As well as modelling the inevitable uncertainty in your business plans. Asteria can also model the complexity caused by the interactions of different aspects of your business.

Modelling cash flows

Suppose you’re a small start-up, producing your business plan. You’ll make assumptions about things like your initial cash balance, your cost structure, and your sales levels and mix, and end up with something like this picture of your expected cash balance:

SmoothCashBalance

 

It looks pretty healthy. There’s a dip at the start, while you’re incurring costs but not making any sales yet, but as the sales ramp up the cash balance rises with them. And it never goes anywhere near the dreaded zero level.

But you haven’t allowed for what will actually happen. Your sales progress isn’t going to be smooth: some months will be good, others bad, even if on average you meet your targets. There may be unexpected delays in the customers actually paying their invoices, too. And there are all sorts of other things that are inevitably uncertain and introduce variability.

Understanding what could actually happen

In order to understand what could actually happen, you can make some assumptions about the variability of costs and sales. And this is the sort of outcome that you might see in practice:

SingleSim1

We can see the initial decline, as before, but the rest of it looks completely different. And if you run it again, it’ll all turn out differently:

And sometimes, you’ll go into the red.

The nice smooth comforting graph we looked at earlier just doesn’t show all these possibilities. It hides the inevitable uncertainty and variability.

What you can do instead is to simulate possible outcomes, and produce a graph like this:

NobodysAverage

The dark red line shows the average cash balance across all the simulations for each month. The gradually paler blue stripes show the central 50% of simulations (ie, between 25% and 75%), the central 80% (between 10% and 90%), the central 90% (between 5% and 95%) and the palest blue shows the maximum and minimum in each month. We can see that the minimum is nearly always negative, and in most months, at least 95% of the simulated outcomes are positive.

The green line shows one possible outcome, which in this case exhausts the cash balance twice. And in fact, individual simulations often exhaust the cash balance at some point.

It’s worse than you think

The trouble is, that it may all even out in the long term, but is that soon enough? If you have more fund that you can draw on, it may be OK. But if you don’t, you simply can’t afford to have a negative cash balance at any point.

CashExhaustion1

This graph shows the proportion of simulations in which the cash balance has been exhausted at some point. We can see that by month 20, the cash has been exhausted in about 40% of cases: by month 60, it’s over 60% of cases. So you are more likely to run out of cash than not: a fact which is completely absent from the picture you first saw.

 Stochastic modelling

Asteria can help you understand the uncertainty. It models possible outcomes, not just averages. All the pictures on this page, other than the misleadingly smooth one, are actual output from Asteria. you can explore the results using Asteria’s intuitive interactive graphs by heading on over to our demo pages. (You’ll need to log in with a Google id).

Asteria can help you understand the level of uncertainty in your business plans, which in turn will help you to manage the risk.