Cashflow Forecasting and Why You Shouldn’t Bury Your Head in the Sand

In 1972, two psychologists, James Averill and Miriam Rosenn, invited undergraduates from UC Berkeley to participate in an experiment. They asked them to take part in a study that involved the students receiving electric shocks in exchange for $2 an hour (equivalent to $11 an hour today). They convinced 80 students to agree.

What Happened?

On the day of the experiment, the students were asked to sit on a wooden chair while the researchers rubbed their right ankles with a mildly abrasive paste to lower the skin’s resistance. Then an aluminium electrode was fitted to their ankle. Every so often, the electrode would generate a shock lasting one second. The men were given headphones that enabled them to listen to one of two channels. The first played classical music and the second was an “information” channel which was silent except for a clear warning signal a few seconds before each shock was delivered.

Given the choice, most students chose the music channel, but 45% of them selected the information channel. Averill and Rosenn then monitored their physiological signs to find out how the students reacted. Surprisingly, the students who chose to listen to the music channel expressed greater signs of anxiety than those who listened to the information channel. While they could not avoid the shocks, knowing exactly when one would be delivered enabled them to relax during the breaks in between. In contrast, those who chose to hide under a musical cloud were in a constant state of high alert, ready for the buzzing pain of the shock at any point.

What Can This Teach Us About Cashflow Forecasting?

This experiment is interesting for a couple of reasons. Firstly, the fact that more than half of the students selected the music channel indicates that many of us try to shy away from potential pain and put our problems out of our minds. However, by doing so we actually cause ourselves to suffer more. In the world of business, many entrepreneurs display similar characteristics when it comes to cashflow forecasting. We choose to ignore the shock of cash deficiencies and hope for the best. But by doing so the negative effect of those shocks are more pronounced. By using the right techniques, aided by innovative new software that links into your bookkeeping system, we can, with a reasonable amount of accuracy, predict when your cash deficiencies will occur and properly prepare for them so that we are more productive in the intervening periods. Additionally, we can source any appropriate finance in order to plug the gaps where necessary. Anticipating cash deficiencies and planning for them is always better than burying our heads in the sand.

Cashflow Forecasting Advice with Phebys Accountants

To find out how Phebys Accountants can help with your business forecasts and find the most appropriate finance to plug any gaps, email or call us on 01480 896267.

You can find out more about what we do here.

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