Scenario Planning & Stress-Testing the Cash Forecast

In March 2020, companies worldwide did the same thing in the same week: drew their revolving credit facilities, in record volumes, because suddenly nobody trusted the base case. The interesting question isn't why they drew. It's which companies already knew their number: the ones who'd stress-tested their forecasts had a drawdown trigger and a size ready. The rest were scrambling, trying to work out a number on the fly, in a week where no one had the capacity for it.

The base case is a single line through a fan of outcomes

Whatever your forecast says will happen is one path, and treating it as the whole plan means every liquidity decision (buffer size, facility headroom, when to worry) is planned around the likely outcome, not the scenarios they are designed for. Those decisions should stem from the bad lines. Stress-testing is a method of drawing the lines deliberately, rather than randomly applying a blanket % up or % down. Take the base forecast and impose specific, named misfortunes, then read off what happens to FX exposures, interest payments, cash and covenants.

Three scenarios beat thirty

The useful set is small and concrete. A receipts shock: your largest customer pays 30 days late, or not at all, starting next month. A payments shock: a critical supplier moves you to prepayment, or a margin call arrives on the hedge book, which is the stress companies forget they signed up for. A rates-and-market shock: the floating stack reprices and FX moves 10% against the budget simultaneously, because bad news never arrives alone. Each scenario earns three outputs: the week cash goes tightest, the covenant that strains first, and the action that would have needed to start already. Thirty scenarios produce a deck and noise.

Idiosyncratic risk

Market shocks are not the only risks to guard against. Internal weaknesses can create stress even with no external shock at all. Concentrations are the usual culprit: one customer, one supplier, one funding line, one bank. What happens if any of these fail? Can you source the components? How quickly can you find a new finance partner? Could you survive if your cash got wrapped up in a bank resolution? Focusing on market moves won't identify these risks.

Reverse stress: start from the corpse

Market shocks rarely look the same twice, and surviving past shocks doesn't insulate you from future problems. Work out what pushes you out of business, and work back from there: what combination of events empties the cash and breaches the covenant? Work back from the failure to the smallest set of causes, then ask how visible those causes would be in advance. Reverse stress testing is standard in bank regulation for a reason: it finds the fragilities that historic scenarios politely avoided.

Wire it to decisions or it's theatre

A stress test that ends without actions and responsibilities is an exercise in futility. The output that matters is pre-agreed triggers: if cash falls below X in the 13-week view, we draw; below Y, the discretionary spend freeze starts. What is the escalation process, and who makes the calls when the triggers are hit? Deciding the thresholds calmly, in advance, is the entire value; March 2020's winners weren't better forecasters, they had made their decisions earlier, and could approach their banks confidently.

The same job at three sizes