Cash Flow Analysis and Forecasting: The Definitive Guide to Understanding and Using Published Cash Flow Data

11

What to do about Bad Cash Flows

In this chapter we are going to consider how to approach the situation where we discover ‘bad’ cash flows in a business we are analysing. I am using the term ‘bad’ as shorthand for any situation where we identify a set of cash flows that is not in accordance with our understanding of what constitutes a satisfactory cash flow performance. When we are examining ‘bad’ cash flows, the context needs to be considered before we discuss what actions can be taken.

If you are approaching this situation as an analyst, you are almost certainly examining the cash flows in the context of either a credit decision or an investment decision. The questions you are seeking to answer are likely to be as follows:

• What is the cause of the cash flow shortfall?
• Is the cause of the cash flow shortfall temporary or permanent?
• How long will it be before the business recovers its performance?
• Will the business default on its loans, debt or trade creditors?
• Will the business survive?

If you are approaching this situation as a manager, director or entrepreneur running the business entity you will also be keen to know the answers to the questions above. However, in these circumstances, we can ask two more questions in addition to those above:

• Were the causes of the shortfall inside or outside our control?
• What actions can we take to remedy the situation?

So, we will approach this subject initially from the viewpoint of the analyst, after which we will consider the problems ...