‘What if’ Scenarios – An Essential Part of Your Cash Flow Forecasting

‘What if’ scenario functionality is for financial occurrences that could-maybe-possibly happen and if they did this is what would happen to your cash flow. 

What do I mean by that?…well, let me first say that your main cash flow forecasting should only be for cash in/out that you know should occur – like sales won/made, office rent, salaries and other known costs etc..  

The ‘What if’ part is for scenarios like potential new sales or extra costs but not confirmed ones, like, “what if we open a new office, make a big investment or take on new staff etc – what would happen to our cash position then?!”

This can be seen from the graph below. In this scenario, the ‘what if’ makes the cash position worse early on but better eventually – knowing this will help you prepare for those early days where your cash is most stressed.

 

the red line represents the actual cash flow; the blue line represents the 'what if' forecast

If a ‘What if’ scenario became a confirmed forecast, e.g. contract/sale won or new staff now starting, then these values should be moved into the main cash in/out sections.  Multiple and merging scenarios is a useful exercise if you have a number of different possibilities all going on at once. 

Sensitivity / Stress-Testing your Assumptions

An important function of your ‘What if’ forecasting is to run a sensitivity check, i.e. stress test your assumptions. You apply a % value to your numbers to represent your certainty level of likelihood of these ‘What if’ cash in/out scenarios, actually occurring.  The higher the % the more certain you are.  If you entered £1,000 and set the % value to 50%, £500 will now appear for that entry.

You are now able to vary this value to reflect how certain you feel about your ‘What if’ scenarios.  For a tender/prospect list ‘What if’ you should experiment with various % values to see the effect on the cash flow.  The higher this % needs to be to show a healthy cash flow forecast the more critical those ‘What if’ values are, e.g. if a 90% value is required for your cash flow to remain healthy, then this means a very high success rate is required for ALL new potential sales – is this realistic? What can be done now to reduce this risk? Whereas, if a 30% value still provides a healthy cashflow forecast then those new potential sales are less critical to maintaining positive cashflow.

Or, on a significant investment scenario, like taking on new staff or moving to a bigger office, ‘what if’ the costs are 20, 30, 40% higher than planned?  At what point does it ‘break’ your forecast?

For a stress testing guide on a tender / prospect ‘What if’ scenario:

10% – Highly speculative and should probably not be added to the ‘What if’ sections until more certain.

25% – there is a chance but still highly speculative.

50% – There is a 50/50 chance. This would be worth adding but still by no means a figure that can carry too much weight, still speculative.

75% – This is now starting to look more hopeful, still not guaranteed but has some justification that it has genuine potential for conversion.

90% – This is now starting to look very good although still not confirmed.

95% – This is almost confirmed, possibly a verbal sale but waiting for the paperwork to follow.

100% – Now is the time to remove it from the ‘What If’ section and transfer it to the Cash In/Out forecast section.

With the key point of using the ‘What if’ forecasting function is to keep your proper cash in/out forecast as relevant and accurate as possible.

Sign up for your 60-day free trial and go to the Help section for further guidance.  If you have any queries then please don’t hesitate to email me at alanjmccafferty@simplycashflow.com

Alan J McCafferty

Founder & CEO, SimplyCashflow