Treasury And Liquidity

Treasury and liquidity

Profitable companies fail on cash. Earnings are an opinion arrived at through accruals; cash is a balance you either have on the day or do not.

Forecast cash directly

The indirect method — net income adjusted for non-cash items — is right for reporting and nearly useless for operating. Build a direct forecast of receipts and disbursements by week, from actual expected timing.

Thirteen weeks is the working horizon: long enough to act, short enough to be accurate. Roll it weekly and compare last week's forecast against what happened. A forecast never checked against outturn does not improve, and its errors are the most useful information it produces.

Model timing, not just amount. A receipt that arrives four days late is the same money and a different liquidity position.

Runway is a decision variable

Runway is cash divided by net burn, but the useful version is scenario-based: the plan, a downside where revenue underperforms, and the case where a large receivable slips.

Know your decision points in advance — the date by which a raise must start, the date a cost reduction must be committed to take effect in time. Decision dates always precede the cash-out date, often by more than people assume, and discovering that late removes the good options.

Working capital is free financing, or a leak

Cash is trapped in the cycle between paying for inputs and being paid for output:

• Receivables — invoice promptly and accurately; disputed invoices age indefinitely, and most

disputes trace to an invoice that did not match the contract. Watch the aging trend, not the average.

• Payables — take terms offered, pay on time rather than early, and do not fund suppliers who did

not ask to be funded.

• Inventory — every unit is cash on a shelf. See operations:supply-chain-and-logistics.

A week off the cycle is permanent working capital released, and it costs nothing in interest.

Where cash sits

Concentration in one bank is a single point of failure, as depositors have periodically rediscovered. Spread operating balances against counterparty limits, and hold reserves in instruments whose maturity matches when the money is needed.

Do not reach for yield with money you have a date for. The return on operating cash is not worth the liquidity risk, and treasury losses of this kind are always described afterwards as conservative investments.

Never

• Run the business on an indirect cash forecast.
• Report runway as a single number without a downside case.
• Let the decision date for financing pass while watching the cash-out date.
• Concentrate operating cash in one counterparty because the relationship is convenient.

Source & license

This open-source skill is cataloged on AgentStack and links to its original source — we do not rehost the code.

• Author: cbrock84
• Source: cbrock84/headcount
• License: MIT
• Homepage: https://cbrock84.github.io/headcount/

Install and usage instructions live in the source repository linked above.