Opening Cash + Free Cash Flow (FCF) = Cash Available for Debt Service – Debt Service = Closing Cash
Most CFOs are worried whether they will have enough cash to service debt.
But even if there is no debt, the worry whether the company will need one remains.
So, understanding your company’s liquidity is important from both operational and strategic level.
The formula above is easy to comprehend, but a bit more difficult to calculate if you don’t have a Cash flow planning model.
It can be anything from a fully detailed 3-statements model to a simple spreadsheet under the direct cash flow method.
Whatever suits your needs.
The point about the liquidity is not predicting the exact figure but giving you an idea how much cash you would have should the assumptions / forecast materialize.
The results will give you possible solutions, whether to the liquidity issues or if you have extra cash to spend.
Please note that the formula above does not include discretionary decisions like sale of assets / parts of business, equity issuance, acquisitions, new debt intake, etc.
These may be solutions to your liquidity problems, but the point is to understand whether your company generates a healthy cash flow or not.
Let me show you a real-life example of Italian manufacturer, recently downgraded by Moody’s to Caa2 on the back of a weak liquidity.
The company had EUR 49m of cash at the end of June 2023, with EUR 94m of debt maturing in 2024.
The June 2023 LTM FCF was negative at EUR -41m, clearly indicating that another period of such FCF generation will leave the company almost out of cash and unable to service debt.
By knowing this, the company’s management and the company’s lenders can now act – they can create a strategy how to resolve the issue – whether they need to sell some assets or parts of business, refinance, find new investors, exit the business…
Forecasting liquidity gives you options.
Options increase your company’s chances for success.
CreditAnalyst(.eu) – Improving your company’s cash flow.
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