How to Build a Cash Flow Forecast (+ Free template)

Whether you want to understand what’s your breakeven, your valuation or simply create a budget for your business plan, preparing a cash flow forecast for your startup is key.

There are a number of options available to you: use a financial model template, a software, hire an expert or do it yourself. In this article we will discuss the latter option: how you can create a rock-solid cash flow forecast for your startup yourself. Let’s dive in!

What is a cash flow forecast?

A cash flow forecast is a document (often in the form of a spreadsheet such as Excel or Google Sheets) whereby one estimates the flow of cash (cash in and out) of a business over a specific period of time.

In other words, a cash flow forecast simply is the projection of a business’ cash flow statement.

What’s a cash flow statement?

The cash flow statement is one of the 3 financial statements of any business. As you might already know, they are: the profit-and-loss (“P&L”, also referred to as “income statement”), balance sheet and cash flow statement.

Whilst your P&L includes all your business’ revenues and expenses in a given period, the cash flow statement records all cash inflows and outflows over that same period.

A cash flow statement from our financial model templates

Indeed, some revenues and expenses are not necessarily recorded in your P&L but should be included in your cash flow statement instead. Why is that?

There are 2 main reasons:

Your P&L only includes the expenses you incurred to generate revenues over the same time period

For example, if you sell $100 worth of products in July 2021 and incurred $50 cost to source them from your supplier, your P&L shows $100 revenues minus $50 expenses for that month.

But what about if you bought a $15,000 car to deliver these products to your customers?

The $15,000 should not be recorded as an expense in your P&L, but a cash outflow instead. Indeed, the car will help you generate revenues, say over the next 5 years, not just in July 2021. We call these expenses “capital expenditures” (or “capex”).

Some expenses in your P&L aren’t necessarily cash outflows

Think depreciation and amortization expenses for instance: they are pure artificial expenses and aren’t really “spent”.

Indeed, although your P&L might include a $100 depreciation expense, your cash flow remains the same. You didn’t really spend that $100: it’s purely an accounting adjustment to account for the decrease in asset value in your balance sheet.

Note: Depreciation and Amortization expenses are used in accounting to reflect the “loss” in value of an asset. For instance, the $15,000 car you just bought, like any other asset, will depreciate over time. Assuming a 5 years depreciation schedule, your car would be deemed worthless in 5 years time.

Why does your startup need a cash flow forecast?

Entrepreneurs and startup founders often create their first budget and cash flow forecast when pitching investors. Budgets later often end up somewhere idle in a folder, outdated, and are updated for the next funding round.

Yet, budgeting for your startup shouldn’t just be a matter of ticking the box for investors. Instead, your cash flow forecast should be on top of your ongoing management tasks: keeping an updated monthly cash flow budget is essential to make better decisions for your business.

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

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The 8 steps to create a cash flow forecast

Creating financial forecasts for your startup shouldn’t be overly complicated. Even if you have no previous finance experience, with some basic accounting and finance knowledge one can create great cash flow forecast for any startup. Follow the steps below to build your own.

The first thing you will need to do is to open a blank spreadsheet (Excel or Google Sheet is fine) and follow the 8 steps below.

Remember that your cash flow forecast will need to be as accurate as possible, to do so you can sources such as market research reports, competitors analysis or even your own financial performance (if any).

1. Start from your actuals (if any)

If you have any historical performance to date, start from this to build your startup cash flow forecast.

Historical performance can be financials (revenue for example) but not only. If you haven’t yet started to generate revenue and/or revenue is limited and you feel other metrics are more relevant, go from there. For instance, if you have started to build a user list, or email sign-ups, you can also use these numbers to forecast growth, and ultimately revenue.

Only include the key drivers to your business

You don’t necessarily need now to start from your entire profit-and-loss or cash flow statement you would have exported from Xero for instance.

Instead, identify what drives the most of your business’ performance: is this the number of customers you have? Is this the commission rate you are charging your customers?

The key drivers will help us estimate your financial forecasts later on. As such, they need to be clearly identified. A few examples of drivers for 3 illustrative businesses are:

  • Retail: number of customers, average order value
  • Ecommerce: number of visitors, conversion rate, average order value
  • SaaS: number of users, churn, average revenue per user

Once you have identified your key drivers, include them as a start to your model. For instance, if you are generating $10,000 sales from 3,000 orders in a given month, your key drivers in that month can be:

  • Orders per month: 2,000
  • Average order value: $5.0

2. List all startup costs

For new businesses which don’t have yet historical performance, start by listing all the expenses you incur and the assets you need to buy before launching your business.

There are 2 types of startup expenses:

  • Assets: one-time purchases of assets such as equipment, machinery, inventory, etc.
  • Expenses: any expenses (usually fixed) you incur before you start your business. Do you need to pay for legal fees to incorporate multiple entities? Do you have to pay for a specific license for marketing your products to consumers? Maybe you will need to pay someone to build your website from which you will start acquiring customers later on?

3. Build your revenue model

Before we estimate revenue based on the drivers discussed earlier (step 1), we need to clearly identify what is your revenue model.

What is your revenue model?

A revenue model can be subscription, transactions, ads, commission revenue, etc. For a refresher, read our article on the 8 most popular revenue models.

Surprisingly enough, one business can have multiple revenue models.

For example, if you sell subscriptions to customers (e.g. gym membership) yet you also sell one-time services (e.g. private sessions with trainers), these should be listed as two separate revenue models.

Indeed, they work differently:

  • The subscription is a function of the total number of users you have multiplied by a recurring monthly fee
  • Private sessions are instead a function of a % of your users multiplied by a one-time fee

How to forecast revenue?

Once we have identified your revenue model(s), we need to build out revenue for each of them.

Using our gym membership above, subscription revenue will be a function of the number you have over time times the recurring fee. For private sessions instead, use a percentage of users who pay for a session each month (based on your historical if any) – for instance 5% of total users – and multiply it by the total number of users and the one-time session price.

Note: you might be wondering whether you should be taking into account VAT / sales tax for your revenues projections. VAT impacts your cash flow but doesn’t impact your profit-and-loss so you might not need to include it. For more information, read our article here.

4. Forecast variable costs

Variable costs are expenses that increase or decrease based on the level of sales and/or another factor (e.g. customers for instance). As such, they can’t just be flat over time, instead their amount will vary based on other parameters of your financial plan.

Common variable costs are:

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

If you have historical performance, use your actuals to forecast variable costs. For example, if you pay $10 in shipping costs in average per order, use the same value for your projections.

Instead, new businesses will have to find information either with industry benchmarks, public sources (cost-per-click for paid ads spending can be found for any keyword on Google Planner for instance) or quotes from potential suppliers.

5. Forecast 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

Salaries and other payroll expenses often constitute the bulk of fixed costs. In order to accurately forecast salaries you need to estimate the right amount of people you will need over time, and their salaries.

Average salaries for specific jobs and geographies can easily be found in industry benchmarks.

The number of people your business will need depends on their function: some teams will increase or decrease based on certain metrics such as revenue (sales and customer success teams often grow in line with revenue) whilst others will remain stable (administrative functions e.g. finance).

Read our article on how to build a flexible hiring plan in Excel for your business for more information on how to efficiently forecast salaries expenses as your business grows.

6. Putting it all together

Once you have projected revenue and expenses based on your key drivers, you can now consolidate it all under your profit-and-loss. Subtract all expenses (fixed and variable) as well as startup costs from revenue to get to net profit.

To calculate your cash flow statement, no need to do anything complicated at this stage: simply use your net profit, and subtract any other cash items (i.e. capital expenditures), for instance the startup asset purchases discussed above (step 2).

Step 7. Review and adjust

After having built your projected profit-and-loss and (simplified) cash flow statement, take time to review your estimates. Do they make sense to you? Is there anything surprising in your projections?

The review of your financial forecast should help you determine 2 things:

  • Are your projections error-free? It’s easy to get lost in spreadsheet and make mistakes in your calculations.
  • Are your projections realistic? Now that you take a step back to look at the big picture (revenue, growth, margins, cash flow), it’s easier to assess whether your projections are unrealistic or not.
In order to build realistic projections for your startup and how to compare them vs. industry averages, read our articles below:
How to Use Industry Benchmarks for your Startup Financial Plan
How to Build Accurate Financial Projections for your Startup?

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Step 8. Determine the amount you need to raise

If you are creating a cash flow forecast for your startup, chances are that your business will be loss making in the first few months or operations. No worries, that’s why startups often raise funding at the beginning before starting operations and/or product development.

If you are looking for funding for your startup, your cash flow forecast will help you assess how much you should raise.

Disclaimer: raising more is not necessarily better. Knowing exactly how much you need to raise will in fact dramatically increase your chances of raising funding.

To know how to assess how much you should raise for your startup, read our article here.

Free cash flow forecast template (+ video)

Click on the link below to download a financial model template you can download and use for free. In this financial model you will find all 3 pro forma financial statements including a cash flow forecast.

Important: this template, unlike other financial model templates on our website, is not business-specific. This means that you may find limitations to use this template for your specific business.  If you wish to use a template specifically designed for your business, have a look at our full list of 100+ financial model templates here instead.

Here’s a short video tutorial on how to use this template:

Any questions? We’d love to hear from you. Contact us here.