Did you know poor cash flow management is the reason for the failure of nearly 82% of small businesses? While large enterprises often have entire departments dedicated to managing their cash flow, startups must be extra mindful of their spending and saving habits.

Cash forecasting can be the difference between a small business succeeding or failing. For founders, it’s a critical component of managing the business and ensuring long-term growth.

So, what is cash forecasting? How does it boost founder confidence? We’ll discuss it in the guide below.

What Is Cash Flow Forecasting?

Cash flow refers to the movement of money in and out of a business. Money might come in through:

• Sales
• Fundraisers
• Loans
• Investments

Money might go out through:

• Wages
• Rent
• Supplies
• Taxes
• Vendor payments
• Maintenance
• Bills

A cash flow forecast helps business owners predict how much money will come in and go out of the business over a period of time. For example, an e-commerce business might predict they’ll have $10,000 in cash inflow and $7,500 in cash outflow next month.

Advantages of Cash Flow Forecasting

Since startups often work with limited resources, it’s important to be strategic about how money is spent. A cash flow forecast can give founders a clear picture of their business’s financial health and help them make informed decisions.

Some advantages of cash flow forecasting include:

• Plan for the Future: When you have a good understanding of your cash flow, you can plan for upcoming expenses and make sure you have enough money to cover them. It could include hiring new employees, expanding to a new office, or buying new equipment.
• Avoid Surprises: Unexpected expenses can pop up at any time, but if you’re actively monitoring your cash flow, you’ll be less likely to be caught off guard.
• Make Informed Decisions: With cash flow forecasting, you can track your progress and change your business model if needed. For example, you might find that your product isn’t selling as well as you thought or that you’re spending too much on marketing.
• Add to Pitch Decks: Since investors want to see that you have a handle on your finances, cash flow forecasting can give you the data you need to create a strong pitch deck.

How Does Cash Flow Forecasting Affect Founder Confidence

Founder confidence means believing that you can successfully start and grow a business. It comes from understanding your industry, building a strong team, and making smart decisions.

Cash flow forecasting gives founders the data they need to make sound financial decisions. Instead of feeling as if they’re shooting in the dark, founders can see whether they’re making progress toward their goals.

The data-driven approach can help founders maintain their confidence even when facing difficult challenges. Let’s say a SaaS founder is trying to decide whether to keep a certain feature free or start charging for it.

They can use cash flow forecasting to predict how much revenue they’ll generate if they start charging for the feature. If the forecast shows that they’ll still be able to hit their targets, it might be worth making the change.

How Does Cash Flow Forecasting Work?

Cash flow forecasting is an important aspect of financial modeling. But how do you forecast cash flow? Here are the standard steps.

Choose a Forecast Period

Decide a timeframe for your forecast. It could be monthly, quarterly, or annually.

For example, if you’ve been in business for six months, you can forecast cash flow for the next six months. But if you don’t have past sales figures yet, you can only estimate future sales.

In that case, you can still produce a cash flow forecast using market research, surveys, and other data.

Estimate Cash Inflow

Cash inflows constitute money coming into your business. It could be from sales, investments, or loans.

To estimate cash inflows, you need to look at your past sales figures and trends. If you’re a startup, you can use market research and surveys to come up with estimates.

Your funding rounds, government grants, and other external factors can also affect your cash inflows.

Estimate Cash Outflow

Cash outflows are all the money going out of your business, such as expenses, debt repayments, or investments. As with cash inflows, you can use past data to estimate future cash outflows.

Look at your past expenses, such as rent, utilities, salaries, and other operating costs. You can also look at your business goals to see if you plan on making any major purchases or investments.

Debt repayments and other financial obligations are also considered cash outflows. If you’re planning to buy a new office or hire more staff, that would also be a cash outflow.

Compile Your Estimates

Now that you’ve estimated your cash inflows and outflows, you can compile them into a single forecast. Start by creating a table with your chosen forecasting period at the top. Then, list your cash inflows and outflows for each month (or quarter/year).

Suppose you’re forecasting for three months. The number at the end of your forecast will be the closing cash balance. When you forecast for the next three months, you can use that number as the starting cash balance.

Let Professionals build Handle Cash Flow Forecasting for Financial Modeling

As mentioned, you have to forecast cash flows when creating financial models, especially if you’re creating budgeting or fundraising models. However, startups often lack the resources and manpower to devote to this critical task.

Instead, you can turn to a professional firm that specializes in financial modeling. At Numberly, we take a tailored approach to making financial models for startups. We understand that startups differ from established businesses and have unique needs.

Our financial models encompass all aspects of a business, from revenues and expenses to fundraising goals and runway. But what sets us apart from your DIY approach is that we cater these components to your company’s unique characteristics rather than pulling a generic model available online.

Schedule a call with us today to learn how we can help you.