Cash Management Strategies

During Economic Turmoil!

Presented by
Robert Tormey, CPA, CTP
AICPA Controllers Workshop West 2009

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 Cash Management Strategies

 The Rolling Forecast and Your Closing Calendar

 Building the Financial Model
 Prior Period Analysis
 Cash Requirements vs. Expenses
 Basics of Your Model – What Stakeholders Expect
 Risk Mitigation Strategies & Unforeseen Events
 Workout and Restructuring
 Glossary of Terms (5)

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 Cash Management Strategies

 Preparing for the Seminar

 Review this Power Point in entirety prior the seminar.
 Review the Glossary of Terms beginning on Page 18.
 Review “Model 9-28 Deal” in pdf. Understand the
structure and elements of the model. Print it out. We will
refer to the model in the seminar.
 Prepare your questions as seminar will be interactive.
 Begin applying these ideas in your current environment.

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 Cash Management Strategies

 The Rolling Forecast and Your Closing Calendar

 Controller must drive predictability of the company‟s
earnings process, i.e. realization of its budget.
 Rolling Forecast - a part of the monthly close process
 Forecast is not Budget but a comprehensive revisiting
of all major budget assumptions for P&L purposes
and an extrapolation of all Balance Sheet trends.
 Numerous issues mature during the operating year
that Budget process could only „assume‟.
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 Cash Management Strategies

 Forecasts differ from budget because of changes in:

 Insurance Renewals and Expirations, Headcount,
Facilities Leases and Expirations, Progress on
Initiatives, Regulatory Licenses, New Products and
SKU Rationalization, Customer Gains and Losses,
Variability of Commodity Prices, Interest rates, Credit
Conditions, Union Agreements, Price changes,
Balance Sheet Changes, Accounting Pronouncements, Pension
Gains, Losses and Actuarial Assumptions, Regulatory Setbacks,
Litigation, and Professional Fees issues, and on and on and on.

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 Cash Management Strategies

 Building the Financial Model

 Creating the Time
 Reduce Time in the Closing Process (5 Days max!)
 Automate Bank Reconciliations (often a time sink!)
 Simplify, Automate, Recurring and Reversing, Estimates, etc.
 „Analyzing‟ accruals vs. Rolling Forecast – prioritize!
 Finding the talent or the product
 Excel – Power User with Analytical/Operational Orientation
 Outsourcing to local advisor
 Software Products – Some good, may be cumbersome.

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 Cash Management Strategies

 Prior Period Analysis

 36 months of Trial balances (Chart of Accounts detail)
 Trend Studies and Ratio Analyses
 Income Statements
 Balance Sheets
 Statements of Cash Flows
 Identify Drivers and Relationships

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 Cash Management Strategies

 Prior Period Analysis

 Income Statement and Balance Sheet Drivers
 Use Income Statements to:
 First Model business on an accrual basis-
 Identify key relationships and ratio‟s between
 Revenues and COGS
 Sales and Accounts Receivable Build
 Inventory Build and Accounts Payable
 Other Expenses and Pacing
 Seasonal Relationships

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 Cash Management Strategies

 Cash Requirements vs. Expenses

 Analyze Balance Sheet and Statement of Cash Flows
to determine what‟s happening on a CASH basis:
 Borrowing Base Issues
 Debt Amortization
 Operating Plan of Company
 Pacing of Inventory Build (if seasonal)
 ASO and DPO relationships
 Capital Expenditures

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 Cash Management Strategies

 Basics of Your Model – What Stakeholders Expect

 Actual and Projected ( rolling 12 month horizon) -
 Income Statements – Budget to Actual
 Balance Sheets
 Statement of Cash Flows
 Covenant Compliance Tests, Compliance Certificates
 Graphics Package
 Cash and Borrowing Availability
 Management Discussion and Analysis

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 Cash Management Strategies

 Risk Mitigation Strategies:

 Forecast - Primary Risk Management Tool
 Encourages management/stakeholders to take action.
 Running out of Cash is not the disease.
 Symptom of issues in the business to address.
 Forecast acts as basis for involvement of
management, equity, lenders and outside
professionals on a timely basis.

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 Cash Management Strategies

 Risk Mitigation Strategies- Problems and Solutions:

 Accounts Receivable – Collections, Credit Insurance,
Credit Analysis, Outside collections firm.
 Concentration Risks – Customer Diversification.
 Declining Margins – SKU Rationalization, Customer
Profitability studies, Mix issues in Sales, Price increases,
Vendor and purchasing initiatives, plant rationalization.
 Continuing Losses or Variances from Plan – Cost
Reduction, Four Wall Analyses of Retail outlets,
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 Cash Management Strategies

 Risk Mitigation Strategies- Problem And Solutions:

 Growth in Inventories – Reduce Purchases/Production,
“Just in Time with Vendors, Vendor Managed Inventory
Discipline, Purchasing Manager, Review Operating Plan.
 Returns and Allowances – Review Quality Control with
Operations, Return Policies with Sales Force, Check for
„Channel Stuffing‟ or Commission Abuse.
 Vendor Terms – Exhaust Terms Opportunities with
Vendors to Raise Needed Cash.

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 Cash Management Strategies

 Risk Mitigation Strategies- Problem And Solutions:

 Expense Control - Cost Containment initiatives in
Travel, Telephony, Merchant Services, Headcount,
Overtime, Personnel Rationalization, Tenant Broker to
negotiate with Landlord, facilities rationalization, reduce
dividends, reduce advertising, research and
development and re-consider new investment in
operating initiatives.

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 Cash Management Strategies

 Unforeseen Events May Exhaust Cash Resources

 Terrorist Attack – WTC, Air Travel Ceases.
 Anthrax in the U.S. Mail.
 War is Declared – U.S. Invades Afghanistan, Iraq, etc.
 USDA bans sale of spinach.
 Credit Markets Freeze – Home Sales and Construction.
 Auto Makers File Bankruptcy.
 State of California stops paying vendors, uses warrants.

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 Cash Management Strategies

 Workout and Restructuring

 Breach of Covenant or Monetary Default to Lender
 Bank moves Company to Special Assets (Workout)
 Special Assets Requires:
 13 Week Cash Flow Discipline and Other Weekly Reporting
 Operational Turn Around Proposal from Borrower
 New Capital From Equity Sponsor or Guarantor
 Freezes Revolver and Credit Facilities in many instances
 May Sweep Company Bank Accounts or Accelerate

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 Cash Management Strategies

 Workout and Restructuring

 13 Week Cash Flow Discipline
 Updated Weekly Report with 13 week horizon
 Different from Integrated Financial Model
 Comprise of:
 Weekly Borrowing Base Reconciliation
 AR and Collections Detail
 Payroll and Other Disbursements Detail
 Accounts Payable and Cash Requirements Report

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 Glossary of Terms

 Financial Modeling Components

 Key Financial Ratios
 Cash Management
 Credit Terms

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 Glossary of Terms

 Financial Modeling Components

 AR Aging - Used with 13 week cash flow to anticipate receipts
 Availability – Credit Available on Revolver, i.e. funds which can be borrowed by the
Corporation
 Borrowing Base – or Collateral Base, defines what the bank is willing to lend against on
Accounts Receivable, Inventory or PPE
 Bridge Analyses or Studies – Analysis of changes to revenue or costs between periods.
 BS Drivers – Defines how the balance sheet behaves in terms of cash. Includes
Amortization of debt, collateral base advances and retirements, DSO‟s of Accounts
Receivable, working capital initiatives, Operating Plan, etc.
 Covenants – Comes from Credit Agreement or possibly Regulatory constraints
 Cross Aging - Limits use of Borrowing Base for customer concentration or aging risks.
 Debt Amortization – Required payments of principal under credit facilities.

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 Glossary of Terms

 Financial Modeling Components

 Financials – Prior Period and Projected in Trial Balance Detail
 IS Drivers – Defines behavior of Income statement items, i.e. Sales
Operating Plan – The plan of the business in non-financial terms, man
hours, machine hours, units produced, houses built, crops grown, etc.
 Operational Initiatives - New Initiatives in the Operating Plan which
will have impact on the financial model, the balance sheet, the bridge
studies, i.e. plant closures, SKU Rationalization, new products, etc.
 Payroll Masters – Payroll detail at the Departmental Level
 Cash Requirements Report – Extracted from AP detail, defines Cash
Requirements by vendor by week going forward, for 13 week cash flow.

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 Glossary of Terms

 Key Financial Ratios

 EBITDA – Earnings Before Interest Taxes, Deprecation and
Amortization, usually on a TTM/LTM Basis
 Fixed Charge Coverage Ratio – EBITDA divided by „Fixed Charges‟
typically Interest, Principal and Capex.
 Interest Coverage Ratio – EBITDA divided by Interest Expense
 LTM/TTM – Last Twelve Months or Trailing Twelve Months
 Maximum Capital Expenditures – Constraint on Capital Expenditures
 Minimum EBITDA – Minimum EBITDA which may be required under
Credit Agreement
 Senior Debt Leverage Ratio – Senior Debt divided by TTM EBITDA

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 Glossary of Terms

 Cash Management
 BAI2 – File Architecture format used to support on line Bank Recs.
 Book Cash - Cash balance on Company‟s books, may be different from
what Bank shows due to deposits in transit, checks outstanding, etc.
 Concentration/ZBA – Sweeps Cash to central account.
 Controlled Disbursement – Deposits Cash when checks presented.
 DSO - Days Sales Outstanding in Accounts Receivable
 Inventory Turn Over Ratio – COGS divided by Average Inventory
 Operating Cycle – Duration of Inventory and AR. Length of time for
investment by company to come back in the form of cash.
 Positive Pay – Notices Bank of checks issued by Company.

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 Glossary of Terms

 Credit Terms
 Altman Z Score – Score developed by Professor Altman to predict risk
of Bankruptcy of Company.
 13 Week Cash Flow Model – Projection of Cash Flows and
Requirements of Company, first product required by Special Asset
Departments of Lenders when Company is in Workout
 Restructuring – Changes to Capital Structure of the Company.
 Turn Around – Improving the operational performance of the company.
 Shared National Credit – Loans which are shared by multiple banks
under the SNC conventions of the Federal Reserve begun in 1977.
 Zone of Insolvency – Company unable to meet obligations when due

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