“Understanding the cash flows is probably the most critical initial step a CFO can take,” says former CFO Ken Sanginario, now a partner at NorthStar Management Partners, a turnaround advisory firm. “It gives them visibility as to how much liquidity they have or don’t have. It starts to give them a framework of how bad the problem is and how much time they have to fix it.”
Tracking the company’s cash does more than simply provide a reality check, Sanginario says; it can also help the CFO identify fast fixes to improve the situation. Collecting receivables more aggressively is one relatively easy way to boost working capital, for example. Carrying less inventory can also help the business build cash. “The more time the business has, the more options the management team can consider,” he says. “A lot of times constructing a cash-flow forecast is an eye-opening exercise,” alerting the CFO to just how bad the company’s problems are. Sanginario says a majority of the distressed companies he has worked with do not have an adequate understanding of their cash flows.
A cash-flow forecast is not only valuable for the CFO in running the business but also critical for lenders, who will regularly check in on the company’s liquidity status once the management team raises the red flag and informs them of the potential for problems. “You have to have a very accurate forecast, because there are going to be a lot of folks looking over your shoulder trying to figure out if you’re going to make it,” says Terry Moriarty, former finance chief at United Site Services, a sanitation-services company that completed a successful restructuring in November 2009.
Tom Spielberger, CFO of Celestial Seasonings and a veteran of a recent restructuring at Pliant Corp., a flexible-packaging company that successfully emerged from bankruptcy in December 2009, agrees. “If you say that cash will be X and it ends up being $6 million less than that, you will spend a lot of time explaining what happened,” he says. The credibility of the CFO, as always, rests on his or her ability to get the numbers right.
Jonathan Cleveland, a managing director in the financial restructuring group at investment bank Houlihan Lokey, urges CFOs of highly leveraged companies to analyze short-term cash needs (which he defines as between 9 and 13 weeks), midterm cash needs (about six months), and long-term (one to three years) cash requirements. For the short-term forecast in particular, “you need to be extremely precise,” he says. “It can’t be delusional and aspirational. Really look at the business and come up with a set of projections that are right, plus or minus 5%.”
In testing their numbers, CFOs need to develop a variety of worst-case scenarios and consider what impact they will have on cash, Cleveland says. “What are the implications if the first signs of trouble start filtering out to the marketplace?” he asks. “It often creates a mini-run on the bank. Is your company prepared to withstand that?” Finance executives who fail to consider such possibilities and end up missing their projections quickly damage their credibility with their bankers and risk being replaced.