July/August 2018

Weekly Cash Flows: Why This Analysis Should be a Best Practice

A weekly cash flow analysis is one of the most basic business tools, yet Marjorie Kaufman observes many businesses fail to utilize it. She explains why this vital analysis should be a “best practice” to keep every business nimble and adaptable to changes in liquidity.

Margie Kaufman,Managing Director, Getzler Henrich & Associates

Margie Kaufman,Managing Director, Getzler Henrich & Associates

During a restructuring, sometimes the simplest tools are the most powerful and versatile. The weekly cash flow is one of the most basic tools in any restructuring process, yet it has many uses. It can serve as the foundation for calculating free cash flows and plans of liquidation and can be used for any sort of business or in any industry.

The weekly cash flow review plays a vital role in both in-court and out-of-court restructurings, as the analysis is used to not only manage the overall business, but to manage bank debt, cash, accounts receivable, accounts payable, inventory and even line of credit availability, where applicable. The cash flow analysis tells management how much cash is forecasted to be available for the company to spend in any specific week, based upon the rest of the company’s business and financial activities. Management teams utilize cash flows to guide various operational decisions. A simple decision to reduce inventory, for example, has broad ramifications. For a manufacturer, choosing to reduce inventory could mean a reduction in production, a decrease in payroll and benefits and diminished overhead costs. For a distributor, an inventory reduction may result in the liquidation of inventory on hand or a reduction in future purchases.

Management Can Assess Performance

Though each weekly cash flow’s methodology is different, the objectives are the same: understand and forecast the availability of cash for the near-term future. By forecasting operations and measuring the results each week, the cash flow analysis enables management to assess performance with clear metrics and make rapid changes. The weekly cash flow analysis provides current financial information, as opposed to waiting for the more traditional month-end reports. With more frequent observations of data, management is better able to nimbly change the company’s course if it becomes necessary.

In either a Chapter 7 or Chapter 11 bankruptcy proceeding, the weekly cash flow is part of the cash collateral pleadings. The cash flow analysis helps debtors see which parts of the business are performing or underperforming by analyzing product lines, divisions or even individual retail locations as appropriate for the situation. During a corporate reorganization, this reporting can provide management with analyses to decide whether or not to close a given location or to eliminate a product line or division. It can determine how the changes will occur and measure the results accordingly. In addition to assisting in the restructuring of the business, the weekly cash flow reporting can give various creditors insights into how a company is performing and estimates of the potential recoveries. It is also useful while preparing standard monthly operating reports.

Assists in Valuation

The weekly cash flow can assist in the valuation of a company since some entities use multiples of free cash flow as a basis for valuation. By better managing its cash flow, a company can increase its value in a meaningful way. Analyzing the details of a cash burn in a retail location, product line or division can assist management in making the necessary changes to increase cash flow, thereby increasing the company’s value. Yet again, tracking cash flows on a weekly basis creates a powerful tool that management can deploy to make significant operating changes that translate into improvements in the valuation of the business.

Critical in Liquidation

Weekly cash flows are also critical when considering company liquidation, as recoveries are measured for the company’s secured, priority and unsecured creditors. Poor performance by a location or product line can expedite decisions, resulting in the closing of a location, warehouse or production facility earlier than planned. The weekly cash flow also allows the company to easily identify liquidation costs which are running too high, so they can be more closely managed. Such decisions can save cash and increase recoveries for creditors.

The weekly cash flow is adaptable to any industry and well suited for analyzing multi-divisional companies. Most finance professionals would view the weekly cash flow as a simple tool, however its complexity scales with the business it reflects. The weekly cash flow can be broken down by location for retailers, product lines for manufacturers and divisions for any company with more than one operating segment. In this fashion, the weekly cash flow can clearly illustrate which locations, product lines or divisions are performing, and which are not. Some analyses detail disbursements by vendor through supporting schedules, while others detail receipts by customer. Each cash flow analysis will reflect the requirements of its analyzed company. Some companies are required to ACH or wire payments to certain vendors, while others use checks, so it is important to clarify how these different types of disbursements affect the availability of cash. When every day matters, the differences between the bank balance and the book balance will be starkly apparent if comparing a same-day wire, a next-day ACH, or a five- to seven-day paper check. If every method of vendor payment is monitored and tracked in the weekly cash flow reports, it is much easier to stay on top of the situation when cash is tight.

Variance reporting, which tracks actual results and compares them to project results, is another important application of the weekly cash flow analysis. Simply updating the cash flow and rolling it forward is not sufficient — operating results must be measured and plans must be fine-tuned as soon as new data is available. If the company has never employed weekly cash flow analyses in the normal course of business, management tends to gain new and sometimes surprising insights into the day-to-day operations. These insights may include timing of sales during the month or season — sales may be greater at the end of the month or season — customer cash receipts, which may be skewed to a given week during the month, or timing of the completion of production.

Highlight Changes in New Cash

Whenever results are reported and additional weeks are added to the report, it is extremely important to make sure all future plans are adjusted based on the most recent week. For example, if a company records an additional $1 million of customer receipts in the first week, management must determine if the additional cash collected is the result of new sales from prior weeks or the earlier-than-expected receipt of payment. If the cash balance is growing without a change in collections, the weekly cash analysis would highlight if the disbursement of funds was delayed. Whatever the case may be, adjustments must be made accordingly. When a business routinely exceeds or falls short of its revenue forecast, its future projections must be updated. These adjustments are critical as additional weeks are added to the cash flow analysis since management relies on these updates to make important business decisions.

These examples underscore the importance of this basic, yet powerful, tool regularly utilized by restructuring consultants. Yet many companies have not adopted a weekly cash flow analysis as a best practice. In one recent assessment of a $250 million revenue company which designs, sources and distributes various products to retailers, the first item on the information request list was a weekly cash flow forecast. This company, with very seasonal sales clustered in the second half of the year, had never produced a weekly cash flow report. To compound matters, there was a three-month lag in producing financial statements. It is astonishing for a company of that size and with that level of seasonality to be uninformed about its cash flows on a routine basis, much less manage its cash position carefully. While seasoned financiers may consider it a simple tool, a weekly cash flow analysis provides information, insight and benchmarking to any company utilizing it, from the large multi-national corporation to the small local restaurant chain, enabling better choices and outcomes for each week going forward.