During times of disruption, organizations need to keep a pulse on their financial performance to know how cash flows are being affected by the situation at hand. One of the tools that helps provide more visibility into short-term obligations is the use of a 13-week cash flow (TWCF). Many organizations may have set one up at the start of the COVID-19 pandemic, but it’s a useful tool well after the environment starts to stabilize. A well-configured system will keep cash flow forecasts up-to-date and provide a strong management tool to align COVID-19 recovery strategy with performance.
Configuring 13-Week Cash Flow Monitoring
The key to getting the most mileage out of a TWCF is to take the time to set it up correctly. Experienced financial consultants may be able to help you set up the right comparisons, including any benchmarking to your sector and metrics that speak to your organization’s goals for stabilization and growth from COVID-19 recovery.
Detailed review of your accounts payable aging will reveal how much you have relied on stretching vendors, what cash you have on hand and what your organization needs to spend looking forward 13 weeks. This vantage will help rectify stretched payment terms put in place as a recovery maneuver as well as provide insight on what can be paid out so that the organization has enough cash on hand for emergency expenses. During times of immediate disruption, a TWCF has the advantage over the more traditional accrual accounting of illustrating the organization’s ability to meet those short-term expenses, such as payroll, rent, and utilities.
Sustaining the Model
True to its name, once established the TWCF model will be updated on a weekly basis. When analyzing forecast and result comparisons on a cumulative basis, it is important to take care in filling in key account balances and document records with actual results. Updates to the TWCF should only take an hour or two once a week to make, but it will generate valuable information for management. This level of monitoring will ensure that organizational leadership understands exactly where the organization stands in terms of liquidity. It could also be an early indicator of stagnation in growth plans or illustrate other factors that could contribute to a downturn.
As the management team becomes more comfortable with the tool and its inputs, they will gain confidence in the organization’s ability to navigate short-term cash management challenges. They may pivot to using the TWCF to determine distributions for stakeholders or investment in the organization.
How 13-Week Cash Flows Help in Recovery and Beyond
Decidedly, for many organizations, cash is king, and so the visibility provided by the TWCF often keeps the tool in circulation long after the disruption has subsided. The longer a business uses the tool, the more refined the assumptions become and the more accurately the organization can predict rolling TWCF. If situations arise again where cash is restricted, it will be easier to understand how the company should act as not to miss a payment.
Shifts When Stabilizing
Once operations are stable, instead of wondering how to make payroll, owners may ask, “How do I optimize working capital?” A change in mindset may be necessary at different times during your organization’s recovery, or in response to external forces in the market, such as new stimulus legislation. You may want shift your organization’s modeling efforts and reconfigure your cash flow calculations when these events occur.
Another use for TWCF is as a resource to help you reevaluate your contracts with vendors. If payment terms were modified or if you can demonstrate stability after a period of financial disruption, it may be the time to renegotiate the terms (where possible) for vendor contracts, especially on commodity type purchases where there are numerous alternative vendors. Continue to follow up regularly on aged accounts receivable invoices and strategically address what is overdue. Additionally, seek to optimize levels of cash on your balance sheet as to not carry too much cash when financial health stabilizes.
Position Your Next Move
For many, recovery from COVID-19 will be a process that may take years to realize fully, and this type of accounting will help measure incremental progress to confirm that your recovery strategy is working or indicate if further operational changes are necessary.
Calculating anticipated accounts receivable on a weekly basis will quickly demonstrate if the sales and collections forecasts developed are reasonable in comparison to recent borrowing base calculations. The TWCF can also provide valuable data to lenders and valuation specialists tasked with providing a business valuation to your organization.
For more information, please contact us or visit our COVID-19 resource center.
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