In business, as the old saying goes, in business cash is king. This is particularly true for companies in distressed situations. A cash flow statement is a snapshot of a company’s situation and a ‘reality check’ measure of its ability to meet its obligations to creditors and investors. Cash flow projections are a description of the company’s ability to continue doing that. Every experienced turnaround professional begins with a detailed survey of the cash and cash flow situation.

The first entry in any cash flow statement is the cash balances at the beginning of the period in question – the amount appears at the very top of the statement. The revenues and expenses – the additions and deductions – from the cash reserves – are then listed. Unlike the income statement – which can be done on either a cash or accrual basis – the cash flow statement uses what is often called ‘cigar box’ accounting. The formula is incredibly simple. You take the cash balance at the beginning of the period – add in the additions to cash and deduct the reductions. The last entry in the statement is a projection of the cash reserves at the end of the period.

Many distressed companies are experiencing ‘burn rates’ – a description which derives from the fact that it is burning through its cash reserves instead of adding to them. The brutal fact is that, without a positive cash flow, any company is facing a gradual descent into oblivion. Eventually cash will become so scarce that critical expenses – like salaries, payments to vendors, continued improvement of the product/service mix and even taxes – will be increasingly deferred. If this situation continues, it is only a matter of time.

One of the most overlooked opportunities to improve cash flow is a careful review and adjustment of the revenue streams. Under some circumstances, less is actually more. One company that I worked with offered a very wide range of products and services. They had set out to be all things to all people – to solve the ‘holistic’ problems. The problem was that they were very small and could not manage to provide professional levels of both from the resource base that the company could claim. One of my first steps was to radically reduce the mix and concentrate efforts on those core services that could be professionally supported by the in-house skill-sets of the core team. Needless to say, management aggressively protested this ‘climb-down’. But, in the end, they had little choice – short people do not make good professional basketball players.

The outgo side of the cash flow statement is the part which generally gets the most attention – and rightly so. However, management can push back here as well. There are often ‘sacred cows’ that have been inappropriately protected from the pressure of the company’s distressed situation. Some of these are contract arrangements with consultants, favored arrangements with providers and compensation levels for the senior team itself. These ‘givens’ are often the very reasons that the company has become distressed in the first place. My initial meetings with the CEO and Chairman tend to focus on these ‘sweetheart deals’. Many times these meetings get quite heated. However, reality eventually sets in and the necessary changes are most often made. After all, the alternative is failure!