Implementing daily cash modeling enables client to survive, then thrive.
The challenge
The investor didn’t seem worried. ‘Hey, I think the CEO could use some help with financials and cash forecasting’ he said over a text, ‘let me connect you.’ The founder was glad to have someone help and we were off and running. The founder knew they faced cash constraints, but had no real way to understand how big the crunch would be, when it would hit and what exactly was causing it.
The next couple of weeks were unnerving. Financial controls and processes were in rough shape. The team was understaffed and the fort was being held down by a brave and stressed out accounting manager. The inherited monthly forecasting model was accrual based and lacked granularity in terms of time and detail. It wasn’t really forecasting actual cash in and cash out. It was clear we didn’t have a good handle on cash forecasting and this was putting the CEO under severe stress as they often had to pull late nights creating their own analyses and spreadsheets in a search for answers.
The Solution
The first task was building a daily cash flow model that allowed us to forecast cash coming in and going out and then replace forecasts with actuals on a daily basis. Our model then rolled up daily to weekly reporting. All cash coming in and out of the business is captured.
The model revealed a looming cash crunch and gave us the timing by week as well as the severity. We also got visibility into the specific big cash outlays to certain inventory vendors so we knew what we needed to do in the near term and what we needed to do longer term to really fix the issue.
We then instituted key processes to stay on top of cash including:
- A daily cashflow stand up with Accounting
- A weekly cashflow and payables meeting with the CEO
- Weekly forecasts of cash received (not just sales) from the leaders of the non-ecomm revenue lines.
The results
With the cash crunch identified and confidence in our ability to forecast cash, we turned to solutions. We could reduce a $1.5 million projected shortfall over several months to a third that size just by re-negotiating payment schedules with large vendors. Moving up a semi-annual sale by 6 weeks and being more aggressive with discounts would generate significant cash just when we needed it. Restructuring terms with the senior debt allowed us to move a large principal payment into the next year when cash would be higher and reduced the monthly payments over the next 12 months. And because we could accurately model the impacts of even small changes such as 15 more days to pay a certain invoice, we had more productive conversations with vendors and lenders. Lastly, the detail helped us identify and then plan for reducing or eliminating unneeded expenses to bring our OpEx down.
All this gave the company time to implement key changes to increase profitability, improve inventory planning and use capital more efficiently.