by Ray Anderson, Frank R. Mack, Ronald J. Reuter, Anu R. Singh
(TMA International Headquarters)
ability to forecast, monitor, and perform in the short term can establish the
foundation for a consensual and beneficial outcome for interested parties in a
well-run turnaround or restructuring engagement. The short-term forecast
preferred by practitioners, lenders, creditors, and most other constituents is
the 13-week cash flow (TWCF) model.
A group of practitioners
whose specialties include interim and crisis management, debt restructuring, and
raising capital recently participated in a roundtable discussion on the topic
moderated by this month’s guest editor,
, the founder of Burnham Venture
Frank R. Mack, CTP
a managing director with Conway MacKenzie &
Anu R. Singh, CTP,
vice president with Kaufman
Why is the TWCF the industry
Whether inside of a bankruptcy or in early decline, all of the constituents need
to focus on the short-term liquidity requirements of the company while also
examining medium-term trends that signal the potential need for additional
funding. Thirteen weeks seems to be the right amount of time to meet all of
these requirements. Additionally, thirteen weeks is not so far out that the
forecasting is speculative.
What are some of the factors that
make it so appealing?
appeal to both the company and its parties in interest is that the TWCF model
communicates the quantified operating and strategic plans for a company based on
its defined exit plan, such as restructuring, recapitalization, going-concern
sale, or orderly liquidation. Over the duration of a TWCF model, the underlying
operating plan should maximize the net cash flows and enterprise value of the
company within its constraints.
Ancillary quantitative models, such as accrual-based financial
statements, pro forma reports and forecasts, and liquidation and waterfall
analyses, are all derivatives of the TWCF model. Therefore, the TWCF model not
only serves as the company’s overall business and strategic plan, but also
accommodates an understanding of the financial impacts of the TWCF to the
respective recovery and/or transactional strategies of the company’s parties in
interest. Thus, the TWCF model is the accepted industry standard in all
corporate renewal situations because of its practical applicability to its users
and its effectiveness as a communication tool.
Even beyond its purpose, the structure and the methodology underlying a TWCF
model is what makes it so appealing. First, no accounting accruals or
management judgment regarding how balances should be calculated is considered. The
triggers are simple—when will cash come in, and what is the order in which obligations must
Second, it provides visibility. Consider cost of goods sold from the
income statement. How much does it really tell you about direct materials,
direct labor, and selling expenses as individual components? Not much. A TWCF
model allows the reader to see otherwise aggregated data to be decomposed.
Finally, due in part to the first two factors, it becomes the best manner in
which to track the turnaround efforts of a company.
In what ways can the TWCF model
guide a distressed company?
A properly prepared TWCF should provide a company and all of the
constituents with a roadmap to the ultimate exit. A TWCF illustrates a company’s cash
sources and uses, and any operational shortfall must be provided for through
the anticipated date for the exit—either through a Section 363 sale, confirmation of plan of
reorganization, or other event.
If the TWCF reveals a significant shortfall that cannot be filled, the
company must reexamine the business plan or preferred exit strategy. It is also
critical to look beyond the TWCF in analyzing a company’s actual performance
compared to the plan. For example, a company could stretch its payables, which
would create an unrealistic picture of cash utilization and mask the true
economics of the business performance.
management and the chief restructuring officer (CRO) ultimately are responsible
for the approving and executing an ambitious TWCF model within the company’s
financial constraints. However, the underlying balanced operating strategies
driving the model should be created by the functional managers responsible for
executing the sales forecast; engineering, purchasing, production, and
distribution schedules; and cash conversion cycle elements of the
Ownership of operating strategies should reside with the company’s
functional managers. Actual-to-budget comparisons by functional areas should be
performed no less than weekly, and variance analyses should be used to create
and implement key corrective plans for the revised TWCF model. It’s a form of
Deming’s concept of continuous improvement applied to the operating elements of
Timelines, operating goals, and variances should be shown
to line employees so that they are aware of performance expectations. These
concepts and processes often are utilized by the best run multinational
companies and are essential to underperforming companies to maximize performance
and enterprise value.
How does the TWCF relate to the
stages of a turnaround?
turnarounds include a five-stage process: change in management, evaluation,
critical actions, stabilization, and an eventual return to normal. A TWCF, when
introduced early enough in a case, focuses management on changing how it runs
its business. More specifically, it can disarm a long-term, sales-focused
orientation and concentrate management on short-term cash
That singular change often leads to an assessment of what factors are
limiting the cash flows of the business, whether they are the poor collection of
receivables, ineffective vendor strategies, or a high fixed-cost burden, all of
which might have been buried in other types of financial forecasts. With this
awareness, turnaround steps can be implemented and tracked
Once a turnaround is progressing, the tracking generally results in lower
variances and fewer surprises. At this point a distressed firm can look to the
other steps required to engineer a return to normal.
you convince parties—management, lenders, and creditors—of its importance?
For creditors or other providers of capital, the company’s TWCF should be a
critical element of the credit or investment process. It sets the parameters
under which funding will occur and should be monitored closely to determine
whether the expected returns will be realized.
A buyer may not have access to management’s TWCF. However, potential
buyers should construct something like the TWCF, including short-term changes to
the business plan, as part of an overall plan to recapitalize a company and
ultimately return to growth. Without a TWCF at the inception of the acquisition,
an acquirer cannot be certain of the short- to medium-term capital needs of the
believe a comprehensive TWCF that is ambitious, yet within the realistic
financial and operational constraints of the company, is self-convincing. The
velocity of the company’s turnaround initiatives and the predictability of its
overall performance against the TWCF are key to acceptance by parties in
interest and stakeholders.
If the company’s negative surprises are continuously outside of the
expectations of its relevant parties in interest, they will pursue adversarial
strategies that minimize their respective risks and maximize their respective
recoveries. This is especially true with respect to key customers, senior
secured and subordinate lenders, and critical vendors.
When potential buyers and/or alternative lenders are underwriting
transactions based on a company’s TWCF, the company’s negative variances usually
result in unfavorable changes to the terms, conditions, and pricing of these
transactions and in certain circumstances will cause them to be terminated.
Given the complexities of business and capital structures typical to this
segment of the economic cycle, it’s critical for a company’s business and
strategic plans, as quantified by the TWCF, to be both accepted by parties in
interest and stakeholders and consistently executed by the
Have you used the TWCF as a means
to earn back credibility with constituents? How?
Whether a company has filed for bankruptcy or violated loan covenants, it has
lost credibility with its lenders. If a company can prepare an accurate TWCF and
meet its targets, it will recover a degree of credibility with its
have been involved in cases in which it was the only way to restore credibility.
It is significantly easier to build and eventually share a TWCF model based on
facts and reasonable assumptions that indicates what is needed to fund a
turnaround than it is merely to ask for forbearance or another form of
accommodation from your bank.
Too many management teams initially want to disclose less information and
make it easy to blame their woes on the fact that the bank has not provided the
cash they need. If the same effort is put forth in demonstrating the cash
position and forecast of the company, most reasonable banks will listen. That is
where the recovery of credibility often begins.
How else has the TWCF assisted you
in difficult communication situations?
Often the TWCF provides a dose of reality to management teams that are in
denial. In accrual accounting, a company may be able to mask some of the
difficult challenges it faces. An example of this would be an inventory build
without a concurrent increase in revenues.
The TWCF is an illustrative document that removes some of the obfuscation
that can be a part of accrual accounting. It should illustrate the weaknesses in
the company’s business plan over the short to medium term from a cash-flow
standpoint. This is often useful in demonstrating to management the flaws in its
business plan that may not be as apparent when viewed on an accrual basis. In
the case of the inventory build, for example, the TWCF would illustrate cash
being used to purchase inventory without contemporaneous cash
Can the TWCF impact the speed and
success of a turnaround?
accurate TWCF is integral to building credibility and trust between management
and lenders in a turnaround. Trust between management and a lender is critical
in navigating the twists and turns of a turnaround. Therefore, management that
consistently meets its TWCF goals will have an advantage in completing a
turnaround in a timely and effective manner. Conversely, a management team that
consistently misses its TWCF goals will find that lenders become skeptical of
the company’s plan and less cooperative during the process.
internally, the same concept can provide significant dividends for a company.
When company management teams are aware of the turnaround steps taken and can
relate the impact of each effort directly to the balance and trajectory of cash
flow, the pace and intensity of corrective actions are catalyzed. A TWCF can be
much more than a spreadsheet that you send to your bank every Tuesday. It can be
the best scorecard a company has to monitor its progress and accelerate
What are the best practices of a
a very tough question, but a few critical components should exist. First, the
model should touch all important facets of the business. The shipping and
receiving manager may know much more about special customer treatment involving
shipments or even returns than does the executive team, for
Second, the model must be dynamic. The first few weeks may be well off
the mark. It is important to track variances to determine where the model works
and where it needs more work.
Third, it should have documentation, a mini owner’s manual. Key
assumptions and methodologies should be documented. Sources of support for
balances should be provided. Changes from previous versions should be
Anderson; Frank R. Mack, CTP; and Anu Singh, CTP, serve as the Continuing
Education Committee for TMA’s Chicago/Midwest Chapter and developed the 13-Week
Cash Flow Workshop. The first workshop was held by the Chicago/Midwest Chapter
in May and was made possible through a grant from Cornerstone 15. The workshop,
which expands on the Troubled Loan Workout program, will soon be available to