How and When to Use a Cash Flow Scenario

What is a cash flow scenario

Before we dive into specifics, it's crucial to understand what a scenario is. Essentially, it's a financial blueprint that outlines projected revenue streams and expenses for the foreseeable future. Scenarios allow you to test out various business hypotheses and visualize the potential outcomes of different decisions.

Imagine you discover that your current cash flow plan indicates expenses exceeding anticipated income, and your cash reserves are dwindling rapidly. This calls for immediate action, prompting you to evaluate your options: slashing office or utility costs (rent, equipment, phone expenses), securing a new client, or venturing into product sales.

At this stage, the future may appear hazy, with the ultimate destination uncertain. However, by incorporating these ideas into a scenario and analyzing the resulting cash flow projections, you can gain valuable insights into the potential financial trajectories.

Why is it a good idea to create a cash flow scenario

Scenarios are a cash flow management tool that can improve the quality of organizational decision-making. By taking the time to create cash flow scenarios, you can increase your chances of surviving and thriving in challenging times. Let's see when you can use scenario analysis.

Best case scenario

Identify potential opportunities By projecting your future cash flows, you can identify favorable circumstances to improve your business's financial performance, such as uncovering new revenue streams or reducing expenses.

Make strategic investments Cash flow scenarios can help you to make key investments that will pay off in the long run, such as expanding into new markets or developing new products.

Increase shareholder value By improving your business's financial performance, you can increase shareholder value and make your company more attractive to potential investors.

Worst case scenario

Avoid financial hardship By identifying potential problems early on, you can take steps to avoid hard times, such as negotiating with creditors or restructuring your business.

Protect your business Cash flow scenarios can help you protect your business from the negative effects of economic downturns, recessions, market fluctuations, and unforeseen events like natural disasters or pandemics that pose significant threats to your company's financial stability.

With ThinkOut, you can build as many scenarios as you want, and then compare the results simultaneously, in real time.

When is a cash flow scenario useful to your business?

Business investment

When evaluating your business and thinking about growing the commercial activity, a cash flow scenario will come in handy. It can help to calculate purchasing new equipment or expanding into a new market. Even more, in this scenario, you can determine the impact of the investment on the company's cash flow over time, identifying potential risks associated with it.

Partnering with another business

If you have that on your roadmap, a scenario will help you in assessing the financial viability of a potential partnership, and analyze the combined cash flow of the two businesses, thus identifying potential synergies and areas for cost savings.

Hiring more staff

Estimating the cost of additional staff, including salaries, benefits, and payroll taxes, and projecting the impact of increased staffing on the company's cash flow is valuable information that you can obtain from a cash flow scenario.

Launch a new product or line of business

Build a cash flow scenario to estimate the development and marketing costs of the new product or line of business. Then, projecting the sales and revenue potential will be also beneficial in determining the net impact on your company's cash flow.

Cutting down expenses

Identifying areas where the company can reduce expenses, such as renegotiating supplier contracts or reducing travel costs will be of use when estimating the potential savings from reducing expenses. After this, you can translate this information into projections of the impact of the cost reductions on the company's cash flow.

Identify early warning signs

A cash flow scenario will allow you to track your financial performance and identify potential red flags that may signal any difficulties. This early warning can provide valuable time to take corrective actions and prevent a crisis from unfolding.

Secure financing

If you are seeking outside sources of financing, a well-prepared cash flow scenario can bolster your business's credibility. Lenders and investors are more likely to provide support to entrepreneurs who demonstrate a clear understanding of their financial situation and a proactive approach to managing potential risks.

Negotiate favorable terms

Cash flow scenarios can be powerful negotiating tools when dealing with creditors or lenders. By presenting a realistic assessment of a business's financial position, businesses can advocate for more favorable terms and avoid unnecessary financial burdens.

Protect the business from liquidation

In extreme cases, a well-crafted cash flow scenario can even prevent a business from being liquidated. By identifying and addressing financial issues early on, you can minimize the risk of insolvency and safeguard your assets.