Which forecast assumptions deserve attention first?

A forecast can show healthy profit while the business runs out of money. In the worked scenario below, changing the proportion of sales collected next month from 20% to 30% turns closing cash from $10,000 into a $10,000 shortfall. Profit stays at $20,000. An assumption register is useful only if it helps identify differences like this.

The question: which assumption changes the decision?

Start with the decision the forecast must support: whether cash will cover the next payroll, whether an extra production shift pays for itself, or how much financing an expansion needs. Then measure the effect of changing the relevant assumptions on that output. A long list of inputs gives no indication of their financial importance.

This note uses an original, illustrative one-month trading scenario. It is a calculation, not a survey or an estimate of a particular industry's results. The business sells 10,000 units at $20 each, incurs a $12 variable cost per unit and pays $60,000 of fixed operating costs. All goods are delivered and invoiced in the month. There is no opening receivable, inventory movement, supplier credit, tax, depreciation, investment or financing cash flow in this simplified example.

Establish the profit and cash baselines

Revenue is 10,000 × $20 = $200,000. Variable costs are $120,000, leaving $80,000 of contribution. After fixed costs, operating profit is $20,000.

Customers pay 80% of invoices in the month and the rest next month. Current receipts are therefore $160,000, while cash operating payments are $180,000. The business uses $20,000 of cash. With $30,000 in the bank at the start, it closes with $10,000. The $40,000 receivable explains why cash generation is $40,000 below profit.

Change one assumption and compare the same outputs

The price increase adds $20,000 to profit but only $16,000 to this month's cash because 20% of the additional invoices is collected later. Additional volume generates $8 of contribution per unit, yet only $4 of immediate cash per unit: customers pay $16 now while the business pays the full $12 variable cost.

Collection timing is the most serious cash stress in this set of scenarios. The business would need at least $10,000 of additional funding merely to avoid a negative month-end balance. Its actual requirement could be higher if supplier payments and payroll fall before customer receipts. A month-end total cannot identify that earlier low point.

Use realistic ranges before ranking the risks

A common percentage change is a useful starting comparison, but it does not make the scenarios equally likely. A business might be able to change price by only 2%, while order volume could vary by 20%. In this example, those alternatives change profit by $4,000 and $16,000 respectively. Evidence about the plausible range can reverse the apparent priority.

Keep a short decision record for the assumptions that matter: the current value, its unit and period, the evidence behind it, a plausible downside, the resulting cash requirement and the action that would follow. For collection timing, inspect actual invoice dates and receipts. For price, use accepted orders and discount history. For variable costs, obtain current supplier quotes and distinguish committed prices from estimates.

After identifying the important inputs, combine stresses that could occur together. Lower volume and slower collections may accompany the same weak trading period. Add the daily or weekly payment schedule before deciding the size of a cash buffer. A sensitivity table describes exposure; it does not assign a probability to that outcome.

Method and further reading

The scenario calculations above are original and all inputs are stated. IAS 7's cash-flow framework explains why accrual profit and cash movements require reconciliation. ICAEW's spreadsheet principles support making assumptions understandable and linking inputs to outputs. Neither source supplies the commercial assumptions used here.

Use the startup budget calculator to explore a monthly cash schedule, or the working capital calculator to examine receivables, inventory and supplier funding.