Why do you need Scenarios in your cashflow forecast?
When you are preparing a cashflow forecasts it is important to include different scenarios into the forecast so that you can prepare for different trading conditions.
These could include the effect of losing a major client, spend money on advertising or different success rates for an advertising campaign that you are running.
Useful scenarios
Running these scenarios will enable you to start to make plans earlier should any of the scenarios start to become a reality. Having a plan in places will enable you business to react quicker and when the signs of a difference in the original cashflow forecast.
One of these scenarios in the past few months would be the effect on the Coronavirus on the UK economy. If you were to prepare a cashflow with hindsight now you would have included scenarios based on the impact that it would have on your business. Whilst it would not have stopped this happening, it would have meant that you would have reacted quicker to the outbreak before it started to take grip in the UK.
One such scenario that could be run now will be how long the Coronavirus will stay around and be impacting your business and before we can start to get back to trading as normal. Running this, we can include timings of a few months, a years impact or a couple of years impact.
Once you have this information you can use this to make strategic decisions for your business. Do you need to review the working capital requirements for your business and review the expenditure to reserve as much working capital as possible? It may be that looking at the cashflow forecast that you decide that you need to adapt to new working practices to find a way forward if the impact will be felt for several years.
“It is of strategic importance for your business that you use these scenarios to look forward and make better decisions for your business. ”
This level of forecasting should be a fundamental part of your business now but also in the future as we move back to the ‘new normal’ after the Coronavirus pandemic. You should not be just using for the accounts to look back on the business and to give yourself a mental score as to how you performed in the last twelve months, it is of strategic importance for your business that you use this information to look forward and make better decisions for your business.
Make better decisions and you will create a more successful business for yourself and be more prepared for when times are good and more importantly when they are difficult.