Master Your Cashflow: Easy Guide to Creating a Killer Cash Flow Forecast for Your Startup

If you want to calculate your breakeven point, your valuation, or just create a budget for your company plan, you must create a cash flow forecast for your startup or business.

A financial model template, software, engaging an expert, or doing it yourself are some of your possibilities. In this post will address the latter approach and provide guidance on how to create a 100% accurate cash flow projection for your company.

Summary of the Blog Post

1. What is Cash Flow Forecast and why you need to prepare the same
2. Steps in Creating a Cash Flow Forecast
3. Factors to Consider When Creating a Cash Flow Forecast
4. Tools and Techniques for Cash Flow Forecasting
5. Best Practices for Cash Flow Management in Startups
6. How to Use a Cash Flow Forecast to Inform Business Decisions

What is a Cash Flow Forecast?

Cash Flow forecast is a document contains an estimate of the cash flow (cash in and cash out) of a business over a specific time period.In other words, a cash flow projection is essentially a projected version of a company's cash flow statement.

Business owners and startup founders commonly present their initial budget and cash flow forecast when pitching investors. But planning a budget for your business shouldn't just be about satisfying investors. It is important to keep an updated monthly cash flow budget if you want to improve your company's decision-making, thus you should put your cash flow projection ahead of your ongoing management obligations.

A few examples for creating (or updating) a cash flow forecast are:

• Assess your breakeven point: when can you realistically expect to be profitable.
• Estimate a valuation for your business, even if you are pre-revenue.
• Include in your pitch deck or business plan.
• Understand how much you need to raise for your fundraising.

Steps in Creating Cash Flow Forecast

Financial forecasting shouldn't be too difficult for your startup. Even without prior financial experience, one can produce excellent cash flow forecasts for any firm with some basic accounting and finance understanding. To construct your own, follow the steps below.

Consider using sources like market research studies, competitor analyses, or even your own financial performance to ensure that your cash flow estimate is as precise as possible (if any).

Step 1 - Start from your Actuals (if any)

If you have any past performance data, use that as a starting point for creating your beginning cash flow estimate.

Financials(such as revenue) can be a measure of historical performance, but not exclusively. Proceed from there if you haven't yet begun to create revenue, your revenue isn't very large, or you believe other KPIs are more important. You can estimate growth and ultimately income using these figures, for example, if you have begun to establish a user list or email sign-ups.

Step 2 - List Down all your Startup Costs

List all the costs you incur and the assets you must purchase before starting your business for new ventures without any prior performance data.

There are two categories of beginning costs:

1. Assets: One-time acquisitions of assets like furniture, inventories, machinery, etc.
2. Costs: Any costs (often fixed) you incur prior to opening your business. Do you have to pay legal expenses if you incorporate several businesses? Does purchasing a specific license for promoting your items to consumers cost money? Perhaps you'll have to hire someone to create the website from which you'll later on get customers?

Step 3 - Build your Revenue Model

Prior to estimating revenue based on the previously covered factors (step 1), it is important to clearly define your revenue model.

A revenue model is a structure for producing money. The value to be provided, how to price the value, and who will be paying for the value are all determined. It is an important part of a business model. It essentially outlines the goods or services that will be produced in order to make money as well as how they will be sold.

Step 4 - Forecast your Variable Costs

Depending on the volume of sales and/or other circumstances, the amount of variable costs may fluctuate (e.g. customers for instance). Because of this, they cannot just stay the same over time; rather, the amount will fluctuate based on other elements of your financial strategy. Common variable costs are:

• Raw materials
• Advertising spend (e.g. paid ads)
• Packaging and shipping costs(e-commerce)
• Transportation
• Corporate taxes

Step 5 - Estimate all your Fixed Costs

Fixed costs in comparison, are easier to estimate as they remain fixed over the projected period. Common examples are:

• Salaries and benefits (for each employee)
• Website hosting
• Bank Fees
• Rent and utilities

Step 6 - Consolidate all your Expenses and Revenue

After calculating their forecasts based on your primary drivers, you can now aggregate all of your anticipated revenue and expenses under your profit and loss. Subtract from revenue all expenses, both fixed and variable, as well as startup costs to arrive at net profit.

Using your net profit and subtracting any additional cash items (i.e., capital expenditures), such as the startup asset purchases described earlier, will enough to create your cash flow statement at this time (step 2).

Step 7 - Review & Adjust

Spend some time going through your estimations after creating your expected profit-and-loss and (simplified) cash flow statement. Do you understand them? Are your predictions surprising in any way?

Your financial projection assessment should assist you in establishing two things:

• Are all of your estimates accurate? Spreadsheets make it simple to lose track of things and make calculations errors.
• Are your predictions accurate? It is now simpler to determine whether your estimates are feasible or not after taking a step back to consider the overall picture (sales, growth, margins, and cash flow).

Step 8 - Determine the Amount you need to Raise

If you are planning your cash flow, there is a good chance that your beginning business may incur losses during the first few months of operation. Do not worry; it is common for businesses to raise money at the onset, before starting operations or product development.

Factors to Consider When Creating a Cash Flow Forecast

When developing a cash flow forecast, keep the following factors in mind:

• Revenue forecasts should be based on realistic sales or revenue projections.
• Operating expenses should be carefully reviewed and projected because they have a significant impact on cash flow.
• Capital expenditures: Capital expenditures should be determined by the company's growth and expansion plans.
• Working capital should be closely monitored because changes in accounts receivable, inventory, and accounts payable can have a significant impact on cash flow.
• Financing activities, such as borrowing or issuing new equity, should be considered and factored into the forecast.
• Cash flow timing: It is critical to consider the timing of cash flows, especially those that are irregular or one-time events.
• Changes in the economy, government policies, and competition are all examples of external factors that can have an impact on cash flow.

Overall, creating a cash flow forecast requires a thorough understanding of the company's operations, historical performance, and future plans.

Tools and Techniques for Cash Flow Forecasting

A cash flow forecast for a startup can be created using a variety of tools and techniques, including:

• Financial modelling software : It can be used to generate detailed cash flow projections and conduct sensitivity analyses. Microsoft Excel, Google Sheets, and dedicated software such as QuickBooks, Xero, and others are popular examples.
• Spreadsheets: Spreadsheets can be used to create a simple cash flow forecast, but they may lack the functionality of financial modelling software.
• Templates: There are numerous templates available online for creating a cash flow forecast. These templates can be useful for new businesses that are unfamiliar with cash flow forecasting techniques.
• Specialized software : It can be used to generate projected income statements, balance sheets, and cash flow statements.
• Consultants: Hiring a financial consultant or accountant to create a cash flow forecast for the business is another option. This could be a good option for startups that lack the time or resources to create their own forecast.

It's important for startups to choose a tool or technique that suits their needs and that they are comfortable using. It is also important to keep in mind that any tool or technique is only as good as the data and assumptions that are used to create the forecast.

Best Practices for Cash Flow Management in Startups

• Create and regularly update a cash flow budget
• Monitor key cash flow metrics: To monitor their cash flow and identify potential problems early on, startups should track key metrics such as cash on hand, net cash flow, and burn rate.
• Prioritize bills and payments: Depending on their cash flow situation, startups should prioritise bills and payments.
• Control costs: In order to improve cash flow, startups should strive to control costs. This could include eliminating unnecessary expenses, renegotiating payment terms with suppliers, or finding more efficient ways to conduct business.
• Optimize collections: Startups should work to optimise collections by implementing best practises for invoicing, following up on late payments, and, if necessary, pursuing legal action.
• Proactive cash flow management requires startups to identify potential problems early on and take action to address them before they become critical.
• Regularly review and update financial plans
• Forecasting tools should be used by startups to estimate future cash flow and identify potential problems early on.
• Have a contingency plan in place: Startups should have a contingency plan in place in case of unexpected events that may negatively impact cash flow.

By implementing these best practices, startups can take an proactive approach to managing their cash flow and make sure that they have enough money on hand to meet their financial obligations and invest in growth opportunities.

Use a Cash Flow Forecast to Inform Business Decisions

• A cash flow forecast can assist a startup in identifying potential cash flow issues and taking appropriate action to address them. For example, If a cash flow forecast predicts a cash shortage in the near future, a startup can take steps such as seeking additional financing or cutting costs.
• A cash flow forecast can also be used to determine the viability of new business ventures. A cash flow forecast, for example, can be used by a startup to assess the potential costs and revenues of a new product or service. This allows a startup to make an informed decision about whether to invest in the new opportunity.
• A cash flow forecast can assist a startup in making informed decisions about when and how to invest in opportunities for growth. For example, if a cash flow forecast indicates that cash flow will increase, a startup may decide to invest in new equipment or hire more employees.
• A cash flow forecast can also be used to make decisions about how to manage the day-to-day finances of the business. A startup, for example, can decide when to make payments, when to collect payments, and when to negotiate new payment terms with suppliers by regularly monitoring cash flow forecasts.
• It can also assist in identifying trends and opportunities to improve cash flow. A cash flow forecast, for example, may show that cash flow is consistently low at the end of the month, indicating that payment terms should be reviewed or collection processes streamlined.

In general, cash flow forecasting is an important tool for any startup because it can provide better insight into the short- and long-term financial health of the business and, when used effectively, can help to make better decisions for future growth.

Conclusion

The amount of cash and cash equivalents utilized for investing, operating, and financing operations, as well as the net change in cash and cash equivalents for special treatments, are all disclosed in the cash flow statement. If you have a significant Cash Flow mistake, Jordensky is here to help.

In case you are looking for better management of Cash flow or looking for CFO Service do not hesitate to contact our team for 30 mins free session on how to manage your cash flows