How to Preserve
and Improve Liquidity

Image of businessman doing financial planning

When it comes to maximizing the value of your business, it’s best to focus resources and energy on improving cash flows and managing risks. The last two years have brought a number of unique challenges to business leaders and liquidity has become a significant topic. Companies are having to make major decisions that will potentially impact cash flows. So how can leaders address this?

Step 1: Develop a Cash Flow Forecasting Tool

When it comes to best practices around preserving and improving liquidity, we like to suggest one approach that has proven to be effective among many of our clients – and that is to develop a robust 13-Week Cash Flow Forecasting Tool. This financial tool helps businesses accomplish three primary objectives:

    1. It predicts cash flow and collateral, week over week, for the next 90 days.
    2. It improves decision-making at the transaction level.
    3. It improves communication with key internal and external stakeholders.

An effective 13-Week Cash Flow Forecasting Model also shows the details of anticipated cash receipts, cash disbursements, and changes in bank collateral through the forecast period. Specifically:

    • Cash Receipts – your company should forecast cash receipts from:
        • When current Accounts Receivable (AR) will be received.
        • When future revenues will convert to cash receipts.
        • Other non-operating cash receipts (e.g., interest income, proceeds from the disposition of assets, draws on a line of credit, etc.).
    • Cash Disbursements – your company should forecast cash disbursements from:
        • Current accounts payable (AP).
        • Future planned expenses*.
        • Other non-operating cash disbursements (e.g., debt service, un-funded capital expenditures, distributions, etc.).*Future projected expenses can be derived from budgets and recent experience, but should also consider anticipated changes to your business (e.g., new program launches, wage increases, new hires, etc.).
    • Bank Collateral – the collateral component is often missed in cash flow forecasting models and can lead to unanticipated liquidity challenges. Cash receipts, cash disbursements, and other business activities can have an impact on the bank’s collateral and, therefore, the company’s liquidity. A good 13-week cash flow forecasting model should take into consideration how changes in AR and inventory impact the bank’s collateral and, therefore, the line of credit (LOC) availability.
    • Cash on Hand – Cash on Hand is calculated using the following formula: Beginning Balance + Cash Received – Cash Disbursed +/- Changes in LOC
    • Miscellaneous – Here are a few other things that you should keep in mind as you build your model:
        • The cash flow should be rolled at least weekly. In times of crisis, you may want to roll it daily.
        • As a result, the model should be easy to create and update.
        • The model should be linked to your accounting system or allow for direct imports of data from the accounting system.
        • Have a weekly clean cut-off, so you are working with the most relevant and timely data.
        • The model should be reviewed at least weekly by the leadership team.

Step 2: Use the Model to Identify Levers

Once you have a functioning model, it is time to use it to find ways to preserve or improve your cash position. We call this process “pulling levers”. Reviewing your income statement will allow you to find opportunities that will improve revenue or reduce expenses. After, you’ll want to look at your balance sheet. The accounts on the balance sheet represent opportunities to accelerate cash receipts or slow cash disbursements. The balance sheet accounts also represent multiple market relationships, every one of which represents an opportunity to renegotiate to improve cash position. Consider what other sources of capital may exist for your business in your network. Examples of levers can include:

  • Cash Receipts
      • Reducing payment terms with customers.
      • Require deposits for new customer orders.
      • The additional cash infusion from owners or investors.
      • Sale of unused or under-utilized assets and equipment.
      • SBA lending or other government assistance.
      • Negotiate increases in collateral advance rates or LOC limits.
  • Cash Disbursements
      • Negotiate new payment terms with vendors or negotiate payment plans.
      • Reduce direct material order quantities or push deliveries.
      • Reduction of labor (headcount or hours).
      • Renegotiation of contracts or agreements.
      • Deferral or reduction of rent and lease payments.
      • Negotiate deferral of principal or interest payments with the bank.

Step 3: Communicate with Stakeholders

Key Stakeholders

Once you’ve built useful forecasts and identified levers, it’s time to communicate the plan to your stakeholders (think customers, vendors, employees, owners, investors, and community members as needed. Remember, your stakeholders are an essential part of your business and share in its success. When communicating your plan to your bank, describe the following:

  • How you developed your cash flow forecast
  • What your forecast shows
  • What steps you’re taking to improve your liquidity and capital position
  • What your current needs are and how might the bank be able to help

It’s better to bring a plan to your bank than to expect them to give you one. This holds for all your stakeholders. Make sure you are clear and considerate in your communication, looking for win-win solutions. You’ll gain confidence from your banking institution by showing exactly how you’ve determined your needs through management tools and decision-making.

This tool is also beneficial for the purpose of discovering the expectations of your customers as well. For instance, if a customer asks to revise payment terms, you can make the modifications in the forecast to determine the impact on your liquidity before agreeing to the change.

Step 4: Start Pulling Levers

Once you have your cash flow model in place and have communicated it to your company’s stakeholders, it is time to start pulling levers. Make sure that you develop an action list for the levers you are going to pull, including a point person for each action and a due date. Review this action list on a weekly basis. It is also essential to ensure you are updating your model as you pull the levers. If you request a customer pay in 15 days and they agree to 25 days, make sure the cash flow forecast reflects that change correctly.

Step 5: Review the Model Weekly and Continue Communication with Stakeholders

Once you have created the forecast, identified levers, communicated the plan to stakeholders, and started pulling levers, it is crucial to maintain this rhythm. Update the forecast weekly and consistently review as a team. Look for changes in the forecast and review the weekly variance report. This will help you improve the accuracy of the model. Additionally, your team should be looking for new levers on a weekly basis. It’s also important to note that in times of distress, the amount of communication with key customers, vendors, employees, financial institutions, and ownership should increase. Continue to update your stakeholders on your plan and your progress.

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: Navigating Unexpected Business Disruptions by Preserving Liquidity

If you’re wanting to learn more about our cash flow forecasting model or would simply like to talk, please reach out. At DWH, we’re here for you — even remotely.

 

5 Qualities to Look for When Choosing a Financial Advisor

Over the past 18 months, many businesses have experienced financial stress.  This may be due to COVID-related slow-downs or shut-downs, supply chain disruptions, or even from tremendous growth.  If you have found yourself in this position, you may have been urged to or required to get some help and may have been provided a list of names to call.  But how will you know who to choose? By cost? By personality? What qualities do you look for? It can be difficult to know what you need if you have never been in this situation before and the stakes are high.

 

The 5 Qualities


Core Values

A good financial advisor devises strategies to maximize the value of a company and proactively communicates a clear strategy and its benefits to each stakeholder. This will minimize unnecessary conflicts, which erode value through the consumption of time and money that could otherwise be allocated to value-creating activities. Ask potential advisors how they work with other stakeholders such as vendors, customers, employees, and lenders/investors.  Try to determine the advisor’s experience and likely credibility with each of these stakeholders.  See if their approach aligns with your values.

Experience
Navigating financial challenges involves more than financial models and analysis. A financial advisory firm should possess a breadth of business competencies and experience successfully guiding the business through the specific challenges you are experiencing.  Ask potential advisors about their experience with situations such as your own.  Ask for references.  Also, a financial advisor who has a team with real-world experience allows them to empathize with your challenges as they assist in developing and executing the best path forward.  So, make sure you ask about the experience of the people who will work on your project.

Capacity
Speaking of team, it is important to make sure your advisor has the capacity to support your business in the time frame you need them to. Make sure you clearly articulate what your expectations are and ask them to provide you a scope of work and timeline in writing.  Ask the potential advisor how they would support you if the timeline needed to be accelerated or the scope expanded.  Ask them if any additional resources would be brought in that were not part of the advisory firm’s normal staff.

Ability to Listen and Understand
Your financial advisor’s ability to listen and understand rather than talk over you with a lot of material is important. Their ego should be left at the door. They should be willing to listen to the issues you are facing and then develop a comprehensive plan to address these issues.  Does the financial advisor ask probing questions and listen to your answers?  Does the advisor speak in a language that is easy to understand and relate to?

Seeing the Bigger Picture
You need a financial advisor who can understand and frame the issues within your broader operations and mission. What other issues are there? What sub-issues exist? What are the goals? How will issues impact other stakeholders? Are the recommended solutions an approach that is sensitive to all stakeholders? Don’t win the battle – win the war. Make sure your advisor is asking questions that show they are focused on the overall business success and not just solving the immediate issue.

 

Choosing the right financial advisor can be intimidating and overwhelming but remember the five topics described in this article when you meet with potential advisors.  This can help you select an advisor who will best represent your interests in a way that is aligned with your core values.

 

All leaders experience performance challenges at some point over the life of their business. You are not alone. We can help. At DWH, we’re here for you. Feel free to reach out for a conversation on how we can be of assistance as you focus on thriving and not just surviving.

 


This post was written by Heather Gardner
hgardner@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.

 

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: 4 Qualities to Look For When Selecting a Financial Advisor to Super Charge Your Business Results

DWH Celebrates Growth and Expansion

With our first-ever female CEO at the helm, DWH has a lot to celebrate. After nearly 13 years of advisory and support to local businesses and the community, our firm is proud to introduce a new look to reflect our continued evolution in Grand Rapids, along with the expansion of our Detroit office. This last year alone, we grew staff by 60% and achieved over a 65% increase in revenue.

Launching today is our new identity, complete with logo, tagline and website, that encompasses our company philosophy of focusing on people.

“Our new tagline – For the life of your business – truly captures the relationships we have with our clients,” stated Monica King, CEO. “We get engaged for a variety of reasons and the ‘how’ in what we do really does make a difference, often leading to long-term relationships where we support many needs throughout all stages of business.”

The new logo takes a clean and uncomplicated approach to the DWH brand. The mark is accompanied by three small dots representing an ellipsis. Ellipses are softened shapes, informally gesturing towards the continuation of something – similar to the journey DWH clients take. The circular container acts as a modern take on a business seal, which by definition is “a device or substance that is used to join two things together…” a perfect representation of DWH’s commitment to the businesses we help.