• Livingstone Capital Group

Improve your cash flow forecast with sensitivity analysis

Many of the financial metrics and reports used to analyze a business have been developed for large mature businesses.  These metrics are often applied to smaller organizations to determine their success or viability. This may not be appropriate when analyzing items such as cash position. For example, larger companies may use operating income plus depreciation as a measure of cash.  This will not be the case for a S.M.E. that has a smaller capital base and reduced access to new capital.  A good cash flow forecast is a necessity for small to medium sized business as it will provide the most accurate view on the cash position.

A good Cash flow forecast will identify large cash variations and allow businesses time to put a plan in place for cash shortfalls.  When preparing a cash forecast, it is important to take into consideration three factors that will impact cash. The first factor to consider is that of forecasted sales.  The second will be required investment into working capital due to growth.  Lastly, the third factor is that of the timing of receipts and payments.  All three factors may have a positive or negative impact on cash.  Understanding the impact of these factors is the first step into creating a solid cash forecast.

To take your cash forecast to the next level, I suggest the use of sensitivity analysis.   Sensitivity analysis is a great tool in preparation for unexpected changes in the business environment.  The biggest benefit from this analysis is that one can identify the range between the best case and the worst case scenario.  Listed below are my top five things to model to understand these two scenarios:

Impact of 10% –  25% increase or decline in sales volume

Impact of price changes on sales; both positive and negative

Impact of cost of supplies due to supply shocks; note this may impact sales volume

Changes in the collections of receivables; 10 to 15 day both an increase or decline

Changes in credit terms from suppliers as volumes change

Once these five items have been modeled, a good contingency plan can be put in place to ensure an adequate cash position. It’s important to note an anticipated negative cash balance is not always a bad thing, however one that is a surprise could be quite challenging.

If you have any questions on this article or would like a sample model that takes into account these five sensitivity items feel free to reach out to me at

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