• Private equity portfolio companies are often highly leveraged, making the formation and maintenance of strong cash flow forecasting capabilities especially critical.
  • While EBITDA was once a reliable surrogate for the cash flow of a business, the growing breadth and volume of permissible adjustments has made it so CFOs must track true cash generation.
  • Transparency to past, current, and future liquidity informs key operating decisions and helps uncover potential issues in the cash conversion cycle.

As we know, it is essential that PE-backed CFOs keep a firm handle on their company’s current and future cash position. Recent turbulence in the market and supply chain has made this visibility more critical than ever. 

Liquidity is key to the success of any enterprise, yet the nature of the typical PE-backed company presents unique challenges and opportunities that render cash flow management especially vital. A business that operates without a firm command of the volume and velocity of its cash generation and consumption will likely encounter painful obstructions that would have otherwise been avoided. EBITDA (and adjusted EBITDA, in particular) can no longer be treated as true indicators of liquidity, and the fixation with these metrics in many PE-backed environments makes visibility to the company’s true cash position all the more critical. 

PE-backed CFOs utilize several best practices to expertly track and forecast cash flow. 

The Case for Discounted Cash Forecasting (DCF) 

Company valuation is the cornerstone of public and private investment planning. A number of factors impact a private company’s valuation – from operating history, management, earnings and cash flow, to capital structure, business risk and liquidity. Yet, in private markets, the lack of market value for debt and equity as well as the unavailability of public information present unique complexities. To this end, cash flow projections are inherently important to plan from a liquidity as well as risk perspective.  

The concept of discounted cash forecasting (DCF), a valuation method that aims to assess the value of an investment based on future cash flow projections, also provides insight on how PE portfolios may evolve. The cash flow simulations allow investors and CFOs to assess new opportunities and even make mo...