Less: Receipts - (2,853) (617) (643) (456) (1,351) (1,739) (973) (789) (1,022) (1,362) (1,021) (980) (472) (14,277) Less: Pre-Pay Offsets Adjustments / Timing Ending Non-Gov't A/R 5,324 4,394 4,717 5,125 5,417 5,393 4,127 4,650 4,643 4,889 3,972 3,896 3,886 4,308 4,308 Less: Ineligibles (49) (49) (49) (49) (49) (49) (49) (49) (49) (49) (49) (49) (49) (49) (49) Ending Eligible Non-Gov't A/R 5,276 4,345 4,668 5,076 5,368 5,344 4,078 4,601 4,595 4,840 3,923 3,848 3,838 4,259 4,259 Availability at 80% 80% 4,221 3,476 3,734 4,061 4,295 4,275 3,262 3,681 3,676 3,872 3,139 3,078 3,070 3,407 3,407 Beginning Governmental A/R ,170 1,825 1,925 1,563 1,613 1,639 1,701 1,681 1,620 1,441 1,417 1, Plus: Shipments (Net) ,815 Less: Receipts - (21) (17) (555) (1,142) (596) (775) (645) (821) (727) (821) (666) (642) (642) (8,073) Less: Pre-Pay Offsets Adjustments / Timing Ending Govt. A/R 675 1,170 1,825 1,925 1,563 1,613 1,639 1,701 1,681 1,620 1,441 1,417 1,417 1,417 1,417 Less: Ineligibles Ending Eligible Gov't A/R 675 1,170 1,825 1,925 1,563 1,613 1,639 1,701 1,681 1,620 1,441 1,417 1,417 1,417 1,417 Availability at 85% 85% ,551 1,636 1,329 1,371 1,393 1,446 1,429 1,377 1,225 1,205 1,205 1,205 1,205 Beginning Inventory 26,033 26,033 25,802 25,961 25,632 25,787 25,930 26,159 25,980 26,126 26,071 26,517 26,714 26,671 26,033 Plus: Receipts - 1,554 1,139 1,019 1,104 1,360 1,040 1,202 1,152 1,148 1,109 1, ,521 15,475 Plus: Manufacturing Overhead ,591 Less: Cost of Sales - (1,673) (1,180) (1,236) (1,148) (1,417) (1,010) (1,580) (1,206) (1,401) (863) (1,179) (1,195) (1,147) (16,234) Adjustment to Actuals Less: Slow Moving Inv. Reduction - (311) - (311) (621) Ending Inventory 26,033 25,802 25,961 25,632 25,787 25,930 26,159 25,980 26,126 26,071 26,517 26,714 26,671 27,244 27,244 Less: Estimated Reserves (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) (5,118) Less: Lien Waiver Reserves (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) Less: License Waiver Reserves (256) (256) (256) (256) (256) (256) (256) (256) (256) (256) (256) (256) (256) (256) (256) Less: Packaging Reserves (103) (103) (103) (103) (103) (103) (103) (103) (103) (103) (103) (103) (103) (103) (103) Reserve Relief Amount Ending Inventory, net 20,556 20,325 20,484 20,155 20,310 20,453 20,682 20,503 20,649 20,594 21,040 21,237 21,194 21,768 21,768 Available AR 4,794 4,471 5,286 5,697 5,623 5,646 4,655 5,127 5,105 5,249 4,363 4,283 4,275 4,612 4,612 Available Inventory 20,000 10,278 10,163 10,242 10,078 10,155 10,226 10,341 10,252 10,324 10,297 10,520 10,618 10,597 10,884 10,884 Additional Borrowing Base - Existing 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 22,500 Additional Borrowing Base - Estimated Reserves 50% 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 4,903 Additional Borrowing Base - Lien Waiver Reserves 50% A) Total Borrowing Base 42,475 42,036 42,930 43,178 43,181 43,275 42,399 42,781 42,832 42,949 42,286 42,304 42,274 42,898 42,898 B) Commitment 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 Lesser of A and B 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 40,922 Credit Line - Beginning (38,492) (38,492) (38,492) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (38,492) Paydown / (Adv) - (2,430) (2,430) Credit Line - Ending (38,492) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) Less: Outstanding L/Cs (188) Total Outstanding (38,680) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) (40,922) Ending Availability 2, Cash on Hand 3,916 3,916 7,339 6,320 6,297 6,897 7,134 8,307 8,598 8,595 8,625 8,799 8,413 8,485 3,916 Net Cash Flow (229) 992 (1,019) (23) , (3) (385) 72 (1,162) 976 (Pay down) / Advance - 2, ,430 Cash on Hand - End of Week 3,916 7,339 6,320 6,297 6,897 7,134 8,307 8,598 8,595 8,625 8,799 8,413 8,485 7,323 7,323 Ending Availability 2, Plus: Adjusted Ending Cash 3,916 7,339 6,320 6,297 6,897 7,134 8,307 8,598 8,595 8,625 8,799 8,413 8,485 7,323 7,323 Liquidity 6,159 7,339 6,320 6,297 6,897 7,134 8,307 8,598 8,595 8,625 8,799 8,413 8,485 7,323 7,323 Liquidity Covenant Surplus / (Shortfall) 1,000 5,159 6,339 5,320 5,297 5,897 6,134 7,307 7,598 7,595 7,625 7,799 7,413 7,485 6,323 6,323 Memo Items: Trapped Availability 1,553 1,114 2,008 2,256 2,259 2,353 1,477 1,859 1,909 2,027 1,364 1,382 1,352 1,976 1,976 Float adjustment Prior week checks o/s (1,067) (1,035) (1,209) (735) (621) (922) (1,121) (857) (1,305) (1,300) (1,353) (1,706) (1,264) (1,401) (1,401) Current week checks o/s 1,035 1, , ,305 1,300 1,353 1,706 1,264 1,401 1,310 1,310 Float adjustment - period 32 (175) (301) (199) 265 (448) 5 (54) (353) 442 (137) 91 91

17 What It Looks Like Prior page deliberately unreadable to show depth of information on the primary page Most cash flow models are so detailed that presentation can be difficult to develop Think of audience and how to present most critical information in an easy-to-read and easy-to-interpret manner This particular example model has 64 worksheets showing summary schedules and detailed supporting documentation

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