How to create a scenario analysis to ensure you're building back a cash cushion by year-end?

In this episode of "Ask a CFO," the host addresses the question of how to manage finances when expenses remain constant but sales are inconsistent. The focus is on understanding different scenarios, including the base case, best case, and worst case. 

The base case involves analyzing the progression of the sales pipeline, considering stages of probability. The best case is often discarded when sales are unpredictable, as it doesn't provide a significant cash cushion. The worst case is the starting point, looking at contracted business with signed deals to determine the year-end cash balance. If it's insufficient, expense reduction strategies need to be implemented. 

The episode also emphasizes the importance of gating items, such as large deals or donors, which can influence cash flow and expense management.

Key takeaways:

• Scenario Analysis: When dealing with uneven sales and fixed expenses, it's essential to analyze various scenarios, including the base case, best case, and worst case, to understand the potential outcomes.

• Cash Liquidity: Maintaining adequate cash liquidity is a top priority for business survival. The worst-case scenario, based on signed contracts, serves as a crucial indicator of potential financial troubles.

• Gating Items: Identifying and monitoring gating items, such as significant deals or donors, can have a substantial impact on your financial situation. They can influence whether you must cut expenses or continue spending to achieve your financial goals.

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