If you want to be an extremely valuable asset to a company, get really good at forecasting cash.

This content might be dry… but it’ll help you manage that dry powder a bit more efficiently

Above is an output of a cash flow forecast model. It illustrates a company’s inflow and outflow of cash over the next thirteen weeks. What does this tell us? It shows what our theoretical ending bank balance would be if we were to meet certain objectives. In this case, it tells us what our ending balance would be if we were to achieve our budget.

This summary view is the apex of all the hard work we put into developing the budget and cash flow models. The top left corner shows a small dashboard with the date that we could potentially run out of cash, the date our bank balance could drop below $1 million, and other summary cash KPIs. In this example, the dashboard “zero cash date” field is blank because the company is not projected to run out of cash if they continue to operate according to plan. It is our go-to decision-making tool that combines into a single model everything we currently know about the business and all the initiatives we plan to implement. It tells us “Yes, you have the cash to operate this way” or “No, you will run out of cash if you continue to operate this way.”

It is a very important tool that is not only designed to be used by management teams but should also be published regularly to investors and boards. If you plan to raise capital or debt, then lenders and investors will request a forecasted cash flow model. You can expect that management teams will be asked for these models time and time again. If you can create a cash flow forecast with even a basic understanding and proficiency of the process, you will set yourself apart from most companies and arm yourself with a tool that gives you visibility into your future cash flow. You will also gain a lot of respect and appreciation from your board and investor group by anticipating their needs.

Cash Flow Forecast Modeling Overview

So where do we start? Once a budget model has been created, you can turn your attention to the cash flow forecast. The budget model uses the matching principle to illustrate what the income statement and profitability could potentially look like in the future, but it does not necessarily illustrate the same for the bank account. Why? Simply stated, there are cash movements in the business that are not always reflected in the income statement. Capital raises, inventory purchases, sales taxes, and other balance sheet activities impact cash without touching income statement profitability. Here are a few examples:

• Raising equity capital is not revenue. Raising equity capital increases the bank account balance and the equity section of the balance sheet. People are investing in the company, not paying for products.
• Purchasing inventory increases the assets on the balance sheet but decreases cash. Only when inventory is sold does it impact COGS on the income statement.
• Purchasing equipment or real estate decreases cash but increases fixed assets or real estate holdings.

A cash flow forecast model takes both the income statement and non-income statement inflows and outflows into consideration to get the full view of where cash is coming from and where it is going.

Cash flow forecast models create a window through which we can view future risks and opportunities.

Stress testing models is what sets great financial leaders apart from the average ones.

Cash flow models should be stress tested. These tests can illustrate multiple future impacts to cash if one or more components of the model changed. For example:

• Revenue stress tests might include adding a toggle to revenue inputs in the cash flow model to see how missing or exceeding revenue targets by 5% affects cash balances.
• Inventory planning stress tests analyze cash balances if inventory purchasing forecasts were adjusted up or down by a certain percentage.

There are many approaches to building these models, but just like budgeting, aim to keep them simple and easy to follow, while building from the bottom up.

Sales and Cash Receipts

Every company thinks about their revenue model differently. When building a cash flow model, we ask the question: “How do I collect this revenue into my bank account?”

Cash flow forecast models only care when cash is received from sales. We do not consider revenue recognition principles or GAAP for cash flow forecasting purposes.

• If your SaaS company sells annual contracts, your cash flow model will show “cash receipts” when the customer pays their annual contract.
• In an eCommerce company, sales happen daily, but the cash flow model should forecast cash receipts only when the cash hits your bank account.
• For CPG products sold to wholesalers, payments may be received 30-45 days after invoicing, so the model must reflect those terms.

To put it simply, cash flow forecasts tell the story of your bank account.

Expenses and Cash Disbursements

From a cash disbursement point of view, expenses should be modeled based on when cash leaves the company bank account. This includes payroll, rent, sales tax payments, and inventory purchases.

• Sales tax collected does not belong to the company; it is remitted to state/local jurisdictions monthly or quarterly.
• Inventory purchases should follow lead times and vendor payment terms. For example, if inventory is needed in July with 8-week lead times and Net 30 payment terms, the company orders in May and pays in August.

Payroll and Other General Expenses

Payroll costs should be modeled according to the company’s payroll schedule. Companies run payroll weekly, bi-weekly, or twice per month. Healthcare benefits and bonuses should be included based on their actual payment dates.

Rent, real estate tax, and insurance should follow contractual payment schedules. Longer-term expenses such as capital expenditures and debt payments should also be incorporated.

Outputs and Analysis: Putting It All Together

Once the cash flow forecast is built, we can analyze our projected cash position. The most valuable period to analyze is the 13-week rolling forecast, which provides a realistic outlook on near-term cash flow.

Comparing “actuals vs. forecast” on a weekly or monthly basis ensures accuracy and helps refine future projections. Executives appreciate visual summaries that highlight key trends, such as cash receipts versus inventory purchases.

Cash Flow in Summary

Cash flow forecast models provide visibility into future cash positions and help investors and management teams make informed decisions. They allow businesses to anticipate capital needs, manage expenditures, and avoid cash shortages.

While this overview covers key concepts, mastering cash flow forecasting requires practice. The more you prioritize maintaining a cash flow model, the better insights you will gain into your company’s financial health.