Getting to the Truth
Applying the 13-Week Cash Flow Model
When analyzing the financial make-up of a troubled organization – especially at the behest of an owner – there is clear value to all parties to utilize a 13-week rolling cash flow model. A model of this nature allows lenders and owners to better understand the cash requirements of the business during a period of duress. A detailed model is an indispensable tool for the executive responsible for turning around an organization that is experiencing financial trouble. By recording the weekly cash inflows and outflows, the executive not only has a key tool for communicating with all interested parties, but also an essential analytical tool for understanding, prioritizing, analyzing, and, ultimately, focusing efforts within the organization to correct the situation. Its use as a key tool for correcting the ills of an organization is the subject of this Thought Leadership report.
Getting to the “Truth”
When an executive or senior manager is faced with a “troubled” organization, the challenge is almost always a daunting one. With very little time and under considerable constraints, this individual must examine the entire organization, quickly form defensible opinions on what root causes exist for their woes, and develop actionable measures to correct them in order to get the company headed in a positive direction. An enterprise-wide 13-week rolling cash flow model provides a good look at exactly where the company generates cash and how it consumes it. What is frequently overlooked when the 13-week cash flow model is used is the value of such a model when it is built from the various component parts of the business to create 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 operational performance.
Examining the “Trees,” Not Just the “Forest”
Breaking down an enterprise into its operational parts is applicable to all organizations regardless of size or industry. In this situation, the reverse of the old adage is appropriate, “You can’t see the trees for the forest.” Most organizations are complex with multiple layers, each of which may hold a key to helping correct the company’s ills. For the sake of discussion, let’s use the example of a large paper mill – a single division within a larger paper products company. When developing the cash flow model, duplicate sub-models are built for key parts of the mill which, when added together, create the enterprise model. This technique breaks the mill into the logging, pulping, and paper making operations, as well as key operational and administrative pieces. In viewing each piece of the model, a clearer picture of the organization’s activities is developed, allowing a more in-depth view of the problems.
Prioritizing Activity
In a troubled organization, resources are at a premium. Tackling any opportunities to quickly aid the organization’s financial plight requires that the opportunities be prioritized by the impact that might be achievable, the cost of tackling the opportunity, and the time that will be required to tackle it. 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 the organization’s efforts on those parts that most require attention. In the most serious situations, this ability to quickly prioritize and focus a company’s efforts increases the chances of rapid improvement.
Determining True Costs
By adding non-financial information, e.g. production volumes or hours worked, to the model, management can develop and analyze the costs of various activities. In this example we would be able to compare the per-unit cost of pulp produced by the pulping operations at the mill to market prices for pulp. 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. In addition, management can begin to develop a sense of the “per unit cost” for operational activities as well as administrative processes. In practice, the “cost” of maintenance was distributed across the various operations that were being supported instead of simply being an “operation” of its own. In this case, maintenance costs due to the age of the mill revealed just how far out of line the “fully loaded” costs of these operations had become.
Uncovering Cost Saving or Outsourcing Opportunities
Occasionally, understanding the per- unit costs for non-critical, non-strategic functions or processes can point to the possibility of outsourcing an individual function or process. Perhaps utilizing a third-party vendor would be more cost effective while not jeopardizing service quality. At this point, the rolling 13-week cash flow model would be providing management with the ability to ask questions about the operations. An experienced turnaround manager will find many different areas of concern across the organization and some will be bigger than others and some will be more complex than others. In the case of a troubled company, all are important as they represent potential areas of cost savings or revenue enhancement. Both are also equally attractive to a company running a negative cash flow.
Tracking Progress
As the weeks go by and the organization works to tackle its problems, the 13-week cash flow model begins to serve another valuable function: a scorecard for the organization’s efforts. Properly built and maintained, the model can report out, each week, measures and statistics that will allow management to communicate the impact of the changes. This capability serves three purposes. First, it supports communications with the employees who are concerned about their futures with the organization. It encourages employee participation in the plan and in some situations helps in retaining valuable employees. Second, as a weekly scorecardthe model enables management to report out to external constituents including lenders and owners, in a consistent fashion and with metrics that are clear. Third, the model becomes the management team’s best vehicle for understanding whether the remedial actions that are being taken are working. This last piece – determining whether the steps being taken are working – is the most important.
In Conclusion
The rolling 13-week cash flow model is an indispensable tool for anyone facing the task of turning around a troubled organization. By breaking the organization down to the critical, strategic processes, the 13-week cash flow model also becomes a management tool for working toward solutions.
For more information about MainStream Management, LLC or to discuss this article further please email info@mainstreamllc.com or call 877.785.6888.