A recent Business Week[i] article profiles a new book by management consultant Ram Charan, “Leadership in the Era of Economic Uncertainty”.  He describes how DuPont successfully ramped up its cash management processes as the downturn came into focus.   “The key, Charan says, is ‘management intensity’ – deep immersion in the operational details of the business and the outside world, combined with hands-on involvement and follow-through.”   He advocates management intensity and a focus in the details.  In our experience, cash management is something most senior managers eschew for discussions on strategy.  But, like they say in the military, amateurs talk strategy, professionals talk logistics.  During this downturn, more senior managers and board members need to be focusing on the details of cash flow. 

 

One management report that is a particularly important management tool is the “Cash Requirements Forecast”.   This is a relatively simple report to prepare and one that provides senior management with a sound early warning tool to identify an impending cash shortfall.  It can be used by companies of any size, in any industry and even by not-for-profits.  I would be surprised if any Treasurer of any company does not already prepare this report.  The question is does Senior Management and the Board ever see it?  If they do, I’d bet that collection efforts and spending controls would take a much higher priority. 

 

I was once an interim CFO for a software development company.  It licensed its software on a 90-day site license basis.  For some quirk in the timing of the original sales of these licenses, most of the revenue was booked and collected in the first of a three month cash flow cycle.  When I began consulting to this client, they had no spending discipline so, by the third month of each quarter they were sputtering along on fumes, barely able to make payroll.  I implemented a daily Cash Requirements Forecast report.  Every day I would have it updated and reviewed with the CEO to determine how we were going to collect Accounts Receivable faster, defer discretionary spending or work with vendors when necessary to delay Accounts Payable payments.  That was a key report to keeping that company afloat. 

 

The periodicity or frequency that such a report is updated and issued (i.e., the columns shown in the following example) could be a monthly, weekly or daily, depending on the severity of the circumstances.  It should go out at least as far as one cash flow cycle; i.e., possibly ranging from surplus to deficit back to surplus.  In the example of the above software company, I prepared this report on a daily basis for the current month and took it out for two more months on a weekly basis to coincide with their three-month cash flow cycle.  I’ve seen real estate developers prepare monthly reports that went out as far as five years to cover an anticipated real estate development project or development life cycle (of course we all know that the farther out it goes the less accurate it will be).  More likely it would be prepared on a daily basis for the current month and then weekly or monthly for a period going out, say, for a rolling 12 month period.  Here is a very high-level “Star Ship Enterprise” view of what this report looks like. 

 

Naturally, a Treasurer or CFO preparing this report will also prepare a number of supporting schedules to refine and ensure the accuracy of the various receipts or disbursement estimates.  That might include an aged Accounts Receivable trial balance to determine the timing of forecasted collections and an aged Accounts Payable trial balance to determine the timing of payments to vendors.  Regardless of the added work that goes into refining the estimates, it would be inexcusable in these economic times to manage cash without such a report. Senior management and the Board should insist on seeing that a Cash Requirements Forecast is used to ensure that potential cash shortfalls are identified early on while action can still be taken to avoid cash short falls. 

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