The importance of cash flow during uncertain times

The next 13 weeks

When the economy goes from a position of strength to one of uncertainty in a relatively short time, the pressure on your business is real and overwhelming. Understanding your cash flow should be a priority as you navigate your options. It takes cash, not book earnings, to meet your obligations and survive economic downturns. Using traditional accounting and finance metrics such as net income, net operating cash flow, and earnings before interest, tax, depreciation and amortization (EBITDA) can be misleading and dangerous during times of declining sales and economic calamity.

If managed correctly, many businesses are able to increase their available cash at the end of a recession. This can be achieved through swift cost reductions and reduced investments in net working capital (e.g., inventory) while converting assets (e.g., accounts receivable) into cash.

The analysis is analogous to an airplane taking flight requiring both speed and altitude – you must optimize both the balance sheet and operations simultaneously. To accomplish this, a thorough understanding of your operating cash cycle along with your fixed and variable cash obligations is necessary.

Start by developing a 13-week cash flow model

A 13-week cash flow model arms you with a tool that highlights some of the critical decisions you must make during these turbulent times. It is a preferred analysis tool performed to give you and potential lenders insight into the next 90 days’ sources, uses and cash positions with the appropriate level of accuracy.

For many businesses, 13 weeks represents a trip around the operating cash cycle and provides a detailed view of cash inflows, outflows and the ability to meet obligations as they come due. The answer of where cash is produced and consumed and the resulting expected cash position is analyzed in weekly detail over the 13 weeks. It will highlight areas of cash shortfalls in advance, so you are prepared to act proactively.

The tool enables operational and capital decisions to be made with high degrees of confidence in situations of deteriorating business activity. This is especially relevant in our current environment, where uncertainty surrounding liquidity and solvency is leading to an acute need for visibility of cash availability to meet needs such as debt service, material purchases and payroll.