What are the best practices for creating and updating a cash flow sensitivity model in Excel?

1 Start with a base case

The first step is to create a base case that reflects your current or expected cash flow situation, using historical data, projections, or estimates. You should include all the relevant cash flow components, such as sales, expenses, taxes, capital expenditures, debt payments, and dividends. You should also organize your data in a clear and consistent format, using separate worksheets for inputs, calculations, and outputs. A common output is a cash flow statement that shows the net cash flow from operating, investing, and financing activities for each period.

2 Define your sensitivity variables

The next step is to identify the variables that have the most impact on your cash flow, and that are subject to uncertainty or change. These could be internal factors, such as sales growth, profit margin, or working capital ratio, or external factors, such as interest rates, exchange rates, or inflation. You should assign a range of values to each variable, based on your best and worst case scenarios, and use Excel's Data Table feature to create a sensitivity table that shows how your cash flow changes with different combinations of values.

3 Analyze and interpret the results

The third step is to analyze and interpret the results of your sensitivity analysis, and use them to inform your cash management decisions. You should look for patterns, trends, and outliers in your sensitivity table, and identify the variables that have the highest or lowest influence on your cash flow. You should also compare the results with your base case, and evaluate how realistic and probable your scenarios are. You can use Excel's Conditional Formatting, Chart, and Pivot Table features to visualize and summarize your data.

4 Update and refine your model

The final step is to update and refine your model as new information and circumstances arise. You should monitor your actual cash flow performance against your base case and scenarios, and adjust your assumptions and values accordingly. You should also review your sensitivity variables and ranges, and add or remove any factors that are no longer relevant or significant. You should keep your model simple, transparent, and accurate, and document your sources and methods.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?