Multiple Cash Flow Scenario That Helps Adjust for Uncertainty

Theresa FerroneBlog

COVID-19 and the associated shelter-in-place orders around the country have impacted business leaders enormously. Everyone is waiting for the dust to settle to see how deeply the economic downturn may go. The crucible of the post-COVID marketplace will ramp up urgency; business owners need to understand and respond with increasingly accurate and effective strategies. COVID-19 has not changed the reality that 10,000 baby boomers will turn 65 everyday and they begin to slow down and consider retirement. A surge in transitions to retirement  means more financial activity and capital demands will be coming to the market just as the effects of COVID-19 and the associated shelter-in-place requirements are being felt. 

We know the level of liquidity in the marketplace is at unprecedented levels. The pressure to create investment in business assets can be expected to increase. The issue for business owners is “how can I learn to be more effective at raising capital or selling my business?” The pressure for investors and lenders will be “how do I get the information I need to put money to work while effectively managing risk?”     

  • Tell the story. Start with available cash, add or subtract the results of company operations, add or subtract changes in balance sheet accounts and solve for ending cash. When done properly, it is telling a story with numbers.
  • Use a 13-week cash flow
  • Use a sensitivity analysis. A sensitivity analysis is a method for modifying inputs or assumptions in a financial model based on different expected economic outcomes or levels of performance. When an initial forecast is based on good historical information, these modifications, when entered into a model, provide alternative views of the future and help users to draw more educated conclusions.  It may also be useful to use an outside third party
  • “Due Diligence” is the Standard. Due diligence is widely known as the investigation of a business before signing a contract, or “an act with a certain standard of care.” 

It is a process best devised and begun years before a crisis, but it needs to be done as soon as possible. For lenders and investors, a cash flow forecast is kind of an insurance policy against catastrophic oversight and a tool to help match the capital availability they offer with the true capital needs of the company. The smart business owner is wise to recognize and embrace the power of due diligence and the power of cash flow forecasting.

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