Whether you raised millions of dollars or chose to bootstrap your startup, having a strong grasp on your cash flow gives you a competitive edge. If cash is the lifeblood of a startup, then good cash flow management is the healthy heart that keeps it pumping through your business.
When you understand cash flow basics and how to forecast cash flow for your startup, you can minimize the risk of operational disruptions and the need for costly loans, and even avoid going out of business. Moreso, a cash flow forecast enables you to make informed decisions, navigate financial uncertainties, and capture growth opportunities.
Small early-stage startups often overlook or deprioritize managing and forecasting cash flow, but that’s a mistake. As a business starts to grow, the founder who knows how to forecast cash flow can plan and expand more effectively.
We peel back the layers of financial complexity and give you easy to follow steps for forecasting cash flow.
First, let’s clarify what cash flow is, what a cash flow forecast is, and why SaaS startups need insightful views into their future cash.
What is cash flow?
Cash flow describes the dynamic inflow and outflow of cash in a business. It tracks money on hand (working capital); new money coming in (cash in) from sales of goods, subscriptions, or services; and money going out (cash out) to vendors, employees, or other service providers.
When cash in is greater than cash out, you have positive operating cash flow; when cash out is greater than cash in, you have negative cash flow. Most SaaS startups have negative cash flow and typically take years to achieve positive cash flow.
Cash flow derives from three sources: operations, investments, and financing.
For simplicity, this guide focuses on operating cash flow and touches on cash flow from financing activities. The CFA Institute has more extensive cash flow education that follows U.S. generally accepted accounting principles (GAAP), if you want to go deeper.
What is a cash flow forecast?
A cash flow forecast estimates how cash in the business will change over a period of time. Its purpose is to guide decisions that must be made today to ensure there’s enough cash to maintain future operations.
Cash flow forecasts can be short (30 days) or long-term (12 to 18 months), and the more accurate they are, the better. Some cash flow forecasts show ample cash to sustain the business; others signal it could run out of cash soon. Either way, you need enough cash to sustain your startup’s momentum.
Why Does a SaaS Startup Need a Cash Flow Forecast?
It’s tempting to fixate on the present rather than examine what the business might look like in 12 to 18 months. Though no forecast is entirely accurate, informed projections can help you plan intelligently.
Cash Flow Forecasting Benefits
Guiding strategic decision-making
Identifying potential problems early
Meeting financial obligations like payroll and third-party expenses without disrupting operations
Preventing or minimizing the impact of cash shortages
Demonstrating creditworthiness and lowering capital costs
Managing debt repayments without straining free cash flow
SaaS startups in particular spend a lot of cash to grow quickly, making investments in marketing and sales, product development, and new hires that increase operating expenses — hopefully increasing the cash in from new revenue, too. Early-stage SaaS startups also tend to run quite lean. When it takes a long time to acquire new customers or when they don’t stick around very long, the variable cash inflow can make it difficult to pay fixed expenses.
Even with additional working capital (cash on hand) that was raised in a funding round or by obtaining debt, a growing SaaS startup probably has negative operating cash flow. This catches many founders that raised capital by surprise. When the business has to use working capital to subsidize operating cash flow needs, because operating cash flow is negative, it’s burning cash. When that happens, it’s imperative to have a cash flow forecast.
Without a cash flow forecast, you’re flying blind. Your startup has a better chance of success when you look ahead at your finances, so you can decide to cut expenses or start fundraising before it’s too late.
Though it’s important to keep track of operating cash flow, what matters most is how it affects your working capital. If you’re drawing down your working capital too quickly and you aren’t seeing improvements in operating cash flow, a cash flow crisis could be imminent. Cash flow forecasting helps you understand what your liquidity looks like in the short, medium, and long term, and in good and bad scenarios.
With cash, timing matters
Forecasts can range from one month to a year or more. Short-term projections of operating cash flow tend to reveal less decision-guiding information for a typical SaaS business.
From our perspective, SaaS startups should forecast up to 18 months of cash flow. Though you may have to make some assumptions about increasing expenses and cash inflows, you will get an approximate lifespan for your existing working capital.
The reason for using a longer time horizon is simple: A SaaS startup that’s operating with working capital needs to know roughly how long it will last and when the business might be short on cash.
More important, you don’t want to have to raise money when you’re in a cash crunch — it’s always best to source startup capital before you need it. If you’re raising venture capital, a weak cash position can diminish your ability to raise and the favorability of the deal terms. Plus, your valuation may be lower. Even non-dilutive debt financing will be harder to get with good terms, because many lenders require you to have 12 to 18 months of cash to fund operations.
How to Create a SaaS Cash Flow Forecast
Your first cash flow forecast will take extra time to prepare, but it should go faster after you set up your initial model. Using historical data, you can project future cash flow that not only starts from your actual cash flow position, but also follows the cash fluctuations in your business.
Accurate financial inputs are essential to successful forecasting. If you’re tracking your actual cash flows, you’ll also be able to compare your cash flow forecast against future results and evaluate its accuracy.
What you’ll need
Balance sheet: You’ll need a beginning cash balance — the actual cash you expect to have on hand at the beginning of the month in your forecasting period — which you can calculate from your balance sheet.
Statement of cash flows: If you already have a cash flow statement prepared with inflows and outflows categorized, it will be easier to populate your model. Otherwise, you’ll have to determine your sources of cash and your expenses from operations, financing, and investing.
Income statement: This captures revenues, gains, expenses, and losses over a specified time frame and can help you fill in your projection model.
A cash flow projection model: You can use a free template to model your projections easily, or you can build your own. This template models cash flow over your time horizon using the granularity you’ve chosen and your cash flow categories.
Free Financial Modeling Resources for Startups
Our partner, Forecastr, offers one of the best financial forecasting software solutions for startups, as well as expert CFO services. They have excellent resources to help you prepare your financials for investors, including:
Financial model templates for almost any SaaS business model
A 60-minute financial modeling webinar you can watch on-demand
If you're a Lighter Capital client, you can get 25% off your first year's subscription, which includes free VIP onboarding and access to Forecastr's Investor Connect platform. Visit our Perks page to learn more.
7 steps to forecast cash flow
An indirect forecasting method is better for longer-term planning and budgeting. You should also be using accrual accounting to recognize revenue.
Step 1. Specify the time period
Do you want to forecast one month, one quarter, or one year? We recommend projecting cash flow up to 18 months out.
Step 2. Determine the granularity
We recommend that SaaS startups focus on monthly cash flow events unless more granular details are required. Distinguish monthly recurring expenses and income from those occurring annually or one time only.
Step 3. Identify cash inflows
These can come from sales, non-sales items, contributions, and, if applicable, interest income.
Step 4. Identify cash outflows
These can be monthly recurring expenses; yearly operating expenses; tax, travel, rent, and loan payments; cloud operating expenses; hardware purchases; or other outlays.
Step 5. Subtract the outflows from the inflows
Do this calculation for each period (daily, weekly or monthly) you are tracking for your forecast.
Step 6. Add/subtract cash flows from working capital
Determining whether you have positive or negative cash flow will enable you to plan your business.
Step 7. Model different scenarios
Repeat the above steps to generate multiple forecasts that offer perspective on both positive and negative results. For example, a bad scenario might have sales that aren’t growing at the desired rate and increasing operating expenses. A good scenario, on the other hand, shows sales that are hitting or exceeding your benchmark along with flat or decreasing expenses. Having these different projection models gives you a more comprehensive forecast and, more important, a range of possibilities for how long your working capital cash might last.
The Downside of Cash Flow Forecasting
Cash flow dynamics affect outcomes in a startup. If your forecast is based on flawed data, if you're too bullish with sales projections, or if you underestimate increasing costs, you can miscalculate your future cash burn and end up strapped.
Other variables and unknowns can surprise you, such as losing your biggest customer account, or churning a chunk of your customer base because of market changes.
No forecast is perfect, but if you follow a few best practices and look at different cash flow scenarios, you should understand the range of possible outcomes:
Use good historical data.
Make assumptions in your model that reflect reality as you know it, like seasonality.
Update your forecasts every month as you get new data.
Compare prior forecasts to actual results so you can evaluate their accuracy and make adjustments.
You’re free to experiment with your modeling, but make sure you base crucial business decisions on realistic and achievable forecasts.
Get Non-Dilutive Funding to Improve SaaS Cash Flow
Our non-dilutive debt capital is ideal for SaaS startups with higher gross margins and recurring revenue. Payments are right-sized to your business, so they won’t deplete your cash as you repay the debt, and funding can scale with you as you grow.