ACC 660 Module 5 Cash Management Assignment Example

Thirteen-Week Cash Flow Forecast, Fourth Quarter

[Student Name]

Southern New Hampshire University

ACC 660: Controllership

Module Five Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Thirteen-Week Cash Flow Forecast, Fourth Quarter

Introduction

The fourth quarter brings an unusual cluster of payments: a quarterly estimated tax payment, quarterly doctor production bonuses, a new MRI for the Denver hospital, the closing of a hospital acquisition in Fort Collins and the term loan's quarterly interest and principal. The sponsor asked the controller whether the group can absorb these without breaching its covenants. This assignment builds a 13-week direct cash forecast starting with $6.2 million of cash and a $25 million revolver with $9 million drawn (Roehl-Anderson, 2013).

Receipts and Payments

Receipts are mostly card payments at the time of service, which settle in two days, so weekly receipts track revenue closely at about $4.37 million. Pet insurance reimbursements and referral clinic receivables are small and are included in that figure. Payroll of about $3.37 million is paid every other week. Drug and supply vendors are paid weekly, about $0.92 million, and other operating and overhead costs about $0.55 million a week. Rent of $1.23 million is paid in the first week of each month. Nonoperating items are scheduled by date: the $3.0 million estimated tax payment in week 3, $1.8 million of bonuses in week 5, the $2.2 million MRI in week 7, the $14 million acquisition in week 9, funded by a $10 million delayed-draw term loan and $4 million of cash, and $5.0 million of interest plus $0.59 million of principal in week 13.

The Forecast

Thirteen-week forecast summary, in millions

Week by week, cash dips to $3.93 million in week 3 after the tax payment, $3.33 million in week 5 after bonuses, $0.76 million in week 9 after the acquisition closes and nearly zero in week 13 after interest. The company's policy is to hold at least $2 million of operating cash across 14 hospitals, enough to cover a payroll shortfall or a delayed card settlement, so the plan draws $2 million on the revolver in week 9 and another $2 million in week 13, leaving $4.03 million of cash at quarter end and $12 million of revolver availability. Each draw is requested two business days ahead, as the credit agreement requires.

Covenant Tests

The loan has two financial covenants. The minimum liquidity covenant requires cash plus revolver availability of at least $10 million at all times; the lowest point in the forecast is about $16 million, so it passes comfortably. The debt-to-EBITDA covenant, tested at quarter end on trailing twelve-month EBITDA, is tighter. After the acquisition, total debt rises to about $249 million, while EBITDA, including the acquired hospital's pro forma $1.9 million and the qualifying add-backs from Module Four, is about $46.2 million. The ratio is 5.4 against a limit of 5.5. In dollar terms, EBITDA could fall about $0.9 million before a breach, a thin cushion for a business whose quarterly EBITDA can vary by more than that.

Recommended Actions

Three actions would widen the margin, and none of them changes the operating plan. Delaying the MRI purchase to week 15, after the quarter-end test, keeps $2.2 million of cash and avoids one revolver draw, reducing quarter-end debt to about $247 million and the ratio to about 5.35. Asking the sponsor to fund part of the acquisition with equity, $4 million, would reduce debt further, bringing the ratio below 5.3. And the controller should ask the lenders now, not at quarter end, whether they would consent to treating the MRI as a growth investment excluded from the test, as some agreements allow. Kim et al. (1998) found that firms with costlier external financing hold more cash, which supports keeping a larger buffer in a company this close to its limits. Graham et al. (2005) report that executives often sacrifice economic value to meet earnings benchmarks; a controller presenting these options should make clear that delaying the MRI is a timing choice, not a cost saving.

Reconciling to the Budget

The budget's rolling forecast, built on an accrual basis, shows fourth-quarter EBITDA of about $12.4 million, which might suggest ample cash. The direct forecast explains the gap: about $5.6 million of debt service, $3.0 million of taxes, $2.2 million of capital spending and $14 million for the acquisition are not in EBITDA, and the timing of payroll and rent concentrates outflows in particular weeks. Reconciling the two each month, starting from EBITDA and adjusting for these items and working capital, shows the sponsor that the cash forecast is consistent with the operating plan rather than a separate guess.

A Weaker Quarter

If weekly receipts ran 5 percent below forecast, about $0.22 million less each week, cash would be about $2.8 million lower by week 13. The company would need a third revolver draw of about $3 million, leaving revolver availability near $9 million and liquidity of about $13 million, still above the $10 million covenant. EBITDA would also fall by about $2 million for the quarter, which would push the debt ratio above 5.5 unless the MRI were delayed and the sponsor contributed equity. That result is why the recommendations should be approved before the quarter begins, not after a weak October.

Updating and Accuracy

The forecast will be rolled forward every Monday, with actual receipts and payments replacing forecasts and a new week added. The controller will track forecast accuracy, actual versus forecast cash each week, by line, and investigate any variance above $500,000. Accuracy builds the sponsor's confidence in the forecast, which matters if the company needs a covenant waiver. Receipts are usually the least accurate line, so the treasury analyst will compare each week's card settlements with the practice systems' daily totals to catch processing delays early.

Conclusion

The group can absorb the quarter's payments with two $2 million revolver draws and will meet its liquidity covenant easily, but its debt-to-EBITDA ratio will be close to the limit. Delaying the MRI and adding sponsor equity to the acquisition would give a safer margin.

References

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002

Kim, C.-S., Mauer, D. C., & Sherman, A. E. (1998). The determinants of corporate liquidity: Theory and evidence. Journal of Financial and Quantitative Analysis, 33(3), 335-359. https://doi.org/10.2307/2331099

Roehl-Anderson, J. M. (2013). Controllership: The work of the managerial accountant (9th ed.). Wiley.