Understanding Cash Flow Forecasting for Startups

Updated: Jan 2

When you first start a new business, you may feel overwhelmed for all the things need to be done. Very often, entrepreneurs put aside those task that they are not very familiar with. In many cases, those are finance-related tasks.

More than 45% of startups don’t bother trying to forecast their cash flow in the first year, seeing it as an impossible task as they don’t have enough data to generate one.

However, as an entrepreneur, it is also important to think steps ahead and ask yourself often:

  • How much cash is coming in and when?

  • How much cash is going out to pay your suppliers and when?

Understanding and predicting cash flow is the key to keep the business from financial overstretch while meeting your ambitious goals.

A forecast itself is simple – but it can take up some time and effort to put together, which is why more than often entrepreneurs tend to put this task at the bottom of their list. But if there’s one thing that I’d like you to take away from this article – it’s this: while doing a cash flow forecast is absolutely essential work for a startup, it does not have to be a nuisance as it seems to be.

What is Cash flow?

Let’s start from the beginning. Cash flow is just the term for the money moving in and out of your business every month, simple as that.

It goes in two directions:

  • Revenues: cash flowing in from customers who are buying your product/service.

  • Expenses: cash flowing out in the form of payments and expenses – like rent, supplies, or tax.

💡 When a company has more income than expenses, it has a positive cash flow. If the case is the opposite, with more going out than coming in, the company has a negative cash flow. The aim is to stay as much in positive as possible. It’s not easy to do that, especially with a freshly launched startup.

Cash flow forecast for startups

For startups, a cash flow forecast, as a part of your business plan, shows how much money you expect to receive, and how much you expect to pay out, over a set length of time. Some entrepreneurs like to plan over the course of 12 months, while others prefer to focus on 3 or 6-month periods at a time.

The trickiest thing for a startup when doing a forecast is that you do not have historical data to refer to. You need to include all possible costs and revenue possible and find out workable formulas generate a statement. Once a year has passed, you will be able to start comparing your numbers and generating a cash flow based on the previous year’s performance.

The fact is that startups often have a large number of costs in their setup period. Then the large negative cash flow will need to be plugged with funding until sales have had a chance to grow. For many businesses, this comes in the form of an investment or a loan which is usually paid off later. Once a company has established a positive cash flow position, the ideal goal is to stay there.

Nevertheless, it is not uncommon that a startup burns through its investment before reaching the point where profitability was predicted. While established businesses might have a buffer of savings to fall back on in the event of the unexpected, startups will often struggle to bring their cash flow back into the positive.

To be a responsible business owner, you should revisit and compare the forecast to your actual cash flow regularly so that you can see how closely the numbers match up, and take actions when necessary.

What does a cash flow forecast serve for?

  • 🎯 Supports running hypothetical business scenarios

Starting a business or scaling it always comes with risks. Using cash flow projections, you can play out the financial implications of hypothetical business scenarios. Forecasting the cash flow against the original plan/hypothesis would help you to understand whether or not it would be feasible and how well your business would be performing.

  • Builds more effective surplus cash management

Just as cash flow projection can be used to identify periods of negative cash flow, it can also be used to predict periods of positive cash flow. Being aware of when you will have surplus cash available will allow you to use this positive cash flow balance to your advantage.

  • 🚨 Tracks expenses and supports better decision making

Creating a picture of projected cash outgoings over a given period can allow you to closely track and understand your regular business activities, spot areas where you may be overlooking.

It also helps each team head to better manage their budget and make better decisions. Yes, all team heads should be aware that if their actions are in line with a healthy growth of the business, if they are given enough transparency.

  • 🕵🏻‍♀️ Helps Monitor late-paying clients and improves customer relationship

Cash flow forecasting can also give you insight into clients who regularly pay late and impact your cash flow. Upon identifying these clients, you could create more strict credit periods to improve your cash flow and avoid periods of negative cash flow due to these late payments.

After all, customer relationship is an integral part of any business and also part of this advantage as well (we will talk about it in depth in future).

  • 🤴🏻 Builds accountability

A proper forecast keeps you focused on what you are trying to achieve through investment, so you don’t get dragged back into the day-to-day. It also keeps you accountable and ensures that you are not losing sight of the injected funds along with all your other cash.

  • 🧙🏻‍♂️ Helps gain investor's confidence

When a regular forecast of cash flow is provided to the stakeholders, it provides a sense of trust and engagement in the business. They may raise their investments based on their confidence in your regular updates.

Trying to figure it out all by yourself?

Do you have to figure it out al by yourself? Well, there must be a better option.

Faicliq is a platform built to make entrepreneurs' life easier. We understand that not everyone is an expert in finance or excel, and one can easily get overwhelmed when trying to figure it out all by themselves. "Where do I start ? What cost do I expect? Which formula should I use? How do I do a visualised report?

We have summarised the potential costs and income sources for you to select and combine, as well as have embedded well-defined formulas, so that a cash flow projection will be automatically generated and visualised.

Forget about keying in data in those little units, looking up proper formulas, formatting the spreadsheet, or visualising the report. Our intuitive financial tool will guide you step by step on forecasting your business for one, two, or five years.

💡 Thinking about becoming an entrepreneur? What about start writing the business plan with us? Get early access to Faicliq platform by filling this form: faicliq.com/early_access