13-Week Cash Flow Modeling and Analysis Introduction. What is a 13-week cash flow model? It is an internal, weekly cash-based analysis performed for a short period of time. Let's talk about these points. Internal, this is based on insider documents. A 13-week cash flow statement cannot be comprised using public documents. The data required is much too detailed. It is cash-based. We will be working from accrual based accounting and translating that into cash flow accounting. It is performed for a short period of time, usually 13 weeks, which is three months or one quarter. They can be performed for a longer period of time. However, in most cases, they're performed one quarter at a time for less than one year similar to the main cash flow statement, this will unwind accrual based accounting whereas most cash flow statements are compiled using the indirect method, the 13-week cash flow statement uses the direct method. Now, those are accounting terms and if you haven't studied accounting for a while, no need to panic. We will go over the direct method. Essentially, this distills all activities of a firm down to cash receipts and cash disbursements. Why do we need a 13-week cash flow statement? The primary or official purpose of a 13-week cash flow statement is in a bankruptcy. The model will be shown to pre-petition lenders who are lenders prior to the bankruptcy filing, as well as new or new potential lenders, potential acquirers, other creditors, and the courts. Generally, at this point in time the borrower becomes a debtor in possession. We will discuss this more later and seeks a special kind of temporary funding to hopefully emerge from bankruptcy with a restructured and improved cash flow position. There are many possible complex outcomes which we won't discuss here. However, in the highly leveraged acquisition environment of today, 13-week cash flow statements are being used more and more by companies that are seeking to placate lenders who are concerned about liquidity events and broken covenants. Arguably, they're more important in the run up to a crisis as opposed to after the crisis has happened. So first, as discussed the company is typically breaking covenants under an existing loan agreement. This will eventually or potentially lead to some kind of default or a workout or restructuring which, of course, can include a formal process like a bankruptcy proceeding. This is historically when a 13-week cash flow statement would be performed to see where the problems are and where the potential cash flow is that is accessible for a new loan or loan restructuring. As an aside, this is one example why the new trendy covenant light or cove light loans can be so treacherous to creditors because it is often very late in the process that they learn about these kinds of distress situations. The 13-week cashflow statement is the analysis that gives us that information or that the company can give to the courts or new capital providers to give them the confidence in either making a new loan or increasing the existing financing.

What are the possible causes of distress to push a company into this situation? Well, there are many situations like the crisis of COVID-19 are a large factor, but in many cases there are preexisting conditions. Those conditions can include industry challenges. For example, threats in the retail sector to the brick and mortar by online retail and the failure to shift to direct to consumer. Another sector currently under pressure is the energy sector where falling prices have pushed up against massive investments that are required to develop energy sources, poorly executed turnarounds or ineffective turnarounds, poor performing divisions or acquisitions and high leverage which can compound all or any of the preceding factors. The first major hurdle to compiling a 13-week cash flow statement is getting the right data. As we mentioned, this is an internal or inside type of project. Most companies do not report publicly on a weekly basis. In fact, weekly reporting can be difficult as it can often be misleading. If we think of the natural flow of business, inflows and outflows can be uneven when looking at them on a weekly basis. They tend to smooth out over monthly, quarterly, and annual reporting. For external reporting we generally only see quarterly or annual reports. Some private companies will report monthly for investor groups, but it is more likely that we see monthly reporting internally. These will be unaudited reports that are taken directly from the general ledger of the company. Internally, it is more common to see the monthly reporting of balance sheets, PNLs, and cash flow statements. Internally, it is more common to see the monthly reporting of balance sheets, PNLs, and cash flow statements. So we know that these documents do exist. Budget groups are likely to forecast on a monthly, quarterly, and annual level. It is rare that they will forecast on a weekly basis unless the circumstances demand it. Internal reporting will also at some point converge with the external reports so we should be able to see the same balance sheet, income statement and cash flow statement from the internal documents just unaudited.