Summary
Current accounting standards are confusing and hard to understand by the average reader of financial statements. They don't present a picture of liquidity or an analysis of of cash needs and uses. Good businesses fail principally because they run out of cash, yet the traditional statement of cash flow doesn't accurately or clearly describe sources of cash and where it went. Nor does it indicate projected cash requirements and whether the company will be able to meet its cash needs. There must be a linkage between realistic sales and earnings forecasts and the bottom line result. Two analyses, therefore, are vital for an understanding of where a company is heading and whether it is reasonable to assume that it will get there. The first is cash basis forecasting, and the second is liquidity analysis. A monthly cash flow analysis for 12 months out is critical to determine the adequacy of internally generated cash flow versus the need to draw-down on existing debt availability.
Analysis
During the current period of economic crisis, many companies need external financing to carry them through the downturn. Often, however, covenant defaults prevent companies from tapping lending availability. Liquidity analysis will quickly highlight the need to modify or waive some of the covenant breaches, if agreeable with the lenders.
