Closure effect on cash
- Year one -USD 7,380,000 · Year two USD 480,000 · Payback 188 months.
Executive Intelligence · Decision Intelligence and Simulation
Decision Impact Forecasting
Forecast ranges from documented methods applied to verified history, with the stated error of the method.
Demonstration: Fairholme Holdings (fictional) · Diversified holding company. Fictional data and a scripted answer.
The situation
- Organisation
- Fairholme Holdings (fictional)
- Who is asking
- Group chief financial officer
- Industry
- Diversified holding company
- What happened
- The group plans to close a loss-making division and wants to see the profit and cash effect over two years, including the cost of closing.
The question asked
What would closing the division do to group profit and cash over the next two years?
What it reads, and who can see the result
- Division P&L exportRevenue, costs and overheads.
- Closure cost estimate documentRedundancy, contracts, assets.
- Reads
- The division's summary P&L and the closure cost estimate.
- Does not read
- Individual employee records.
- Permission
- Group finance access.
- Who sees it
- The group CFO and the board.
Try it
Change the assumptions. Every result and the answer below are recomputed from them, and a warning appears when a result crosses a stated limit.
- Overheads that remain
- USD 2,520,000
- Annual profit improvement after closure
- USD 480,000Revenue 24,000,000, direct costs 22,800,000 and allocated overheads 4,200,000: the division loses 3,000,000 after overheads.
- Year-one cash effect
- -USD 7,380,000
- Year-two cash effect
- USD 480,000
- Months to recover the closure cost
- 188
Year one is cash-negative: the closure cost exceeds the savings in the first year.
The answer
Simulated answer. Written for this fictional case, not produced by a live model. Only the figures in it are computed, from what you decided above.
Closing the division improves annual profit by USD 480,000; year one is -USD 7,380,000 and year two USD 480,000.
The division loses money after its share of group overheads [S1]; closing it removes the direct loss but not all the overheads, because 60% of them stay with the group. The closure itself costs USD 7,500,000 [S2].
It takes 188 months to recover the cost of closing. The overhead assumption is the one most often too optimistic: overheads allocated to a division rarely disappear with it.
Relies on: S1 · Division P&L, last yearS2 · Closure cost estimate
No approval is needed for this result: it is read-only insight, and nothing consequential happens because of it.
What it produces
Limits of this example
- Ignores revenue from related divisions and strategic value.
- Closure cost is an estimate and often rises.
- This is a scripted demonstration on fictional data. No model was called and no real organisation, person or result is shown.
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