13-Week Cash Flow Under a Revolver Covenant
You are the treasurer at a specialty retailer with a $60 million asset-based revolver. The credit agreement requires minimum liquidity of $8 million and a springing fixed-charge coverage ratio of 1.1x if availability falls below $10 million. Today cash is $5.2 million and revolver availability is $9.4 million. Over the last quarter, DSO rose from 48 to 62 days, DPO fell from 35 to 30 days, and inventory days rose from 75 to 90. Monthly revenue is $18 million and COGS is 70% of revenue. The next 13 weeks include a $4.0 million quarterly tax payment, $2.5 million of committed capex, and a $6.0 million seasonal inventory build. The CFO wants to know whether the company will breach the covenant, whether to draw the revolver now, and whether stretching payables by 10 days is a safe lever. Suppliers have already threatened to tighten terms.
1. Estimate the cash tied up by the working-capital deterioration and compare it with available liquidity. State assumptions and limitations.
Read the worked answer
Use monthly revenue $18M and COGS 70% = $12.6M; 30-day month.
- DSO +14 days: $18M × 14/30 = $8.4M more receivables.
- DPO −5 days: $12.6M × 5/30 = $2.1M less payables.
- Inventory +15 days: $12.6M × 15/30 = $6.3M more inventory. Total working-capital drag ≈ $16.8M.
Available liquidity = $5.2M cash + $9.4M availability = $14.6M. The full drag exceeds liquidity by about $2.2M before considering the $4.0M tax and $2.5M capex. Limitation: these are stock changes, not all realized in 13 weeks; the $6.0M seasonal inventory build is part of the inventory change, so do not double-count it. Build a direct 13-week cash forecast by week; use the ratios only to size the risk.
2. Recommend a sequencing of actions for the 13-week window, including revolver draw and supplier terms, with covenant considerations.
Read the worked answer
First, update the 13-week direct forecast and confirm the covenant test. Availability of $9.4M is already below the $10M springing threshold, so the FCCR test is live; minimum liquidity is $14.6M today, above $8M. Drawing the revolver converts availability into cash but does not increase cash plus availability, so it protects payment capacity, not the liquidity ratio.
Sequence: (1) draw $4–6M before the tax payment to avoid a cash crunch; (2) cut the seasonal inventory build by at least 20% and delay non-committed capex; (3) negotiate 10-day payables extension only with the top five suppliers, in writing, and avoid taking unauthorized deductions; (4) accelerate collections on top 20 customers and consider receivables factoring if DSO does not improve; (5) brief lenders before the availability drop. Stretching payables by 10 days preserves about $4.2M ($12.6M × 10/30) but risks supply disruption; use it as a bridge, not a plan.
3. What would you monitor weekly and what trigger would cause escalation?
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Monitor weekly: cash balance, revolver availability, cash plus availability, FCCR and its headroom, 13-week forecast variance, DSO/DPO/inventory days, top-customer collections, supplier terms and hold notices, and inventory receipts against the build plan. Escalation triggers: availability below $8.5M; cash plus availability below $10M with a downward trend; FCCR below 1.15x; a top-five supplier demanding cash on delivery; or forecast variance worse than $1M in any two consecutive weeks. Escalate to the CFO and lender relationship lead within 24 hours, with a revised 13-week forecast and a specific ask (additional availability, covenant waiver, or capex deferral).