cash is king - or queen (pdf)...may 18, 2020 · •cash is the lifeline of the business. • pay...

Cash is king — or queen

May 18, 2020

Why and how to conduct effective cash flow forecasting now

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.

Housekeeping items

Send questions, message or inquiries.

Click the icon to download the slides for the webcast, as well as links to additional resources.

• If you experience technical difficulty, please press Ctrl + F5 to refresh, or send us a message using the Q&A button.

Provide feedback.

moderatorToday’s

Kath CarterPartner, Global Transaction Advisory Services, Markets Accounts and Business Development Leader and EY Entrepreneurial Winning Women™ Global Executive Sponsor

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

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

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

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

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.

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

• 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?

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

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

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

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

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

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

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


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

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

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

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

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


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

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

https://www.ey.com/en_us/webcasts/2020/05/how-companies-can-develop-manage-and-evaluate-forecasts-for-recovery-scenarios

https://www.ey.com/en_us/growth/growth-in-the-time-of-covid-19

https://www.ey.com/en_us/webcasts

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

© 2020 Ernst & Young LLP.All Rights Reserved.

2005-3490299ED NoneUS SCORE no. 09321-201US

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

ey.com

cash is king - or queen (pdf)...may 18, 2020 · •cash is the lifeline of the business. • pay...

Documents