💰Cash Flow Forecast & Planning: a Step-by-step Guide
When we're doing financial forecasting for startups, cash flow is one of the main metrics we focus on, as it can make or break your business.
However, cash flow forecasts are not only about cutting costs or increasing your revenue quickly.
Cash flow planning goes much deeper than that – it ensures you have enough time to experiment and find the right product-market fit that will generate success. This is not an overnight process, and it often requires multiple attempts.
Creating an accurate cash flow forecast gives you peace of mind, ensuring that you can grow your business without worrying that you'll run out of cash.
In this article, we'll show you exactly how to do it.
What is a cash flow forecast?
Cash flow forecasting is about projecting the movement of cash into and out of your business or projecting cash inflows and outflows over a set period.
An accurate cash flow forecasting process allows business owners to anticipate cash positions, prevent cash shortages and grow their business in a sustainable way.
Net cash flow is an important metric that indicates the difference between total cash inflows and outflows:
Direct vs indirect cash flow planning
There are two different methods of cash flow planning:
Direct cash flow forecasting bases its predictions on actual cash inflows and outflows, such as cash received from customers or paid to suppliers. Since it requires detailed tracking of actual cash movements, it is one of the most accurate tools for small business financial planning, but also very time-consuming and best for short-term planning.
Indirect cash flow planning estimates future cash flows by starting with net income from the P&L statement and adjusting for non-cash income and expenses to arrive at the net cash flow. This way, you can track your revenue as it is earned, using accrual-based accounting. The indirect approach is simpler and best for long-term planning.
Cash flow forecast: A step-by-step guide
You don't need to be a financial expert to do cash flow forecasts for your startup or small business. But you need to follow some basic financial rules and principles. To make financial planning easier for you, we've put together a step-by-step guide.
Gather the data
First, you need to collect financial data from:
A profit and loss (P&L) statement: Also known as an income statement, this financial statement details a company's revenue, expenses and net profit or loss over a specific period. This period can vary in length but is typically a month, quarter or year.
A balance sheet: This financial statement provides information about a company's assets, liabilities and equity at a specific moment in time.
Fixed and variable costs: You need to be able to cover operating expenses, so make a list of all your fixed and variable expenses. Fixed costs are expenses that are always the same, such as rent or salaries, and variable costs are those that can fluctuate on a monthly basis based on production volume and number of users, such as transaction processing fees, shipment etc. Also, don't forget loan payments if you have them.
Build your cash flow forecast
You can build your forecast by looking at the cash inflows and outflows, i.e., incoming and outgoing cash.
Cash inflows: Think about the revenue you expect your business to earn from selling its products or services within a defined timeframe.
Cash outflows: Think about the expenses you expect to have in the following period. Consider all the fixed and variable costs that may come up and make room for some unexpected expenses as well, because we all know those things often happen.
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Now that you've considered both inflows and outflows of cash, split your projections into smaller time intervals, such as weekly or monthly. In doing so, you can pinpoint potential gaps in cash flow so that you can create strategies to overcome them.
Analyze
After you've gathered all the necessary data and built your cash flow forecast, it's time to learn how to do a financial analysis. You're going to analyze the past period by comparing your plan and actual results.
Before we start, here are some metrics you need to know:
Burn rate: This metric shows how quickly a company spends its cash reserves. It indicates the average amount of money the company “loses” per month to cover expenses before generating positive cash flow. There are two kinds of burn rates – gross and net burn rates. You can calculate your gross burn rate simply by summing all your monthly expenses. When it comes to the net burn rate, you can calculate it by subtracting total monthly expenses from total monthly cash from sales.
Runway: This metric refers to how long your business can continue operating before running out of funds. Here's how to calculate runway: simply divide the total amount of cash you have on hand by the monthly burn rate. But don't worry, you don't have to do this manually. You can use our free runway calculator instead.
Now, how would you know if your business is financially healthy without a clear evaluation framework? That's why we have created benchmarks for these two key SaaS metrics:
Another part of analyzing is answering some of the following "Why" questions:
Why did our burn rate exceed or fall short of expectations?
Why does our business have a longer or shorter runway than anticipated?
Why did our plan achieve or fail to achieve the desired results?
Other questions to take into consideration have to do with "what if" scenarios based on the projections you've made:
How would our numbers change if sales slowed down?
How would our cash flow be affected by increased expenses?
What effect would hiring another person have on our runway?
Of course, doing financial analysis is much easier with the right tools. Check out this guide to find the best financial analysis software based on your needs.
Adapt based on your findings
Creating a cash flow forecast doesn't mean your job is done. You have to update the plan monthly and pivot based on the burn rate and runway data.
In case the burn rate is excessive, and the runway is shrinking, there are several things you can do to ensure that your business will thrive:
Explore cost-cutting measures, such as postponing non-essential hiring or negotiating with suppliers.
Reassess your pricing strategy. Maybe it's time to up your prices or find new ways to monetize, such as upselling or cross-selling.
Evaluate your customer acquisition strategy and see whether you can lower customer acquisition costs (CAC).
Cash flow statement example
Now that we got all this out of the way, here's a practical example of what a cash flow statement looks like:
Cash flow planning: Final tips & golden rules
Finally, let us share some insights we've gained through working with many startups.
Here are some tips for managing cash flow:
Create a cash flow forecast for the upcoming 3 months.
Understand the effects of your decisions on your runway and burn rate.
Ensure that your executives are also aware of these impacts.
Conduct monthly plan/actual analysis to make your future plans more accurate.
And finally, these are our cash flow planning golden rules:
Add multiple scenarios for your cash flow model, so you're equipped both for best-case and worst-case scenarios and nothing can surprise you.
Give yourself enough time (or runway) to find the right product-market fit, as those things rarely succeed on the first try. Be conservative with your calculation, which means leaning on the cautious side and intentionally using lower estimates for variables such as revenue and sales growth and overestimating expenses and risks to prepare for all scenarios. It will help you to know how much money you can “burn.”
Aim to secure funding that will help you reach your next milestone rather than aiming for a specific number of months of runway.
If you want to keep cash flow tips handy when you need them, we’ve got you covered. Just enter your work email to receive a cash flow planning cheat sheet delivered straight to your inbox.
How can Fuelfinance help you?
Here at Fuelfinance, we understand how frustrating it can be not knowing how to manage your finances, let alone conduct a cash flow forecast.
Fuelfinance is a cloud-based financial modeling software designed for startups and small businesses, serving as your fractional CFO as it comes with unlimited support from our financial experts.
Here are some of its key features:
Comprehensive all-in-one dashboard: Our customizable dashboards allow you to view all your metrics in one place and track personalized KPIs based on your startup financial model.
Financial analysis: Fuelfinance is one of the best FP&A software for startups and small businesses, enabling you to generate financial statements and reports effortlessly with just a few clicks.
Financial planning: Our tools provides you with thorough and precise forecasts that include both conservative and optimistic scenarios. Planning helps you anticipate and prepare ahead for various potential future circumstances and challenges.
Advanced automation: Our goal is to streamline your operations by minimizing manual paperwork and saving you valuable time. Accessing up-to-date financial information instantly empowers you to make informed decisions at any moment.
Expert support: Fuelfinance goes beyond traditional customer support typically found in similar tools. With us, you'll have a dedicated financial manager serving as your outsourced CFO. The expert support is unlimited – we're here whenever you need us! Additionally, we specialize in startups and can provide guidance on managing startup finances, seed funding, venture capital and many more.
Integrations: Our cash flow forecasting and planning tool is compatible with a range of third-party platforms such as QuickBooks, Stripe, Gusto, Wise, Brex, HubSpot and more.
But that's not all. If you're just starting out and can't afford to pay for financial management solutions, we've got you covered.
Aim to scale your business without financial constraints
Additionally, our Bootstrap offers you:
Financial statements: With just a few clicks, you can generate essential statements such as the profit and loss statement, cash flow statement and balance sheet.
Comprehensive dashboard: Our dashboard consolidates all essential metrics into a single view, enabling you to monitor customized KPIs tailored to your SaaS financial model.
Financial planning templates: Simply input your customized information into our pre-designed templates, and it'll conduct plan/actual analyses and data calculations for you.
Video tutorials: Straightforward tutorials covering all aspects of financial management and planning for founders without prior experience.
Ready for a financial piece of mind?
Starting your own business can be daunting, and all finance-related work doesn’t make it easier. But an appropriate financial assistant can make those worries go away.
Our solution? Fuelfinance is a tool with a startup background that aims to help small business owners and startup founders get control over their finances.
With Fuelfinance, you don't have to manually input data and worry whether you’re doing it correctly. In a matter of seconds, you will have your cash flow forecast and plan right in front of you!
Book a demo call with us to see how you can automate your finances and set yourself up for success.
FAQs
What are the three main components of the cash flow forecast?
The main components of cash forecast are cash inflow, cash outflow and net cash flow, which shows the difference between inflow and outflow.
How to calculate projected cash flow?
First, you should try to project your inflow and outflow in a given period based on historical data. Then, calculate the projected cash flow by subtracting the projected outflow from the projected inflow.
What is the 12-month cash flow forecast?
It's a document that shows your projected cash flow for a one-year period, including all projected inflows and outflows. Companies use this document to make sure they have enough cash to meet obligations and cover operating expenses in the following year.
How do you read a cash flow forecast?
Start by examining cash inflows and outflows and seeing whether there's room to increase revenue or cut costs. Try to identify any trends or issues, such as seasonal fluctuations, negative cash flow or potential cash shortfalls and see how you could prevent them.
What is a cash flow projection example?
For example, a SaaS cash flow projection might include projected inflows, such as subscription and investment revenue, and projected outflows, such as operating expenses, payroll and tax payments. Then, you'd calculate the cash flow for each month.
Why should you have a cash flow plan?
A cash flow plan helps ensure liquidity, make smarter financial decisions, allocate your resources in a more efficient way and prevent cash shortages. In other words, it helps you grow and scale your business in a sustainable way and boosts investors' trust.
