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Strategic Planning

The Startup Cash Flow Forecast Guide: Pitfalls and an Easier Path Forward

The traditional cash flow forecast isn’t designed for startup founders and CEOs to understand. It’s a puzzling mess of GAAP accounting and financial statements that make it hard to spot weaknesses in your cash flow plan. You need a cash flow forecast you can actually make sense of—one that makes it easier to plan for high growth.

4 min read
Strategic Planning
The Startup Cash Flow Forecast Guide: Pitfalls and an Easier Path Forward

The traditional cash flow forecast isn’t designed for SaaS startup founders and CEOs to understand. It’s a puzzling mess of GAAP accounting and financial statements that make it hard to spot weaknesses in your cash flow plan. You need a cash flow forecast you can actually make sense of—one that makes it easier to plan for high growth.

Cash is every company’s most important resource. No matter what you’re building, how high your valuation is, or how strong your business model seems, a few missteps in cash flow planning could shorten your runway—the amount of time your business has before it runs out of money. That’s why it’s so important for startup founders and finance leaders to build the most accurate cash flow forecast possible and get an accurate picture of how growth plans will impact bank balances.

But making sense of your cash position for both the short and long-term is easier said than done. Cash is king. And that’s why startups need a simpler way to create a cash flow forecast that keeps up with the pace of business change.

What Is a Cash Flow Forecast?

A cash flow forecast is a projection of how much money you’ll have in the bank after accounting for income and expenses over a given period of time. Your cash flow forecast presents an estimate of your future bank balances based on the money going in and out of your business.

In addition to payables and receivables from your balance sheet, a cash flow forecast also includes line items like revenue, payroll, depreciation, and other expenses from your income statement. All of this information makes your cash flow forecast a critical tool for understanding how changes in your strategic plans will impact your runway.

At the most basic level, the point of a cash flow forecast is to make sure you understand whether or not you have the necessary amount of cash to keep your business up and running. But a great forecast does more than just confirm you have enough working capital to pay your bills and employees. It should also be a tool for thinking through strategic challenges, such as finding ways to extend runway and deciding when to raise your next round of funding (and how much you need to raise).

There are two main ways to build your cash flow forecast — the direct method and the indirect method.

  • Direct method. A direct cash flow forecast typically focuses on short-term projections (90 days or less). It uses known/anticipated transactions to provide an accurate view of cash flow for a specific period in time.
  • Indirect method. An indirect cash flow forecast uses historical data from balance sheets and profit and loss (P&L) statements to project a startup’s long-term cash position. The indirect method is a common part of budgeting processes, as startup leaders run cash flow projections to see how strategic plans will impact bank balances. But it’s less accurate than the direct method because it extends further out into the future and there is less established history at most startups.

Business leaders typically look at cash flow forecasts at the end of each month. However, startups can benefit from daily or weekly reviews of cash flow because they evolve so rapidly.

Cash Flow Statement Must-Haves for Clean Projections

A reliable cash flow statement is the basis for any effective forecast. Before you try to forecast cash inflows and outflows in your business, make sure you nail down the basics of this piece of the traditional 3 statement financial model.

cash flow statement in Mosaic
Standard cash flow statement in Mosaic

A high-level cash flow statement includes insight into the accounts that impact net income and operating cash flow, including:

  • Accounts payable. The amount of money you owe across expense accounts from operating activities.
  • Accounts receivable. The income you gain from invoices that customers pay for your products and services.
  • Commissions accounting. The fees you owe to account executives on the sales team for commissions on closed-won deals.
  • Other liabilities. Expenses you owe outside of accounts payable, including loans, deferred revenue, and payroll.
  • Prepaids and other assets. Asset accounts, including office equipment and computers, depreciation of that equipment, and any prepaid expenses. 

These are the account categories that you project forward in a pro forma cash flow statement. And while it may seem like a simple act of calculating changes in balance sheet accounts, that’s a massively tedious process if you’re running weekly or even monthly cash flow forecasts. As a result, many CFOs and their teams fall into a few common cash flow forecast pitfalls.

The 3 Common Pitfalls of Startup Cash Flow Forecasts

Startup businesses fall into common pitfalls with cash flow projections and forecasts because founders and CEOs aren’t necessarily focused entirely on finance. You know it’s important to have a firm grasp of your cash flow. But that doesn’t mean you’re going to become an expert in generally accepted account principles (GAAP) overnight to be able to build the kind of cash flow plan a dedicated finance team would.

The reality is that cash flow planning isn’t easy under any circumstance—even if finance happens to be your area of expertise. That’s why running out of cash is one of the top reasons startups fail. Avoid the following pitfalls to stay in control of your cash flow.
business financial planning blueprint ebook annual planning agile planning

Pitfall #1: You Only Plan for the Ideal Scenario

Startup leaders that take a DIY approach to cash flow forecasting with an Excel template or some accounting software often stop short at the ideal scenarios for payables and receivables. Assuming cash inflows and cash outflows will follow the perfect circumstances in your head can lead to problems with budgeting and mapping out a strategic business plan. 

Your cash flow forecast has to account for more nuance than the ideal scenario includes. For example, what if you assume your Salesforce payments can be broken out over the course of 12 months, but, in reality, you have to pay for twelve months upfront? Or, what if one of your customers runs into trouble and can’t pay their invoice? These would be major hits to short-term cash flow management that could derail strategic plans.

It’s difficult to create a cash flow forecast that accounts for all the nuances and variabilities that can impact your bank balances on a daily, weekly, and monthly basis. But having deep visibility into a wide range of potential scenarios is crucial to startup success.

You need a more accessible way to manage and update your cash flow forecasts, so you can analyze potential issues and see how they’d impact your runway.

Pitfall #2: Your Cash Flow Forecast Is Separate from Your Financial Models

One reason startups experience funding shortfalls is that their cash flow forecasts and projections don’t align with headcount plans, expense forecasts, sales rep quota capacity plans, and other financial models that help run the business. This happens when financial assumptions you make in the model don’t match up with the reality of the changes in your bank account.

You might build your financial model on the assumption that 100% of your customers will pay you on a monthly basis. But in reality, you may end up negotiating different terms depending on the customer. What if 80% of your customers pay monthly, 10% pay annually, and 10% pay upfront? If you adjust your cash flow forecast without also updating the financial model, you can end up with blind spots in your strategic plans.

The best cash flow forecasts align fully with the financial models you use to project overall business performance and map out growth strategies. To gain this alignment, you need access to real-time financial data from all of your business systems.

Pitfall #3: You Take a Hands-Off Approach to Cash Flow Forecasting

The easiest way for startup founders and CEOs to handle cash flow forecasts is to hire someone to build them in a first-class way—but that doesn’t mean you should remove yourself from the process entirely. Maintaining total visibility into cash flow forecasts and projections will help you make more effective strategic decisions.

Even if you don’t build the cash flow forecast yourself, you should be able to make changes to project how strategic plans will impact cash flow. Having the flexibility to run “what if” analyses is critical.

What if all of your customers started paying 12 months in advance? What if half of your customers run late on their invoices? What if new vendors expect quarterly payments? If someone else is managing your cash flow plans, and you don’t fully understand the forecasts, you could end up making decisions that put your runway at risk.

Having an accountant or finance pro build your cash flow forecasts is great. But you need to be part of the process if you want to stay in control of cash flow.

How To Forecast Startup Cash Flow with Mosaic

Startups need both short-term (the direct method) and long-term (the indirect method) cash flow forecasts to effectively understand where dollars are coming in and where dollars are going out of the business. 

The short-term side of startup cash flow forecasting is less about modeling and more about getting real-time visibility into key performance indicators and trends. That’s why Mosaic provides an out-of-the-box financial dashboard template for cash flow analysis that automatically stays up-to-date with the latest actuals from your ERP integration.

startup cash flow analysis dashboard
Startup cash flow analysis template in Mosaic

Once you have the short-term view of cash flow, you can look further into the future and model out a pro forma cash flow statement. 

Our Strategic Finance Platform ties all the components of a financial model together to automatically create a cash flow forecast based on the various ways your decisions will impact cash balance in the future. The steps included in modeling a startup cash flow forecast include:

  • Forecasting headcount for various departments and using driver-based planning to map out future expenses from equipment purchases, software purchases, payroll, and more.
  • Planning vendor payments as the company grows and tying that to cash impact on runway.
  • Calculating changes in your balance sheet forecasts in terms of cash impact so your pro forma cash flow statement stays up-to-date. 

The result is a cash flow forecast you can overlay on your financial reports.

Pro forma cash flow statement with forecast
Cash flow statement with forecast in Mosaic

It’s Time for a More Modern, Forward-Looking Cash Flow Planning Process

Mosaic turns traditional cash flow forecasting and planning into a more flexible, transparent process that gives startup founders and CEOs more control over their runway. Instead of getting lost in a complicated mess of GAAP cash flow statements and financial model spreadsheets, you get a unified visualization of your finances that is always up-to-date with real-time data from how your business actually operates.

Unlike other financial modeling software solutions, the Strategic Finance Platform makes cash flow planning more accessible to all business stakeholders—not just the finance team or the accountant. It gives you the flexibility to quickly model new scenarios and see how strategic plans will impact cash flow. Model cash flow by vendor to see how decisions to invest in new systems will impact your runway. Or, quickly analyze different scenarios to see how changes in customer billing schedules will impact the amount of cash you have to increase headcount or expand your product line to a new market. You can change the model with a few clicks in Mosaic.

Looking at historical cash burn is important. But the typical backward-looking process of studying past reports to project future cash flows isn’t enough for the modern startup. You also need clear visibility into how today’s strategic decisions impact runway tomorrow, next quarter, and beyond. And that’s where Mosaic makes life easier for startup leaders.

If you want to learn more about how easy it is to manage and plan your cash flow and build a rolling forecast in Mosaic, get a demo and see how the platform works.

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