The Covenant Playbook: Running to Headroom, Not From It

We need to mange this challenge... or we need to call your Mom!

Objective: preserve time and options by managing to headroom, not just to plan. 

System: a three layer operating model that integrates cash, borrowing base, and covenant reporting.

Rhythm: weekly cash and covenant packet, monthly scenario review, quarterly lender alignment. 

Outcome: fewer surprises, faster corrective action, stronger lender confidence, better exit narrative.

1. What Good Looks Like

• Daily cash position with same day reconciliation.

• 13 week cash forecast with weekly refresh and variance closure in 24 hours.

• Borrowing base hygiene with aging, eligibility, and dispute control.

• Covenant portal with current metrics, trend, headroom, and scenarios.

• Named owners, fixed cadences, and standard reason codes for every variance.

2. Covenant Map

Create a one page summary for all covenants in force.

Headroom formulas

• Leverage headroom = Threshold minus Current.

• Coverage headroom = Current minus Threshold.

• Liquidity headroom = Current minus Threshold.

3. Three Layer Operating System

Layer A. Cash Engine

• Daily cash position.

• 13 week forecast with receipts, disbursements, and net change.

• Variance drill with standard codes: timing, volume, price, one time, error.

• Control points: cut off times, sign off checklist, bank reconciliation.

Layer B. Borrowing Base Discipline

• AR aging hygiene: current percent, largest disputes, DSO trend.

• Inventory eligibility: finished goods percent, ineligible causes, turns.

• Documentation: proof of shipment, proof of delivery, credit memo discipline.

• Weekly dispute blitz with top ten reason codes and cycle time targets.

Layer C. Covenant Portal

• Packet content: updated ratios, headroom chart, base case and two downside cases, actions in flight, next decisions.

• Distribution: CFO, Treasurer, CEO, Operating Partner, chair of audit committee.

• Access: read only folder, immutable monthly archive.

4. 30 60 90 Day Plan

Days 1 to 30: Stabilize and See

• Build a single tile dashboard for 13 week cash: week start cash, inflows, outflows, ending cash.

• Lock the weekly cash standup: 30 minutes, fixed agenda, attendees CFO, Treasurer, Controller, FP and A, Operations.

• Publish covenant summary and assign owners.

• Clean the AR aging: assign dispute owners, set 14 day closure target for top ten cases.

• Deliverables: dashboard v1, variance log with codes, covenant one pager, AR dispute list.

Days 31 to 60: Improve and Prove

• Free cash from working capital:

  • AR: accelerate collections, term compliance, dispute closure.

  • AP: term harmonization, discount policy, approval cadence.

  • Inventory: turns improvement in two families, slow moving action.

• Build lender ready packet with headroom scenarios.

• Dry run with internal review: challenge assumptions, document sensitivities.

• Deliverables: cash improvement plan with quantified impact, lender packet v1.

Days 61 to 90: Shape and Negotiate

• If relief is required, propose targeted adjustments with operating proof: temporary step down, short dated holiday, or revised definition mechanics.

• Add third party validation where credibility is critical.

• Align board on commitments, monitoring, and contingency triggers.

• Deliverables: executed action list, updated covenants if negotiated, archive of packets and decisions.

5. Headroom Math: Mini Toolkit

Core equations

• Net debt = Total debt minus cash.

• Leverage ratio = Net debt divided by LTM EBITDA.

• Interest coverage = EBITDA divided by cash interest.

• Fixed charge coverage = (EBITDA minus capex minus cash taxes) divided by (cash interest plus required principal).

• Equity value = (EBITDA times multiple) minus net debt.

Sensitivity checklist

• EBITDA minus 10 percent.

• Interest plus 200 basis points.

• Working capital outflow minus 10,000,000 over eight weeks.

• Contingent liability paid in week 6.

Document the exact impact on each covenant for each sensitivity.

6. Dashboards and Cadence

Weekly cash standup agenda

• Week n minus 1 variance: top five over or under with reason codes and owners.

• Week n forecast: risks, upside, decisions required.

• Borrowing base: current availability, ineligible summary, disputes in flight.

• Covenant portal: current headroom and any threshold proximity alerts.

Monthly scenario review

• Update base and two downside cases.

• Confirm action stack, owners, dates, and expected cash effect.

• Reconcile data to financial statements.

Quarterly lender alignment

• Share trend, actions delivered, and next quarter plan.

• Invite challenge questions and lock follow ups.

7. Working Capital Plays

Accounts receivable

• Dispute blitz on top ten reasons.

• Short, clear escalation path for customers and internal teams.

• Early pay incentives only where contribution margin supports it.

Accounts payable

• Normalize terms across suppliers.

• No rogue early pays unless ROI exceeds hurdle.

• Approval cadence aligned with cash calendar.

Inventory

• Two family turn program with SKU level actions.

• Slow moving stock plan: markdown, bundle, refurb, scrap.

• Forecast discipline: S and OP review, safety stock rules, supplier MOQs.

8. Lender Pack: Contents

• Covenant summary and headroom trend lines.

• 13 week cash forecast and the last four weeks of variance tables.

• Working capital program: measures, dollars unlocked to date, next actions.

• Risk register: item, probability, impact, mitigation, owner.

• Board and management cadence summary.

• If applicable, independent validation excerpts.

9. Risk and Mitigation

10. Exit Back Packaging

• Before and after packets with dates and owners.

• Headroom trend showing improved resilience.

• Cash unlocked from AR, AP, inventory with audited tie outs.

• Lender letters or emails that confirm confidence and cadence.

• Evidence that routines survive personnel changes.

11. One Page Checklist

• Daily cash position reconciled.

• 13 week forecast refreshed and variances closed.

• AR disputes logged with owners and cycle time targets.

• Borrowing base ineligibles tracked and reduced.

• Covenant portal current with scenarios.

• Weekly cash standup and monthly scenario review on calendar.

• Lender packet archived monthly.

• Risk register updated with actions.

12. Standard Artifacts

• Variance log template with codes.

• Covenant dashboard layout with headroom bar.

• Dispute reason code dictionary.

• Weekly standup agenda.

• Monthly scenario slide with base and two downsides.

VCII Note and Copyright

TVC Next treats cash and covenants as frontline work. The objective is predictable headroom supported by routines, dashboards, and documented decisions that a buyer and a lender can verify.
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