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Cash Event Simulation
Simulation generally refers to doing things with a computer instead of trying them out in real life. With cash event simulation, the idea is to take into account every payment and every cash receipt that is projected to happen in a business, and monitor the resulting cash balance over time. Doing it on a computer lets you try different payment plans, and different collection strategies quickly and efficiently - without upsetting your customers and suppliers.
Because it is impossible to forecast when each receipt will actually occur, SurvivalWare Transition Planner uses Monte Carlo simulation techniques to deal with the uncertainty. You make some assumptions about the range of values for things like monthly sales and collection period, and it takes care of the rest. Instead of modeling each transaction, and crunching the numbers to determine cash inflows and outflows just once -- you do it 100 times or more. For each "trial" of the simulation, a different sales figure will be used, drawn from the range of values you specify in your sales assumptions. Also, different values for collection period will be used for each invoice, and special events will happen at random.
Internally, SurvivalWare Transition Planner breaks apart the sales forecast for a month into individual sales transactions, each occurring on a different random date, and taking a random amount of time from when the invoice is sent out to when to cash comes in. Collections from already existing open invoices are done in a similar fashion. The same with special events. The end result is a series of cash inflows that will be different for each trial. The cash outflows are simpler - for the most part they don't vary from trial to trial - but rather consist of your detailed instructions about what to pay when.
Keeping track of the details of each trial, and then sorting the results at the end allows you to make observations about the behavior of your cash balance. You might find that in 98% of the trials, the cash balance exceeds zero in the 12th week of a forecast, and in 90% of the trials, the cash balance exceeds $10,000 in that week. SurvivalWare would show a PP Score of .98 for week 12, and the "Shortfall - Conservative View" would show a positive cash balance of $10,000.
The software does the heavy lifting for you. You don't actually have to click a "Run" button 100 times, rather you just click on the "Results" tab and it all happens automatically. First, you get to see the simulation in action. A thick red line is drawn on a graph to show how much cash is required to get through each week of the forecast horizon. Then as each trial is calculated, it plots a thin green line representing the cash receipts. If the green line is above the red line, then that is a good thing. If the simulation consists of 100 trials, you'll see 100 green lines plotted against the thick red line when the simulation is done.
The simulation in action - one green line per trial:
The shortfall graphs help pinpoint when the problems occur, and the magnitude. The PP Score in the upper right quadrant below shows that you definitely have a problem. The Shortfall Analysis - Conservative View reveals that you're short by about $25,0000 peaking in the 12th week. The Shortfall Analysis - With Luck indicates that you may only need another $12,000 to $15,000 if you're lucky.
What you have to do in SurvivalWare Transition Planner
Here's what you have to do to run a cash event simulation using SurvivalWare:
1. Enter known facts
2. Enter assumptions about projected sales
3. Enter payment obligations
4. Enter assumptions about special events
5. Exercise control over how to do the simulation
6. Run the simulation by clicking on the "Results" tab
Known Facts
-> Current cash balance-> Details about how much money customers owe (i.e. open invoices including invoice date and amount)
-> Credit card balances, limits, interest rates, and minimum payments
Assumptions about projected sales
-> How long it takes to collect-> Average size of a sale
-> Commission rates
-> When commissions are paid
-> Monthly sales projections (low, most likely, high)
-> What proportion of sales are prepaid
Payment obligations
-> Payroll related (net payroll, payroll taxes, employee benefits)-> Regular monthly expenses
-> Payments to creditors
-> Special one time expenditures
Assumptions about special events
-> Probability of occurrence (POO)-> Earliest, most likely, latest date of occurrence
-> Amount of the cash inflow or outflow (low, most likely, high)
-> Dependent events (e.g. closing a big deal triggers a payment 3 months later)
Control over the simulation
-> Time periods to use to tabulate results (days, weeks, months)-> How many time periods to forecast
-> Number of trials in the simulation
-> Whether to allow borrowing from credit cards to make up for cash shortfalls
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