13-Week Cash Flow Modeling and Analysis. What the Model Tells Us. Apart from the obvious result as to whether the company is running out of cash, what analysis can be gleaned from the 13-week cash flow statement. Like any good model, we are interested in the drivers. In this case, we want to isolate the issues that are leading to poor cash receipts or increased cash consumption in order to address the liquidity crisis. For operations, are there concerns about the revenue forecast and which divisions are generating cash versus others? Are expenses tracking too high? Can wages or other variable costs be cut? Can CapEx be modified? In terms of the working capital or balance sheet, are collections taking longer than usual? Is there room to extend payment to suppliers? Can inventory be liquidated or will it require more investment? Can other assets be sold to generate cash? This will ultimately lead us to a discussion about financing options which is the primary reason why we do this analysis. What financing is needed? What room is currently available under the current facilities? Can additional debt be added or will that require a workout or restructuring? Will the company need to seek formal protection? The first step in any troubled loan is to use the strength of the relationships and hopefully the credit agreement to restructure or work out the loan. There are a few ways this can be done including relaxing covenants so as not to force default or possibly add more capital. This can be challenging if there are multiple lenders and multiple seniority tiers. The banks at the top typically are not too keen to put in more money. Non-bank lenders are often more willing, but demand some kind of seniority for that new loan that the banks will often balk at. Also, sometimes junior lenders don't like senior lenders offering more debt to borrowers, which then pushes them further down in the capital structure, sometimes referred to as cram down. The inability to find a solution with a workout or restructuring can often lead to chapter 11. Any financing that is done within the context of chapter 11 is often called debtor in possession financing. This simply means the courts have become involved and the assets or collateral, including cash, are still owned by the company, but are now supervised by the court. Within chapter 11, 363 sales give the debtor in possession more control to sell assets than under chapter 7, where courts are in charge. This leads to something known as credit bidding which has two facets. The secured lenders can bid for the assets up to the value of their loans, which the assets have secured, so no new cash needs to be raised here. Private equity firms can also credit bid in the case of creditors not wanting to control the assets, they will bid for the assets up to the value of the loans. There is really no need to bid beyond that since the assets will be sold to pay for the loans. They can then effectively control all of the assets of the company, merely for the cost of the loans, hence the name credit bidding. What chapter 11 allows for is the time to arrange this new financing. If that cannot be arranged, it generally means that no one sees a path forward for this company, which leads to chapter 7, or a liquidation of the company's assets.
