1. Brad Smith,
President & CEO
Tom Bogan,
CEO
MARCH - 2016
cfotechoutlook.com
Sriram Padmanabhan,
SVP,
NIIT Technologies
CXO INSIGHTS
Tom Berquist,
CFO,
TIBCO Software
CFO INSIGHTS
Kevin Held,
CFO,
TradingScreen
IN MY OPINION
Adaptive
Insights:
A Trailblazer in
Budgeting and
Forecasting
Tom Bogan,
CEO
$10

2. 34March 2016
Borrowing Base:
The Daily Benchmark
By Peter Stone, CFO,The ADS Group
I
started my professional career
as a staff accountant for a large
regional public accounting firm.
As time passed, my knowledge
expanded and my responsibilities
changed with promotions to senior
accountant and audit manager. Having
worked in public accounting for
approximately eight years, I wanted to
learn more about the operations aspect
of business and the daily challenges
outside of GAAP compliance. My desire
to learn was pushing me to expand
outside of the firm and my career at
auditing historical transactions was
about to change.
My career path is similar to other
CPA’s who have left public accounting.
I was fortunate to have built trusting
relationships with my clients and along
the way, and was offered a CFO position
for a privately-held manufacturing
CFO Insights
An example of the borrowing base calculation is as follows:
Accounts Receivable = $10,000,000
Discount Factor = 85%
Accounts Receivable Availability = $8,500,000 (A)
A + B = $11,000,000
Less: Outstanding LOC Balance (net of cash) = $2,000,000
Borrowing Base Availability = $9,000,000
Inventory = $5,000,000
Discount Factor = 50%
Inventory Availability = $2,500,000 (B)
company. Almost immediately, I
realized that the most basic of tools
and metrics need to be measured daily.
In my opinion, the most significant of
financial metrics is the daily borrowing
base. Borrowing base calculations
vary amongst financing arrangements,
but in general discounted collateral
(“margining”) is used for borrowing on
a line of credit. Common examples of
collateral include accounts receivable
and inventory. Most line of credits
require a borrowing base certificate to
be submitted monthly. The calculation
of the borrowing base is simple math,
but the importance of calculating it daily
is immeasurable. As a CFO, I was no
longer reviewing past transactions, but
now constantly looking into the future.
The daily borrowing base is essential
in a CFO role. It is an indication of
company trends, cash management and
financial planning. Many organizations
complete their monthly financial close
within 15 days of month-end. Without
a daily benchmark, this leaves 15 days
of missed time to analyze and correct
negative trends. This daily metric
allows the dissemination of information
timelier and allows management an
insight of future results. My suggestion
is to have an availability benchmark that
makes sense for your organization. In
developing a benchmark, it is important
to factor in the following components:
1. How much does availability vary in
the course of a month?
2. How many months of availability
are needed without making a drastic
change of action?
The daily borrowing base calculates
a single number and when comparing
against a benchmark, can easily be
translated into business operations
problems based on the inputs.
If, for instance, the daily borrowing
base number is less than the
benchmark, it would be one of three
reasons:
1. Accounts receivable are less than
expected. If this is the case, it could
be an indication that product is not
being shipped or possibly that sales are
late in getting invoiced. Lower than
anticipated accounts receivable could
also equate to less demand and sales
forecast adjustments.

3. 35March 2016
Peter Stone
2. Inventory is less than expected. If
inventory is less than expected it is could
be an indication that raw materials are
at risk of falling below re-order points
and procurement may incur expediting
charges. Running out of inventory
components could have drastic
negative effects on the production
workforce and meeting ship deadlines.
3. The outstanding balance on the line
of credit is higher than expected. This
input is based on variance throughout
the course of the month when
establishing the initial benchmark.
Cash flow can have large swings
on a daily basis for items such as
bi-weekly payroll and weekly check
runs. Whereas inventory consumption
and accounts receivable should be more
linear throughout the course of the
month, depending on your product and
industry.
Regardless of the situation, the daily
metric allows the identification of a po-
tential problem and allows for
timely resolution and
correction. When
compared to the
established
benchmark
daily, a more
in-depth
investigation
can be com-
pleted.
Not only
does the daily borrowing base allow
for better cash flow management,
but it can also be utilized when
performing check runs and negotiating
terms with vendors. The metric can be
provided to lenders more frequently
leading to increased communication
and mitigating any surprises. The
daily borrowing base allows for
superior financial planning insight. As
management initiatives are carried out,
it is the preservation of availability
that helps support identified growth
initiates to be taken advantage of.
The daily availability calculation
is easy math. The frequency of
the calculation is what makes it a
valuable tool. Regardless of a lending
requirement to submit a borrowing
certificate monthly, it is more for the
benefit of the organization as to where
the company is headed. Unlike public
accounting and ensuring everything
is accounted for correctly in the past,
this metric is an indication of things
to come.
$
My desire
to learn was
pushing me to
expand outside
of the firm and
my career at
auditing historical
transactions was
about to change