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Cash flow is the heartbeat of every business, but when a company is either near or in the midst of a distressed situation, cash flow can be a heart in need of a pacemaker. Much like an irregular heartbeat, cash flow can be inconsistent with high payables one week and large collections or a high payroll the next. No company can weather these economic mood swings over an extended period of time unless it learns to manage its resources, especially its liquidity. This is best accomplished through accurate forecasting of future demands on cash flow and greater control of accounts receivable and payable. Nothing less than the company's solvency and viability are at stake, which requires a robust cash flow forecasting analysis.
The purpose of cash-flow forecasting is to help company and lenders analyze problems and determine whether they have the internal resources to fix them. The goal is to use cash management to identify peak needs from a timing perspective. A cash forecasting tool is, in effect, a dashboard that displays those critical metrics for short- and longterm decision-making that goes beyond liquidity. In addition to solvency, the ability to pay creditors and service debts as they become due and, of course, generate profitability is essential.
It is important for all of these issues to be addressed to the satisfaction of all constituents (lenders, vendors, customers and the workforce) if the company is to conduct a successful turnaround. Accordingly, the best form of cash flow management has an intangible quality: as a basis for building trust and a better relationship with stakeholders.
Importance of Cash Flow Tool
In a turnaround, understanding the real-time status of cash flow is critical as is the ability to forecast liquidity, particularly in the short term of 13 weeks. Executives need to take the temperature of the company's financial health while providing potential remedies, in particular those areas where management and most likely outside professionals can enhance value. The forecasting tool offers a thorough assessment of the health and viability of the business while assisting management in quantifying the costs and results of a turnaround over a period of time.
Effective forecasting should be designed to provide vital information about profitability in both the short- and long-term. Its...