conducting-liquidity-and-viability-analysis

# Conducting Liquidity And Viability Analysis

## When To Use

- Building or reviewing a 13-week cash flow (TWCF) model for a distressed company
- Evaluating whether a business can fund operations through a restructuring timeline
- Assessing liquidity runway to determine filing urgency or need for DIP financing
- Identifying critical vendors whose non-payment would trigger operational shutdown
- Supporting going-concern opinions, lender negotiations, or board-level solvency decisions

## Inputs To Gather

- **Bank statements and cash ledger** — trailing 13 weeks minimum; 26 weeks preferred for seasonality
- **A/R aging schedule** — with collection history and concentration by customer
- **A/P aging schedule** — including past-due balances and vendor payment terms
- **Revolver/ABL borrowing base certificate** — current availability, reserves, and eligibility criteria
- **Debt service schedule** — principal, interest, fees, and covenant compliance dates
- **Payroll registers** — by pay period, including taxes, benefits, and contractor payments
- **Capital expenditure commitments** — contractual and discretionary, with deferral feasibility
- **Intercompany funding flows** — if multi-entity, map cash pooling and restricted subsidiaries
- **Material contracts list** — leases, supply agreements, and any minimum purchase obligations

## Workflow

1. **Establish the cash baseline**
   - Reconcile opening cash across all accounts (operating, restricted, escrow)
   - Identify trapped cash in foreign subsidiaries or restricted accounts
   - Confirm revolver availability net of reserves, letters of credit, and borrowing base limits

2. **Build the 13-week cash flow model**
   - Use a direct-method (receipts and disbursements) format — not indirect/accrual
   - Week 1–2: populate from known scheduled payments and confirmed receivables
   - Weeks 3–6: use rolling historical conversion rates for A/R and A/P
   - Weeks 7–13: apply trend-based or management-forecast assumptions with clear labels
   - Segregate operating cash flow from restructuring-related professional fees and costs
   - Model revolver draws/repayments dynamically based on weekly net cash position

3. **Stress-test and scenario the model**
   - **Base case**: management forecast with historical adjustment
   - **Downside case**: 10–20% revenue haircut, accelerated payables, delayed collections
   - **Liquidity crisis case**: loss of top customer or key supplier, revolver freeze
   - Identify the week where each scenario breaches minimum cash or triggers covenant default

4. **Perform critical vendor analysis**
   - Classify vendors into tiers: (1) sole-source/operational necessity, (2) important but substitutable, (3) discretionary
   - For Tier 1 vendors, assess: lead time for alternatives, contractual cure periods, lien exposure
   - Estimate the cost of vendor defection (production stoppage, lost revenue, substitute pricing)
   - Flag vendors with cross-default or setoff rights against receivables

5. **Assess going-concern viability**
   - Calculate liquidity runway in weeks under each scenario
   - Determine if the company can fund: (a) ordinary operations, (b) restructuring costs, (c) adequate protection payments simultaneously
   - Evaluate whether a consensual out-of-court process is feasible or if a filing is required to access DIP financing, the automatic stay, or Section 363 sale process [VERIFY — jurisdiction-specific filing considerations and local rules]
   - Identify specific triggers that would move the timeline forward (e.g., vendor acceleration, lender sweep, covenant breach date)

6. **Document assumptions and sensitivities**
   - Create an assumptions page listing every conversion rate, growth factor, and timing assumption
   - Flag which assumptions have the highest cash impact if wrong (tornado chart or sensitivity table)
   - Note all data gaps and their estimated materiality

## Output

- **13-Week Cash Flow Model** — weekly receipts and disbursements with beginning/ending cash, revolver balance, and minimum liquidity line
- **Scenario Summary Table** — side-by-side comparison of base, downside, and crisis cases showing the week liquidity is exhausted
- **Critical Vendor Matrix** — tiered vendor list with sole-source flags, estimated switching cost, and recommended payment priority
- **Liquidity Runway Assessment** — narrative memo stating weeks of runway under each scenario, key triggers, and recommended next steps (e.g., engage DIP lenders, prepare first-day motions, negotiate forbearance)
- **Assumptions and Sensitivity Log** — tabular list of all model inputs with source, confidence level, and cash impact range

## Quality Checks

- Confirm the TWCF beginning cash ties to the most recent bank statement — zero tolerance for unexplained variances
- Verify that total 13-week disbursements are cross-checked against trailing actuals (±10% variance requires explanation)
- Ensure revolver mechanics reflect actual credit agreement terms (borrowing base formula, reserves, dominion triggers) [VERIFY — confirm against executed credit agreement]
- Validate that critical vendor tier assignments have been reviewed against supply chain and operations teams — not solely from financial data
- Check that the downside scenario assumptions are genuinely adverse, not a marginal trim of the base case
- Confirm professional fee estimates reflect actual engagement letters and anticipated restructuring scope
- Flag any week where minimum operating cash falls below a two-week payroll coverage threshold