Objectives

The analysis enables you to detect liquidity issues that could result in a cash shortage. A company’s viability depends on its capability of generating cash form operations.

Results from the liquidity analysis will better enable financial management to meet its working capital needs. The following graph illustrates the results from one of these types of analyses.

Analysis and Financial Data

The following indicators and tests are applied to cash sources and uses data:

• Sources of financial information include bank statements, balance sheets, income statements, inventory reports, etc.
• Working capital components include inventory, receivables, accounts payables, available bank cash, etc.
• Financial measurements used include Days Sales Outstanding, Inventory Turnover, Days Payables Outstanding, Bank float estimates, etc.
• Other factors taken into account include: sales demand, pricing, billing terms, collections, and other measurements of current operations and business performance.
• The above information is used to quantify historical Free Cash Throw-off results over various time periods.
• Models are then built using different algorithms to predict the company’s capacity to generate future Free Cash Flow and to identify periods of cash shortages.

Benefits

The benefits that can be realized from utilizing this solution:

• Identify the direction and inter-relationships between the various sources and uses of cash.
• Predict future liquidity issues, identify the source(s) of the deteriorating conditions and affect change before it is too late.