How to Build a Startup Cash Flow Forecast

To run a startup, you need to have a strong understanding of your cash position and in turn, cash flow. Where cash position dictates the amount of capital you have at your disposal currently, cash flow is the amount of money your business is receiving and spending over a period of time. 

A cash flow forecast is the precursor to a cash flow statement, serving as a measurement of what your business’s cash flow will be over a short or long period of time. For startups, this is essential in several circumstances such as creating your pitch deck or doing a valuation of your company. 

A cash flow forecast documents the projected cash flow of a business over a period of time. In other words, it is an estimate of a startup’s cash flow statement. A cash flow statement is one of three documents, including a balance sheet and a profit-and-loss (P&L) sheet, that convey the details of your business’s financials. 

There are two types of cash flow forecasts: direct forecasting and indirect forecasting. The key differences between the two involve the time period, the contents shown, and the way the report is constructed. 

Direct

Direct forecasting tends to be over the course of a shorter time period and mainly involves the cash being used for working capital. As this is more of a short-term forecast, the contents of the report involve upcoming debts owed as well as payments to be expected.  

Indirect

Indirect forecasting provides insight into longer-term cash flow projections, including capital needed for growth-related projects and initiatives. To measure this, you will typically look at past financial statements such as income and balance sheets as well as assets such as inventory. 

Knowing where your startup is financially is critical to making choices for the betterment of your company. Having an idea of where your startup is headed financially so you can plan for the future is just as crucial. These are a few circumstances that warrant a cash flow forecast: 

Pitching to Investors

A cash flow forecast is typically included with a pitch deck when you are seeking funding from investors, as it provides a valuable estimate of the financial wellness of your business. 

Determining the Amount of Funding Required 

Before you pitch to investors, however, you need to determine the amount of funding required to launch or scale your startup. A cash flow forecast helps determine the amount of cash you will have at your disposal to do so without outside capital.

Assess When the Company Will be Profitable 

When planning extended projects or growth strategies you will implement, it is important to get an idea of when your company may be profitable in order to make educated decisions on where to allocate capital.

Estimate Valuation of the Company

Regardless of whether your startup is pre-revenue, having an estimation of your company’s valuation can be helpful before taking on investors and determining the amount of equity they should be given. 

Now that you have an understanding of what a startup cash flow forecast is and why you might need one, it’s time to get started on creating one for your business. Fortunately, creating a startup cash flow forecast shouldn’t be complicated, here are the steps you need to take to make one for your business. 

First, you’ll need to determine if you are forecasting a short-term or long-term view of your startup’s cash flow estimation. 

For early-stage startups, prioritizing short-term forecasting, typically monthly, is a good approach as there will be less consistency month-to-month during this time. As your startup matures and you have more historical data surrounding your startup’s financials, moving to quarterly or annual forecasting may be beneficial. 

Keep in mind that depending on which cash flow forecast you’re creating, either direct or indirect, the time period you’re forecasting will change. 

Revenue forecasting can be conducted even if you’re pre-revenue, as the metrics you’ll assess initially aren’t rooted in historical data within your startup. 

To get started, identify your market size, customer base, and potential sales volumes. Additionally, consider seasonal fluctuations or other timing differences that may impact revenue month-to-month. This will help create a more dynamic forecast. 

Next, calculate your startup’s fixed and variable costs. Fixed costs remain constant regardless of your business activity level. For example, rent, salaries, and insurance costs. Alternatively, variable costs fluctuate with your business volume. Examples include raw materials, shipping costs, and sales commissions.  

It is important to consider the additional capital coming in that may impact the amount of cash you have access to presently or in the future. Therefore, the next step is to include other cash inflow streams such as loans, funding, grants, or other sources of capital not generated from sales.

The expenses or cash outflows your startup is responsible for from capital and operational expenditures, as well as debt repayments, need to be taken into consideration. 

Start with capital expenditures. This can include machinery, equipment, or other long-term investments. Secondly, operational expenditures such as utility bills, raw materials, marketing expenses, and taxes. Finally, you need to record debt repayments. These include any repayments for loans or other borrowings.

It’s no secret that payments aren’t always made in time. When developing your cash flow forecast, factor in potential payment delays, regardless of the payment schedule you’re set for customers. Especially if your startup is offering credit terms to customers. 

Next, determine your startup’s monthly, or whichever time period you’re calculating for, cash flow from this month as well as previous months. To do this, subtract your total outflows from your total inflows to calculate your net cash flow for each individual month or time period. 

To get a clear picture of your cumulative cash flow over the lifespan of your startup, combine each month’s (including this month) cash flow.  If your total results in a negative number, it indicates potential cash shortages.

Doing one cash flow forecast isn’t going to give you the information you need long-term. To ensure you’re monitoring the health and sustainability of your startup, reviews and adjustments to your forecast are critical. 

Not only does this ensure you have a strong idea of your company’s cash position, it also helps you and your team make nimble decisions for the betterment and longevity of your company. 

Finally, it may be a good idea to develop several forecasts that consider a variety of outcomes. This could be as simple as “best-case scenario,” “worst-case scenario,” and “most-likely scenario.” This can help you prepare for uncertainties and understand potential risks before they arise. 

While it is possible to create a cash flow forecast for your startup on Google Sheets or Excel, there are several software options available to make creating and updating forecasts easier and more efficient. 

QuickBooks is known primarily for its accounting software; however, the platform also offers services to forecast and manage cash flow statements. Simply connect your accounts to allow QuickBooks to track inflows and outflows then you will be able to monitor the overview of your startup’s cash position and projected cash flow on your dashboard. 

Mosaic offers robust cash flow forecasting software that allows startups to forecast beyond cash flow. On the Mosaic platform, users can track net burn and liquidity in addition to cash flow using real-time data to ensure you are always aware of your startup’s cash position now and in the future. 

Trovata leverages machine learning to provide comprehensive, valuable cash flow forecasting software that gives startup founders insight into their cash position. On the platform, users can adjust variables to better measure growth rates as well as model and plan strategies and potential investments.