![]() Smooth revenue is steady and predictable, (e.g., the income from service contracts or other ongoing revenue streams). Like peanut butter, revenue comes in two varieties: smooth and chunky. ![]() Let’s look at the two key factors involved: revenue and cost drivers By preparing a most likely (base) case, best case, and worst case scenarios, you’ll have a clearer sense of what might lie ahead. But what if the cost of raw materials rises unexpectedly? Or if sales are lower than expected? You can account for these possibilities by incorporating them into a new scenario and seeing how they affect the end result. The formula is: current cash balance + inflows – outflows. What if? A cash-flow sensitivity analysis begins with a simple tally of all expected inflows (client receipts, loan proceeds, etc.) and outflows (vendor and loan payments, capital expenditures) in a given period. Here are the key components to setting up a cash-flow sensitivity analysis: “Honoring obligations is critical to the relationship businesses maintain with their supplies, balancing against being nice to clients when it comes to receivables.” ![]() “It’s about making sure you have sufficient cash on hand to meet current obligations and anticipating fluctuations in receipts and disbursements,” says James Hicks, head of treasury services at Regions Bank. Modeling your company’s cash-flow sensitivity can help you forecast your cash situation and address any potential shortfalls before they happen. When it turns negative, watch out: even a business that shows a profit on paper can find itself in dire straits. ![]() When you’re cash-flow positive, you can pay your bills on time and maintain a good relationship with vendors and other stakeholders. Cash flow is the lifeblood of any business. ![]()
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