Cash Visibility

In many businesses the bank balance is the only measure of cash anyone looks at. A profitable month that ends short of cash is a surprise. A good year whose cash did not keep up with its profit is a puzzle the accountant explains months later. And when a buyer who models cash arrives, the first person to compute how much of the business's EBITDA became cash is the buyer's quality-of-earnings team, so whatever they find, the seller hears it for the first time in the middle of a sale.

Cash Visibility reverses that order. It measures cash with a monthly cash flow statement that walks from EBITDA to the change in cash, a rolling weekly forecast whose accuracy is recorded, and a yearly cash conversion figure with every gap explained, so the business sees its cash before the buyer computes it.

A monthly walk from EBITDA to cash

Every monthly package for the last two years carries a cash flow statement that walks from EBITDA through capital spending, the change in working capital, taxes and financing to the change in cash, reconciled to the bank.

The statement becomes part of the monthly close, built from the closed balance sheets and the classified capital spending schedule, in the same layout every month. The prior months are backfilled from the closed statements, so that the two years exist when an inspector asks, without waiting two years from the day the work began.

The walk locates every dollar of difference between profit and cash. A month in which EBITDA was strong and cash fell stops being a mystery, because the statement shows whether the cash went into a receivable not yet paid, a batch of stock, a capital purchase, a tax payment or a loan repayment. A buyer can then read the business's cash directly, with no reconstruction and no discount for doubt about what the reconstruction missed.

A forecast that records its own accuracy

The second record is a thirteen-week cash forecast, rolled every week for months on end, with the forecast made four weeks earlier landing close to actual closing cash in nearly every week.

The first bridge introduced the thirteen-week forecast as a tool for the owner, a way to see tight weeks coming. On this bridge it becomes evidence. Receipts are built from the aged receivables and the order book, and payments from approved payables, the payroll calendar and the capital spending plan, week by week. Every week, the forecast made four weeks earlier is set beside what happened, on one line, with a one-line reason for any miss beyond the margin.

A forecast is a claim about the future, and buyers discount claims. One that carries months of its own track record, showing how close it came each week and why it missed when it did, is a claim the business has already tested. The accuracy record is what turns the forecast into evidence that the business can see its own cash.

Cash conversion, stated and defended

The third record is cash conversion, EBITDA less capital spending less the change in working capital as a share of EBITDA, reported for each of the last three years and each quarter of the latest, with every significant movement explained.

The ratio is computed in the monthly package on a trailing twelve-month basis, with the prior year beside it. Every movement of more than a few points gets a written reason that cites the schedule behind it: capital spending timing from the capex schedule, a working-capital swing from the peg schedule, a large prepayment from the deferred revenue list. That makes the share of earnings that becomes cash a number the business has stated and defended, which leaves a buyer far less room to compute it and interpret it in its own favour.

What good conversion looks like

No single level of cash conversion is right; it depends on what the business is. A service business that owns little equipment and is paid promptly converts most of its EBITDA into cash. A manufacturer that replaces machines and carries stock converts less. A distributor selling on long credit terms converts less again, especially while it grows. A buyer compares the ratio with businesses like it, and with the business's own history.

The history is often the more useful comparison, and its trend tells a buyer more than its level. A ratio steady for three years says the business's capital needs are understood and stable. A falling ratio, even from a high level, says something is absorbing more cash each year: receivables lengthening, stock building, capital spending rising. The quarterly figures matter for a related reason. A seasonal business can show a healthy yearly ratio built from quarters that swing widely, and a buyer modelling it by quarter needs to know the swing.

Hence the requirement to explain every significant movement. A number on its own invites the buyer to supply the reason, and a number that arrives with its reason, drawn from the schedule that caused it, settles the question.

The forecast as a management tool

The forecast earns its keep long before any buyer reads it. The business uses it to decide when it can afford a capital purchase, whether a quarter's tax payment needs the credit line, how much the owner can safely take out after the reserve is funded, and whether a large order can be accepted on the payment terms the customer wants. Before the forecast, each of those was a guess. With a forecast whose accuracy is known, each becomes a judgment made against a figure whose error is also known. The record a buyer eventually reads is a by-product of running the business this way.

What it does to value

In the framework's valuation, Cash Visibility moves no value at all. The cash the business produces is the same whether or not anyone measures it; the driver only reveals it. What changes is the buyer's uncertainty. A buyer without the business's own measure of conversion assumes a worst case and holds back a margin for it. Given a measured, explained ratio and a tested forecast, the buyer can work from the measured variance, and the margin narrows. The framework records that as an effect on price and certainty. The driver carries no rank on the bridge and is done for the certainty it gives a buyer.

The owner has a reason to want it regardless of any buyer. The previous two drivers manage and clean working capital, and this one is how the business knows whether they are working. A fall in cash conversion is usually the first visible sign that working capital is ballooning, and a business that measures conversion every month sees the swing in the month it starts.

What has to be in place first

The cash flow statement and the conversion ratio are built from two schedules, the capital spending classification from Capex Discipline and the working-capital history from Working Capital Management. The forecast needs a finance seat with an hour a week, from Management Install, because it is a weekly discipline and an owner keeping it in a notebook does not count. And it needs bank data to reconcile against, through bank feeds into the accounting system set up under Books.

Knowing that it works

The driver is tracked by the number of weeks with a rolled forecast on record; by the four-week-ahead forecast error each week, as a percentage of actual closing cash; and by trailing twelve-month cash conversion each month, against the prior year.

Reading this week's forecast, the owner should be able to name the lowest week in the next thirteen and what drives it, from the forecast alone. Last year's cash conversion should come as easily, explained in three sentences from the cash flow statement, the way a modelling buyer's analyst will.

Why it slips, and what holds it

The forecast stops being updated: a busy month, a finance seat on leave, and the weekly record develops gaps a buyer will notice. And working capital balloons without anyone seeing it, because nobody is looking at conversion.

Both are kept in front of the people who can act. The forecast and its accuracy line are a standing item at the weekly leadership meeting, so a missed week shows up as a gap in a record the leads look at every week. The cash flow statement and the conversion ratio sit on the first page of the monthly package, where a fall in conversion reaches the owner every month as the first sign of a working-capital swing.