Restructuring Advisors

13 Week Cash Flow Gets To The Truth

When analyzing the financial make-up of a troubled organization – especially at the behest of an owner, no one questions the value of utilizing a 13-week rolling cash flow model to best understand the cash requirements of the business. What is frequently overlooked is the value of such a model when it is built from the various component parts of the business and adds up to the total enterprise model. This additional level of detail is extremely important for anyone looking at the business with an eye toward making strategic, operational, or financial changes in order to improve or save the business.

Examining the “trees,” not just the “forest”

cash-flow-graph

Breaking down an enterprise into its component parts is applicable to any organization of any size. In a large paper mill – a single division within a much larger paper products company – this technique broke down the mill into the logging, pulp making, and papermaking operations, as well as several key operational and administrative processes (see Exhibit 1). By breaking down the whole into the sum of its parts, a clearer picture of the organization’s activities would be developed and allow for more in-depth understanding of its core activities.

Prioritizing analysis and activity focus

By examining the cash inflows and outflows from each part of the enterprise, the manager is better able to prioritize those parts that are most responsible for the “trouble” and to focus his/her – and the rest of the organization’s – efforts on those parts that most require attention. Particularly in very serious situations, this ability to prioritize and focus one’s efforts greatly increases the organization’s chances of correcting the situation as quickly as possible.

Determining “true” unit costs for specific processes

By adding non-financial information, e.g. production volumes, to the model, management can develop and analyze the unit cost of various activities. By benchmarking these unit costs against industry data, a sense of non-competitiveness can be developed as well as a sense of how far costs must be lowered to become competitive.

Uncovering outsourcing (or cost savings) possibilities

Occasionally unit costs for non-critical, non-strategic functions or processes can point to the possibility of outsourcing an individual function or process. Perhaps a third-party vendor supplying billing or call center functions would be cheaper while not jeopardizing service quality, or perhaps billing or purchasing. In the mill example, management can at least ask the question: “Do we have to supply our own logs for the pulp mill?”

The rolling 13-week cash flow model is an indispensable tool for anyone struggling to turnaround a troubled organization – for many reasons. By breaking it down to the critical, strategic processes of the organization, it can also become a management tool for working toward solutions.