Discover how a cash flow analysis can help drive a business turnaround programme.
Cash flow analysis measures how much cash is generated and spent by a business during a given period of time. It’s the best measure of a company’s performance, particularly in a turnaround programme, because it can be measured and compared at any time, and it’s difficult to artificially inflate it. At the end of the day, all business success or failures translate into a cash impact.
An energy retailer needed a robust cash flow analysis and forecast to support strategic business turnaround decisions particularly regarding working capital management and short-term cash facility requirements.
Under my supervision as Finance Director, the Treasury team designed and developed a direct cash flow model providing a daily rolling forecast over a 6-week period and a monthly forecast over 12 months.
The model was complex to build in particular because:
- Energy consumption is seasonal with a significant part of the revenue and profit generated across the 3-month winter period. It is also the pick in cash disbursement.
- Domestic customers are paying their energy bill by monthly instalments. Periodic adjustments to these instalments are required to reflect changes in customers’ consumption or tariff.
- Impact of the debt collection programme and other exceptional cash collection had to be identified separately from recurring monthly payments.
- There were several dozens of cash out assumptions based on different cost drivers (energy consumption, number of meters, etc.).
- Actual payments had to be reconciled with cash out assumptions on a daily basis and variances explained to improve the model accuracy.
The cash flow forecast was aligned with the company budget, the working capital improvement and cost saving programmes.
At short-term, the daily cash flow forecast helped managed a tight cash position.
The 12-month cash flow forecast provided management with insight into the cash requirements through the winter period and the right information to make business-critical decisions.
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