Working Capital Management & Cash Forecasting

What do Working Capital Management and Cash Forecasting have to do with Practical Turnaround Management? 

One of the first steps that turnaround managers undertake is creating the 13-week cash forecast.  With this they can see the full picture and then set reasonable expectations for stakeholders such as lenders, vendors and employees.   

One of the next steps is to evaluate working capital. The calculation is:

           Operating current assets – Operating current liabilities

Current assets are Cash, Accounts Receivable and Inventory.

Current liabilities are Accounts Payable, other accruals and the current portion of long-term debt. 
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Reducing working capital is a great example of how the turnaround management toolkit can be used on a daily basis by companies that are not in distress. 

Reducing working capital liberates cash.  Internally generated cash and profits are always an important source of funds, and are management’s first choice on the pecking order, especially in an era of tight credit.  This cash can be put to more productive uses or returned to shareholders in the form of dividends.  These actions create value for shareholders.      

The Discounted Cash Flow (DCF) model below shows that each additional dollar of Free Cash Flow (FCF) increases firm value, holding other variables constant.  WACC is the weighted average cost of capital.

The DCF model for calculating a firm’s value is:   

Here’s the practical turnaround thinking:  do not wait for a liquidity crisis to occur before addressing these issues.  Reducing their working capital needs and improving their cash forecasting abilities are top priorities for management teams who want to maintain or improve performance.  13-week cash forecasts lead to more prudent borrowing and investing decisions.  The smart money creates and maintains the forecast even when the firm’s financial condition is strong.

Contact Melissa Craig to have an informal conversation about how your company can unlock value by reducing its working capital needs, and improving its cash forecasting abilities.  See the Services and Solutions in the sidebar.

• 13-week cash forecast

• Working capital management
  • Cash Conversion Cycle
  • A/P processes; trade discount analysis
  • A/R processes; credit policy analysis
  • Banking configuration
  • Payment automation
  • Purchasing controls
  • FX management
• Treasury and FX applications