Scenario Planning: How to secure cash flow and profit?

Learn how to build scenarios to develop scenario planning as a strategic financial advisory service.

The recent rise in oil prices can create cost pressures on fuel, energy, and raw materials prices for all businesses. Entrepreneurs consider different options and how they impact cash and profitability in practice. What if we hire a new employee? What if transportation costs increase? What if we give a new customer 60-day payment terms? The income statement and bank balance show what has already happened. Scenarios show what could happen; they allow you to simulate and forecast different alternatives. Scenarios utilize accounting data, the entrepreneur’s plans, and the accountant’s financial expertise. In this article, we will cover:

• What is a scenario

• How to build your first scenario

• How to further develop your scenario

What is a scenario?

A scenario is a financial simulation where one or more variables are changed to see how they affect key figures such as:

• Revenue

• Profitability

• Cash flow

• Financing needs
  

A scenario is a decision-making tool for entrepreneurs.

How to build a scenario

Keep the scenario simple. Focus on a maximum of three concrete questions, such as:

• What do profit and cash look like if a new employee is hired?

• What is the cash balance in six months if a new customer has 60-day payment terms?

• What do profit and cash look like if external services increase by 15%?

Use actual data as the foundation

You can build a scenario from scratch or import actual figures as the basis for your forecasting model, for example, from the general ledger. Create three scenarios: A, B, and C

Keep your first “what if” model simple:

• Scenario A = base case: hire the employee and sales develop as last year

• Scenario B = optimistic: hire the employee and achieve 20% sales growth

• Scenario C = downside: hire the employee, but sales drop by 20%
  

Save the model and get answers such as:

• How much does profit improve or decline?

• How much cash is in the bank?

• When is the break-even point reached?

  
  

When your basic model works, expand it gradually by testing price changes, payment terms, and loan repayments to understand their real impact on profitability and cash flow. At this stage, the model becomes a continuous advisory tool rather than just a calculation.

Tips for success

1. Keep it simple. Focus on no more than three key variables at a time.

2. Add variables one at a time. Expand the model step by step once the basics work.

3. Compare with actuals. A scenario is a strategic decision-making tool, not a report. Regular reporting shows how actual performance compares to scenarios, which is essential for practical decision-making.

Want to create scenarios easily with an automation?

You can easily create scenarios with Riskrate automation and also track actual performance regularly. Book a free 30-minute session with our team, and we’ll show you how to get started today. We’re happy to help! Report with a click.

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