1. | |JULY 2014
1CIOReview
February 2016
Capital Markets
1
Nelson Lin,
President
Robocoder
Corporation:
Real-Time Trading
Strategies for Triple
Digit Returns
CAPITALMARKETSCIOOUTLOOK.COM FEBRUARY - 2016
Steven Pae,
SVP-IT,
CIT
IN MY OPINION
CIO INSIGHTS
Brad Bodell,
SVP & CIO,
CNO Financial Group, Inc.

2. | |JULY 2014
14CIOReview
February 2016
Capital Markets
25
Borrowing
Base: The Daily
Benchmark
By Peter Stone, CFO,TheADS Group
CX INSIGHTS
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
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”) isused
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.
An example of the borrowing base calculation is as
follows:
The calculation of the borrowing base is simple
math, but the importance of calculating it daily is
I
Accounts Receivable =
Inventory =
Discount Factor =
Discount Factor =
Less: Outstanding LOC Balance (net of cash) =
Accounts Receivable Availability =
Inventory Availability =
Borrowing Base Availability =
A + B = $11,000,000
$10,000,000
$5,000,000
$8,500,000 (A)
$2,500,000 (B)
$9,000,000
85%
50%
$2,000,000
Peter Stone

3. | |JULY 2014
15CIOReview
February 2016
Capital Markets
26
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.
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 potential problem and allows
for timely resolution and correction.
When compared to the established
benchmark daily, a more in-depth
investigation can be completed.
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