Private equity firms expended an eye-catching $478 billion on buyouts in 2019. For the third time in as many years, there was a sharp increase in global deal-making as PE recorded its biggest worldwide spend since 2007.
Numerous factors are driving private capital’s continued upward trajectory, including cheap debt and large inflows of cash via pension funds and other investors, but the rise in PE has also been concurrent with the steep decline of IPOs. According to an October 2019 report by EY, this coalescence of events is among the most radical developments in capital markets since the 19th century.
The sustained growth of private equity firms has also influenced certain procedures in the areas of cash and liquidity management. Although once a niche practice, employed almost exclusively by PE, the 13-week cash flow forecasting model is now in widespread use across the corporate landscape.
At CashAnalytics, we’ve witnessed, particularly in recent years, the 13-week model become the default choice for companies setting up a new cash flow forecasting process. This shift is reflected by the wide variety of businesses, ranging from PE to publicly listed to privately held, for whom we have created customized 13-week cash flow forecasts.
Before further exploring just why this forecasting time horizon is utilized to the degree that it is, we would advise those considering implementing a 13-week forecast to first institute a process that will meet the requirements of all key stakeholders. We discuss this, and much more, in our 13-week cash flow forecast setup guide.
Striking the Perfect Balance
It is no secret that the reliability of a forecast declines the further it extends into the future, but the 13-week timeframe strikes an almost perfect balance between range and accuracy. By encompassing a full quarter, the 13-week model is short enough to empower agile decision-making but also sufficiently substantial to support medium-term strategy.
By availing of this forecast, businesses will always have clear visibility over cash levels for the next quarter-end, and senior management will invariably seek reports on cash balances that align with their own key reporting dates.
And, because this model is segmented into weekly reporting periods, thus providing enhanced granularity, it permits companies to safeguard against the short-term planning gap. In the context of day-to-day liquidity risk management, the 13-week forecast has been shown to reliably detect potential shortfalls early enough for them to be addressed before materializing.
Extending to the medium-term, the timeline enables cash management planning, such as debt drawdowns or short-term investments, but it does not overlap with long-term cash management planning so minimal reconciliation is required.
Another hallmark of the 13-week model is its capacity to satisfy the requirements of multiple stakeholders, such as investors and banks, because, along with several other useful functionalities, it can exhibit how a firm’s full cash flow evolves over a significant future period.
Banks, for example, will often request a 13-week cash flow forecast to gauge a company’s future covenant levels or, more broadly, their ongoing ability to service debts. It is favorable to investors, namely private equity, because it not only allows them to closely monitor a business’s short and medium-term cash and liquidity levels but also evaluate its overall health.
For businesses considering setting up a new forecasting process, or updating their existing one, adopting a specialized software solution will immediately improve the accuracy and quality of the forecast, whatever the time horizon.