Does your forecasting include a sensitivity analysis
Over the last few years, as part of our Business Mentoring Programme, we have been providing our clients with a sensitivity analysis around their profit and cash forecasts.
In recent months, we have also found that many of the traditional lenders are looking for such informative information to demonstrate the business has considered the 'What if' scenarios and truly understand their numbers.
A sensitivity analysis will take your forecasts and consider a few alternatives. Firstly to calculate how much more profitable and valuable the business could be, but also consider the impact on the business should certain objectives not be achieved.
We work with our clients to review their business and suggest how certain improvements can make a difference in their business. The improvement potential of the business may be just a few simple changes that help to improve the profit and cashflow. At this point, the sensitivity analysis would look at the position if the business successfully made such improvements.
A recent discussion with a client also highlighted how such an analysis can play a part in the teams motivation to take the right action. The business was projecting growth in their business and had already made considerable investment in equipment, vehicles and new recruits for the sales and operations teams. Much of the equipment and vehicles had been financed, therefore the cash impact was not being experienced at this time. The future finance repayments were to be financed by the growth of the business and the projected cashflow. However a simple question fuelled the motivation for the Sales and Operations Director - "What if". Instead of just talking about the theory of the impact, we were able to share their numbers based on a performance, that still projected growth but 5% less than he had forecasted. This showed that the business cashflow would suffer and some difficult decisions would be avoided if the forecasted performance actually happened. We all like to avoid pain!
Are you preparing a business plan and forecast for the bank? Have you considered a sensitivity analysis?
If we can share our experience of applying this principle with our clients, then please do not hesitate to contact us.