13 Week Cash Flow Method for Contractors

The recent interest rate increases initiated by the Federal Reserve are designed to counteract increasing prices. While dealing with inflation is certainly important, many contractors are already challenged by the ill effects that it brings. Most notably, there has been an increase in the cost of building materials, equipment rentals, skilled labor, and supplies. The trend of increasing costs has made it difficult for many to thrive. While there are different ways to combat the effects of inflation, one of the most effective is through cash flow planning. Maintaining a consistent cash flow is essential to weathering the storm of economic issues.

The 13-week cash flow method, which is a weekly cash flow forecast, presents an opportunity for owners and managers to carefully address the challenge. While it is often used by distressed businesses, it is also useful when making short-term decisions. Not only does it facilitate the optimization of short-term cash flow, but also provides critical insights into financial, operational, and strategic opportunities. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What is the 13-Week Cash Flow Model?

At its core, the 13-week cash flow model is a financial decision-making tool. It shows week-to-week inputs and outputs and helps CFOs or Controllers (“finance leaders”) understand the key drivers and risks within the business.

The 13-week forecast is a product of historical balance sheet data, cash flow, and income statement forecasts. While each 13-week forecast will look different depending on the business, there are common components.

• Operating cash receipts, disbursements, and inflows
• Non-operating disbursements, like interest payments, principal amortization, and professional fees
• Net cash inflows and outflows
• Beginning and ending cash balances

When it’s compiled and updated, the 13-week cash flow model can uncover opportunities and avoid potentially negative outcomes. It’s a tactical approach that requires collaboration between the finance and business leaders along with outside tax and accounting advisors.

Benefits of the 13-Week Cash Flow Model

During uncertain and changing environments, the 13-week cash flow model can inform decisions across all parts of the company.

It’s useful for identifying opportunities like:

• Reduce accounts receivable (A/R) aging
• Adjusting accounts payable (A/P) schedules and other debt payments
• Preparing for strategic corporate transactions, like a merger or acquisition

Unlike monthly or quarterly forecasts, the 13-week model shows details that help to improve short- and medium-term cash flow. While some inputs won’t be as concrete as other period-end reports, the short-term forecast can often uncover potential risks sooner.

The extra analysis from a 13-week forecast can provide enough lead time to avoid negative scenarios like:

• Missing payroll
• Defaulting on debt
• Entering bankruptcy or a receivership

Short-term forecasts became invaluable during the COVID-19 pandemic as global disruptions stopped most businesses. Most financial experts prefer monthly cash flow forecasting; however, unusual events, like a pandemic, inflation, or a recession may necessitate more frequent reviews. Even when not required, 13-week cash flow forecasts can position the company in the best possible light to investors, lenders, or creditors.

Assessing Cash Flow Needs

Finance leaders also need to examine the strength of their balance sheet. Could the company survive in the next period with a certain percentage of less revenue? Knowing the answer to that question, and by how much, will help them understand the current liquidity situation. This exercise may also shed light on critical expenses involved in the cost of goods sold, operating expenses, and overhead.

To get started, the business owners will need to pull certain roll-forward data from the financial statements.

• Working capital: payment timings for payroll and vendors and inventory purchases
• A/R: days sales outstanding, invoices for large customers, and other relevant A/R data
• Inventory: purchase forecasts, cost of goods forecasts, inventory turnover
  • Inventory roll-forward data indirectly impacts A/P
• A/P: days payable outstanding, vendor-specific reviews
• Accrued wages: wage expense forecasts minus cash disbursement forecasts

It’s critical that information at this stage is accurate and complete. When all inputs are updated, it’s possible to go from a forecast accuracy of about 60 percent to a more certain outlook of more than 90 percent.

How to Perform Short-term Cash Flow Modeling

Once key inputs are gathered and organized, the finance team can begin making the forecast template. It’s best to keep formulas simple, with hard-coded values throughout the model. Details on specific transactions can be added using cell comments throughout the worksheet.

When ordering the values, cash inflows are descending, in order of certainty. For example, certain inflows, forecasted sales, debt funding, and equity investment.

Cash outflows are in order of size and importance; for example, payroll is generally at the top for most companies, followed by payments to mission-critical vendors and suppliers, inventory purchases, then small vendors.

Once all data is aggregated, the result is a net amount of cash available each week. To get the most accurate view of current cash needs and profitability, finance leaders may want to compare net cash to earnings before interest, taxes, depreciation, and amortization (EBIDTA).

Each week, the data is reviewed so that important decisions can be made regarding available cash flow. Solutions might involve accelerating sales, delaying certain payments, deferring short-term revolving debt payments, seeking investor funding, reducing payroll, or liquidating certain assets.

Key Cash Flow Considerations

There are times when this model may not make the most sense. If the focus is instead on short-term liquidity needs or long-term risk management, there may be other approaches that would produce more meaningful results.

To get the most out of a weekly forecast, companies need to first have an established budget and a regular review process. How well do all leaders understand the current data – like key performance indicators (KPIs) and key revenue drivers – can impact the value they get from the 13-week cash flow model.

Because the 13-week cash flow model is a shorter-term forecast, it requires updating data weekly. This is more time-consuming than monthly or quarterly reports. Processes should be in place to automate data inputs, when possible, to increase efficiency and prevent user errors.

Contact Us

While the cash flow method is effective at helping manage inflationary periods, it does require more frequent data updates. This can be challenging for Atlanta contractors if key accounting reports are not kept accurate. For this reason, it is important to work with a qualified advisor to guide efforts. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.