A Chapter 11 forecast can show improving earnings while the business runs out of cash. A common forecasting mistake is treating projected profitability as evidence that the company can fund its reorganization. A credible forecast must explain when cash will arrive, when payments are due, and whether funding will be available to bridge the gap.
Profit does not establish liquidity. Revenue may be recognized before customers pay, while payroll, inventory purchases, and other operating costs require cash sooner. A forecast built around sales and margins can miss these timing differences.
Consider a hypothetical company that begins a week with $100,000 in available cash and expects $300,000 in customer collections. It must pay $250,000 in payroll and supplier costs that week. If $200,000 of the expected collections is delayed, only $200,000 is available against $250,000 in payments, creating a $50,000 funding gap. The delay may leave reported profit unchanged while making the original cash forecast unworkable.
Chapter 11 adds further cash demands and constraints. Professional fees, required case fees, applicable adequate-protection payments, and restructuring expenses should be modeled at their expected payment dates. Cash in a bank account is not necessarily available for unrestricted use: cash collateral generally requires the secured party's consent or court authorization. Financing assumptions should reflect approval requirements, draw conditions, and actual availability.
A practical way to address the problem is a rolling 13-week cash flow forecast that schedules receipts and disbursements by week. Collection assumptions should reflect receivables aging, customer payment history, and known disputes. Payment assumptions should incorporate current supplier terms and applicable court orders. The model should identify minimum cash needs and funding gaps.
The forecast also needs regular testing. Comparing actual results with projections helps distinguish timing differences from lasting deterioration. Downside scenarios should test slower collections, tighter supplier terms, or delayed financing. The short-term cash forecast should reconcile with longer-term operating and plan projections; it does not, by itself, establish plan feasibility.