Surprisingly, we are encountering numerous management teams that did a great job of growing their businesses in good times, but are not meeting expectations today. For instance, we recently completed an investigative accounting engagement for a financial institution with a large exposure to a company that purchased its goods at contractual fixed rates, but sold them at variable rates. Certainly, red flags were raised about the associated risks of such a business model. However, "nobody" expected the free fall in the market pricing of the company's products that ended up occurring.

To ascertain how much blood had been lost and provide information to help our client decide what to do with its borrower, we:

1. Reviewed the company's weekly liquidity model/cash flow forecast,
2. Reviewed the company's borrowing base, which was submitted twice/week to the lender, and
3. Managed the accounting of cash receipts for a business unit that was being sold.

Through these activities, we discovered:

1. Liquidity Model/Cash Flow Forecast - While the company updated its model/forecast on a weekly basis based on actual revenue and expenses, they were not accurate. The individuals responsible for the model were new to the company and inexperienced with the accounting nuances of its niche industry.
2. Borrowing Base - Numerous mistakes in the calculations and incorrect system information were found. The responsible staff member was not familiar with the systems.
3. Cash Receipts - A process was in place to allocate cash receipts for the business unit that was being sold. However, the source system information was inaccurate so the initial terms negotiated with the buyer were based on incorrect numbers.

Even though the borrower appeared to have the requisite processes in place to forecast future cash flow, inaccurate information rendered the reports useless. If you are curious about the quality of the financial reports and projections you are getting from your portfolio companies, we may be able to help you avert a financial disaster.

Brandlin & Associates is an exclusive provider of accounting due diligence, financial consulting and strategic consulting services. We pride ourselves on offering superior technical expertise, years of practical experience and unparalleled service to decipher financial and operational performance metrics. As a result, our clients are able to make informed decisions in a timely manner.

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