A Simple Template to Improve Cash Flow Forecasting and Drive Liquidity Awareness

August 07, 2020

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Executive: SaaS CFO with multiple private equity-backed exits.

Challenge: Managing near- and medium-term liquidity under a sponsor focused on investment and inorganic growth activity.

Solution: A weekly cash report completed by the controller team to strengthen cash flow forecasting and make liquidity a consistent touchpoint topic.

“Growing both revenue and EBITDA is part of creating value in a PE-backed company.

EBITDA has long been viewed as a good indicator of cash flow in a business. However, EBITDA has become so littered with adjustments in many portfolio companies that it may no longer be an accurate surrogate for cash. 

EBITDA adjustments are typically born from one of two things. One, standing the business up – the sponsor bought a company and needs to put the right people, processes and systems in place to deliver on the investment strategy. Those activities lead to items that would be considered one time or unique in nature.

Two, the investment thesis often requires multiple acquisitions to execute on the plans for growth. The activities associated with inorganic growth activity consume cash but are not included in adjusted EBITDA. All of the expenses associated with an acquisition – from the diligence to the Q of E, to the integration efforts, to the synergies – lead to a lot of adjustments.

The uniqueness of many of the activities that go on in PE leads to the need for EBITDA adjustments. The volume and scale of those adjustments often make it so adjusted EBITDA is not a good surrogate for actual cash flow. If you treat it like one, you and your sponsor can miss the true liquidity of the business.

Despite having a strong adjusted EBITDA, I’ve had to tell boards that while we had the debt capacity to do more deals, we didn’t have the underlying cash flow to actually service the bank agreements if those deals went through. Having that visibility to your true cash position is of great importance.

I utilize a simple report template to track cash week-by-week. It allows me to see what the total inflow/outflow of cash is each week.

I expect this report to be completed by my controller team EOD Monday. The information is fairly rudimentary to capture, and I drive that rhythm so we have the most recent possible information for management and CFO team meetings every Tuesday morning.

The Cash Template is one tab in my weekly KPI report — the other three are Bookings, Monthly Recurring Revenue and Staffing. This weekly report frames our conversations about the business.

The power of a template like this is in its simplicity. Such templates can become meaningless if you can’t keep it updated or it contains so much information people feel they can’t do anything with it.

If you’re consistent with tracking your cash over time, developing something like a 13-week cash forecast becomes much easier.

You project out things like when payroll will hit, ebb and flow of collections, and expected Capex, and then you can forecast to see if you expect to be in a good position cash-wise or if you’re going to run into a challenge. It’ll never be perfect. All models are wrong, some models are useful.

I use this template to inform 4- or 5-week cash flow forecasts and set little goals for my team. I always have a weekly AR review meeting, for example. I lay down a gauntlet with my team — ‘Ok, based on my modeling, I expect collections for this month to come in at this level. You hit this level of collections, then lunch is on me.’ Kind of keep it fun and light, but by constantly tracking your cash position, you’re able to set logical goals.

No matter how safe you think you are, not tracking your cash on at least a weekly basis is a big mistake in a PE-backed company. You always need that good view of cash flow in the business to inform your decisions.”

Action Steps

  • Download the above Weekly Cash Report Template.
  • Establish a cadence that makes the completion and discussion of the Weekly Cash Report an integral part of your business.
  • Build a weekly history of your cash position over time to enhance cash flow forecasting and help make liquidity top-of-mind in key operational and strategic decisions.

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