Bridging the Gap: Effective Cash Flow Sensitivity Analysis

Anticipating how future events will affect your cash flow can help your business ward off trouble.

Cash flow is the lifeblood of any business. When you have positive cash flow, you can pay your bills on time and maintain a good relationship with vendors and other stakeholders.

When cash flow turns negative, watch out. Even a business that shows a profit on paper can find itself in dire straits. Modeling your company’s cash flow sensitivity can help you forecast your cash situation and allow you to address potential shortfalls before they happen.

“Sensitivity analysis is about making sure you have sufficient cash on hand to meet current obligations and anticipating fluctuations in receipts and disbursements,” says Bryan Ford, Head of Treasury Services at Regions Bank. “Honoring obligations is critical to the relationships businesses maintain with their suppliers. When it comes to receivables, businesses must balance those obligations against being nice to clients.”

Preparing for the Unexpected

A cash flow sensitivity analysis can help you anticipate how different variables will affect your working capital. Here is what to pay attention to when working on one:

  • Inflows and outflows. A cash flow sensitivity analysis begins with a simple tally of all expected inflows (e.g., client receipts and loan proceeds) and outflows (e.g., capital expenditures and payments to vendors and loans) in a given period. The formula is current cash balance + inflows – outflows. 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 would affect the result. By preparing best- and worst-case scenarios—as well as the most likely case, which is called base case—you’ll have a clearer sense of what might lie ahead in terms of your needs.
  • Revenue. Like peanut butter, revenue comes in two varieties: smooth and chunky. Smooth revenue is steady and predictable (e.g., the income from service contracts or other ongoing revenue streams). Chunky revenue experiences peaks and valleys to varying degrees of predictability, which may be seasonal, project driven or even based on the market conditions your clients face. Most businesses have a mix of both, but the chunkier your revenue, the wider margin there may be between best- and worst-case scenarios. Remember that unless you’re in a cash business, such as retail, revenues are not equivalent to inflows. Base your predictions on the payment habits of your clients rather than your terms. If, for instance, you offer 30-day payment terms but your largest client takes 45 days, use the longer time frame for your analysis.
  • Costs. Expenses, too, may be more or less predictable (e.g., fixed costs like rent, variables such as raw materials and unexpected expenses such as equipment failure or weather damage). A gas station, which sells a volatile commodity, will need a larger cushion against price fluctuations than a service provider like a law office. Variable costs should of course be calculated as a percentage of revenue to rise and fall according to your income forecasts.

How to Head Off Trouble

So you’ve completed your analysis—what now? If you anticipate a shortfall, Ford says, you can draw from an investment savings account or line of credit. “That can come in a couple of forms,” he says. “There’s the traditional line of credit, or you could use a purchase card for receivables: Your supplier is paid today, but you have 35-40 days before you have to pay the balance.”

A cash flow sensitivity analysis is also an opportunity to review your cash conversion cycle—how quickly you’re converting inventory into sales and sales into cash. Pay particular attention to trends in your business’s inventory levels and client payments. If your inventory is growing, you may be looking at slowing sales. If your clients are taking longer to pay, they may be under pressure to reduce their own purchasing. Adjust your negative scenarios accordingly.

Finally, to get a fuller picture, adjust the time frames in your analysis. Ford recommends performing analyses with 90-day, six-month and 12-month horizons. “You should also match the remedy with the time frame,” he says. Brief shortfalls can be offset with short-term credit or purchase-card transactions, but regular or longer-term deficits may indicate a need to increase your savings cushion or consider a term loan.

“The more time you give yourself to anticipate need,” Ford says, “the easier it will be to come up with solutions that keep your business viable and poised for long-term success.”

Three Things to Do

  1. Listen to a podcast on cash management strategies to improve your business’s cash flow.
  2. Contact Regions’ Treasury Management Services to discuss payment collection solutions.
  3. Learn how incentivizing early payments can offset cash flow challenges.


This information is general education or marketing in nature and is not intended to be accounting, legal, tax, investment or financial advice. Although Regions believes this information to be accurate as of the date written, it cannot ensure that it will remain up to date. Statements of individuals are their own—not Regions’. Consult an appropriate professional concerning your specific situation and for current tax rules. This information should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.