Cash flow modelling - Sensitivities/Downside scenarios

Hi!
I am looking for some sources regarding cash flow modelling. I am working in Leveraged Finance and have certain knowledge but for my thesis I need a "scientific" source and so far I was not able to find something.

Is there any source out there that would count as a good reference? Especially when it comes to building downside cases?

Thanks for help.

 
Best Response

Scientific source to cash flow modeling? There is no such thing. The closest you could get is academic and professional white papers.

Building downside cases is a pretty standard methodology. There are X number of drivers of the top and bottom line economics of your business.... you use historic research combined with forward looking expectations of economic commentators (e.g. IMF), market participants (e.g. commodity futures curve) and you canvass the two to create a reasonable downside case.

So if you're an oil refiner, your business drivers will be volume and crack spreads. Volumes will be dictated by your refinery's capacity and operating rates (for both your refinery as well as the industry). Spreads will be dictated by various macro economic factors and will be explicitly forecasted by a host of industry participants and commentators. So your downside case would say ok, well this is what the market is currently expecting (i.e. a base case)... and historically every 7 years we hit a down cycle and we see operating rates hit 75%, down from 90%... in addition to that crack spreads tighten to X... thats whats happened historically, but given that there is significant refining displacement in Y region currently with no new capacity coming online in the industry in the near-term, its reasonable to expect that we operating rates wont be hit as hard. So you say well what if the downcycle comes sooner than expected, or the downcycle that is currently approaching is rougher than expected.

 

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