deloitte crg - tma | turnaround management association cash flow management.pdf · cash receipt...

Deloitte CRG

Cash Flow Management: A balancing act of technical know-how and finesse

Deloitte Transactions and Business Analytics LLP

May 22, 2014

Copyright © 2014 Deloitte Development LLC. All rights reserved.1

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Disclaimer


• What is it? A tactical tool to help companies understand and manage short-term liquidity

• When is a Company (typically) required to create one? During a liquidity crisis or at times of distress

• What purpose does it serve? Provides greater visibility into potential upcoming points of liquidity difficulty, while

allowing a better understanding around which to frame a restructuring

• What deliverables may be submitted to the stakeholders?

13-week cash flow forecast (summary level)

Borrowing base (if applicable) Weekly forecast vs. actual (variance report)

• How does the 13-week cash flow compare to an integrated business plan model?

Tactical vs. strategic view of the near term Indirect and/or direct in integrated model vs. direct method in 13-week cash flow

• Always perform analysis on a “book” basis, not a “bank” basis

Overview of The 13-week Cash Flow


13-week Cash Flow Forecast Example

Sales and Receipts

Operating Disbursements

Non-operating Disbursements

Revolver and Availability

Week Count Total

0 7 14 21 28 …. 77 8418-Jan 25-Jan 1-Feb 8-Feb 15-Feb … 5-Apr 12-Apr Total

Total Sales 2,000 6,500 - 2,950 ………….. - 30,450

Cash ReceiptOperating Receipt 3,500 5,000 500 5,000 ………….. 1,750 36,200 Excess Inventory Receipt ………….. 1,500

Total Receipt 3,500 5,000 500 5,000 ………….. 1,750 37,700

DisbursementVendor Payment 2,000 3,750 - 1,000 ………….. 2,950 22,530 Gross Payroll 863 288 963 288 ………….. 863 8,063 Rent and Utilities 25 25 225 25 ………….. 25 925 Equipment Leases - - 500 - ………….. - 1,500 Property Tax - - - - ………….. - 4,000 General Insurance - - 38 - ………….. - 375 Other 50 50 50 50 ………….. 50 650

Total Op. Disbursements 2,938 4,113 1,775 1,363 ………….. 3,888 38,043

Net Operating Cash Flow 563 888 (1,275) 3,638 ………….. (2,138) (343)

Non-operating DisbursementInterest Payment - - 376 - ………….. - 1,349 Capital Expenditure 125 125 125 125 ………….. 125 4,500 Professional Fee 100 ………….. 300

Total Non-op. Disbursements 125 125 601 125 ………….. 125 6,149

Net Cash Flow 438 763 (1,876) 3,513 ………….. (2,263) (6,491)

Revolver roll-forwardBeginning revolver 20,500 20,063 19,300 21,176 ………….. 24,729 20,500 Add: draw - - 1,876 - ………….. 2,263 18,218 Minus: Paydown (438) (763) - (3,513) ………….. - (11,727)

Ending revolver 20,063 19,300 21,176 17,663 ………….. 26,991 26,991

Availability (**) 2,938 3,586 1,824 3,537 ………….. (5,308) (*) Check outstanding is as of Jan 14, 2013(**) Availability is the difference between revolver (after covering float) and the lower of borrowing base/facility limit of $25,000

Projection PeriodDays

Week Ending


0 7 14 21 28 …. 77 8418-Jan 25-Jan 1-Feb 8-Feb 15-Feb … 5-Apr 12-Apr

Accounts ReceivableEnding A/R 13,500 15,000 14,500 12,450 ………….. 9,250 Ineligible 2% (270) (300) (290) (249) ………….. (185)

Eligible A/R 13,230 14,700 14,210 12,201 ………….. 9,065

Collateral A/R 85% 11,246 12,495 12,079 10,371 ………….. 7,705

InventoryEnding Inventory 33,505 29,880 32,318 30,775 ………….. 37,200 Ineligible 5% (670) (598) (646) (616) ………….. (744)

Eligible Inventory 32,835 29,282 31,671 30,160 ………….. 36,456

Collateral Inv 50% 16,417 14,641 15,836 15,080 ………….. 18,228 Limit at 18,500$

Collateral Inv - Applied 16,417 14,641 15,836 15,080 ………….. 18,228

Total Collateral Value 27,663 27,136 27,914 25,451 ………….. 25,933 Minus: Open L/C (2,250) (2,250) (2,250) (2,250) ………….. (2,250)

Total Borrowing Base 25,413 24,886 25,664 23,201 ………….. 23,683

Availability CalculationLower of Borrowing Base or Limit 25,000 24,886 25,000 23,201 ………….. 23,683

Ending Revolver 20,063 19,300 21,176 17,663 ………….. 26,991 Plus: check outstanding (float) (*) 2,000 2,000 2,000 2,000 ………….. 2,000

Ending Revolver (after covering float) 22,063 21,300 23,176 19,663 ………….. 28,991

Availability (**) 2,938 3,586 1,824 3,537 ………….. (5,308) (*) Check outstanding is as of Jan 14, 2013(**) Availability is the difference between ending revolver (after covering float) and the lower of borrowing base or facility limit of $25,000

Projection PeriodDays

Week Ending

Borrowing Base ExampleWeek Count

Accounts Receivable

Inventory

Total Collateral Value

Revolver and

Availability


Weekly Forecast vs. Actual Variance Analysis Example

Line Items (same as 13-week

Cash Flow)

Variance Testing (if applicable)

CumulativeCurrent Week Notes

Forecast Actual Variance Forecast Actual Variance

Total Sales 2,000 1,850 (150) 12,800 12,100 (700) Timing issue on ….

Cash ReceiptOperating Receipt 3,500 3,100 (400) 11,900 9,850 (2,050) Paperwork mismatch ….Excess Inventory Receipt - - - - - -

Total Receipt 3,500 3,100 (400) 11,900 9,850 (2,050)

DisbursementVendor Payment 2,000 1,800 200 7,500 6,600 900 Certain disputed items not paidGross Payroll 863 830 33 2,450 2,510 (60) Overtime was slightly lowerRent and Utilities 25 10 15 300 325 (25) Lower-than-projected electricityEquipment Leases - 50 (50) 500 510 (10) One item wasn't paid ….Property Tax - - - - - General Insurance - - 38 41 (3) Other 50 35 15 200 575 (375)

Total Op. Disbursements 2,938 2,725 213 10,988 10,561 427

Net Operating Cash Flow 563 375 (188) 912 (711) (1,623)

Non-operating DisbursementInterest Payment - - - 420 465 (45) Capital Expenditure 125 175 (50) 500 1,050 (550) One machine broke down …Professional Fee - - - 100 115 (15)

Total Non-op. Disbursements 125 175 (50) 1,020 1,630 (610)

Net Cash Flow 438 200 (238) (108) (2,341) (2,233)

Variance TestingLower of 10% of Total 4-wk Cumulative Disbr 12,008 12,191 (183)

Variance Explanation (for 1-week w.e. Jan 18)

-1.5% = Favorable variance (% of forecasted disbursement)

1-week w.e. Jan 18 4-wks w.e. Dec 28 to Jan 18


Understanding the assumptions and corresponding results• The assumptions embedded within the cash flow forecast should map and mirror

business movements through a company, reflecting a clear picture of liquidity: For example, in a negative cash flow situation:

How much is the weekly cash burn rate?

How long is the cash “runway”? Is the deficit liquidity temporary or permanent?

In case of a positive cash situation:

Is it due to improving operations or to changes in working capital?

• Understand how working capital moves in conjunction with the business operations:

Accounts receivable (“A/R”) Changes in A/R component

Inventory

Events, such as inventory reduction, and how they impact borrowing base Accounts Payable (“A/P”)

Potential pay-down of A/P, or aging of certain categories

Be aware of non-A/P disbursements captured in accruals


Understanding the assumptions and corresponding results (cont’d)• Use the cash flow as an integral part of the planning process

Who is involved in the preparation?

Collaboration from various departments (e.g., sales, operations, finance, accounting, etc.)

Assign responsibility to management in charge of discrete item spending How is the weekly (daily) cash management process conducted?

Determine who handles communications with the vendors and what message is delivered

Develop a disbursement approval process and delegate check signing authority

• Use the weekly variance analysis as a communication and learning tool

Understand importance of cumulative variance analyses Establish and observe the trend over time

• Use components of income statement (“P&L”) revenue and expenses to sense-check the cash flow

Collections

Material vendor payment goes hand-in-hand with COS of material

Certain accrual item reflects total payment for the whole year


Various levers on cash flow management• Levers on cash flow management:

Revenue and receipts

Cash collections acceleration

Aged receivables settlement Asset monetization

Disbursements Equipment rationalization

Vendor management

Non-operating receipts or disbursements

Contribution from stakeholders, such as over-advance or equity


Leading practices in preparing a 13-week Cash Flow

• Document assumptions behind the cash flow forecast The forecast should reflect the current state, not a “pretty rainbow” scenario

Reasonable operational reason to support major assumption changes

• The borrowing base is linked to the cash flow forecast

Roll-forward of working capital accounts that is easy to follow

• Other considerations

Under commit and over deliver

Company should not play the “float” game Ensure that all trust-fund type payments are identified and covered


Leading practices in preparing a 13-week Cash Flow

• Be there in person to manage cash Quick reaction is needed on many occasions

Having a person in charge with good understanding of all moving components is critical

• Develop a discipline of routine communications/calls on cash flow

Do not hide from stakeholders

• Avoid general modeling errors

Certain categories go negative, such as accounts receivable

Revolver draw does not have a limit Accounts payable increases significantly

Mathematical errors, row and columns do not tick and tie

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Presenter Biographies

18 Copyright © 2014 Deloitte Development LLC. All rights reserved.

Presenter BiographiesSoegiono HadiwijayaSenior Vice President, Deloitte CRGDeloitte Transactions and Business Analytics LLP

Soegiono “Sugi” Hadiwijaya has more than 10 years of combined experience in financial services and turnaround management. He has provided financial advisory and operational restructuring services both out of court and during Chapter 11 proceedings, assisting companies with tasks such as cash management, securing of financing, business plan assessment, M&A activities, and financial modeling.

Mr. Hadiwijaya is particularly skilled at helping companies better their value through profitability analyses, cash flow projections, budgeting, and strategic planning. Mr. Hadiwijaya also authored and served as lead instructor for Cash is King, the Deloitte CRG nationwide training program on 13-week cash flow forecast and liquidity management.

A few noteworthy engagements include:

● Assisted an $8.5 billion poultry processor during its Chapter 11 restructuring process, where he managed cash and liquidity as part of the DIP arrangement, created the five-year business plan and financial projection, worked with management on financial analyses regarding operational strategies and assisted in the negotiations of the restructuring plan, exit financing and mediation proceeding on chicken plant closure

● Provided financial advisory services for a specialty custom-engineered steel enclosure manufacturer, where he managed cash flow, developed business plan and assisted in operational turnaround efforts such as developing project dashboard and assessing sales quote model

● Provided financial advisory services for a regional highway contractor, where he managed cash flow, led negotiations with stakeholders on liquidity matters and assisted in lender negotiations

● Managed expert witness engagements in regards to post-confirmation cram-down interest rate for commercial real estate portfolio, where he developed the expert report and created analyses on Till methodology application

● Designed a complex cash-collections model and conducted assessment on cash-acceleration initiatives during the prepackaged bankruptcy filing of a $1 billion health club chain with more than 300 locations nationwide

● Performed a four-wall store profitability analysis for a $600 million Northeast-based arts and crafts retailer, where he analyzed store profitability trends and presented recommendations to management on the store footprint and closing plan

Mr. Hadiwijaya also holds certifications as a Chartered Financial Analyst, a Certified Insolvency Restructuring Advisor (CIRA), and a Certified Distressed Business Valuation (CDBV). In addition, he started and co-leads the Nextgen/Young Professional initiative of Turnaround Management Association in the DFW area, and is involved in a joint education/mentoring program with the University of Texas at Dallas on its restructuring/turnaround courses.

Industries:● Agribusiness● Consumer Products● Energy● Health and Wellness● Manufacturing● Retail● Telecommunications● Transportation

Contact Information:2200 Ross Avenue, Suite 1600Dallas, TX 75201D: +1.214.840.1669F: +1.877.299.7388C: +1.214.551.5742Email: [email protected]

Education:B.B.A., The University of Texas at Austin

This biography may refer to client engagements performed prior to joining Deloitte Transactions and Business Analytics (“DTBA”) in the Deloitte Corporate Restructuring Group (“Deloitte CRG”).

19 Copyright © 2014 Deloitte Development LLC. All rights reserved.

Presenter BiographiesRudolph J. Morando Jr.Senior Vice President, Deloitte CRGDeloitte Transactions and Business Analytics LLP

Rudy Morando works with mid-to-large businesses in strategic and investment advisory roles. He has experience in crisis management, cash-flow management, debt restructurings, business sales, and wind-down capacities across a variety of industries.

Mr. Morando is skilled in strategic planning and profitability assessments, having provided such services for a $150 million public electronics company and a similar-sized food manufacturer. He also has experience in financial analysis and diligence, operational assessments & process improvements, working capital improvement, vendor management and stakeholder communications.

A few notable engagements include:

● Provided financial diligence for a $100 million brewery for potential investor

● Conducted business plan assessment for a $110 million printing company

● Prepared DCF analysis 200+ portfolio properties for a $500 million REIT company

● Led debt and operational restructuring of a $300 million staffing company

● Created cash management tools for a $100 million telecommunications company

● Developed 13-week cash flow for a $400 million ad placement company

● Developed 13-week cash flow and variance reporting for a $100 million jewelry manufacturer

● Produced inventory liquidation analysis for a toy company

Previously, Mr. Morando worked for a leading global finance company where he provided financial advisory services to several small businesses. He also served as a strategy analyst in the telecommunications sector and as an associate within an early-stage venture capital business in Providence, Rhode Island.

Mr. Morando is a co-developer and instructor of ‘Cash is King’, Deloitte CRG’s training program on 13-week cash flow development, and of ‘Three Statement Modeling’, the Deloitte FAS training program on integrated financial modeling. In addition,he is a Certified Insolvency and Restructuring Advisor (CIRA), a Certified Turnaround Analyst (CTA), and a member of TMA Global’s Certification Oversight Committee.

Industries:● Advertising● Electronics● Finance● Manufacturing● Staffing● Telecommunications

Contact Information:200 Berkeley StreetBoston, MA 02116D: +1.617.437.3783F: +1.877.300.6855C: +1.617.875.2085Email: [email protected]

Education:B.A., Northeastern University

This biography may refer to client engagements performed prior to joining Deloitte Transactions and Business Analytics (“DTBA”) in the Deloitte Corporate Restructuring Group (“Deloitte CRG”).

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About Deloitte CRGDeloitte CRG is comprised of the restructuring professionals of Deloitte Financial Advlsory Services LLP and its affiliate Deloitte Transactions and Business Analytics LLP.

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About Deloitte

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