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business plan cash flow forecast example

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Cash Flow Forecasting: A How-To Guide (With Templates)

Janet Berry-Johnson, CPA

Reviewed by

May 30, 2023

This article is Tax Professional approved

Most small business owners just want their accounting done so they can focus on doing what they love. But tracking and forecasting cash flow—despite the time and effort required—is essential for starting, operating, and expanding a business.

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In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses.

To avoid that fate, you need a cash flow forecast to help you estimate how much your cash outflows and inflows will affect your business.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.

It’s not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered. In cases like these, a business owner must plan how they will cover costs before receiving the payment.

For example, say Hana Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month but won’t receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable. Unless Hana Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients.

With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. You can also use the information provided on past cash flow statements to estimate your expenses for the period you’re forecasting for.

( If you just want to dive into cash flow forecasting, check out our free cash flow forecast template . )

The benefits of cash forecasting

Cash forecasting may sound like something boring that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash deficit and make necessary changes, like changing your pricing or adjusting your business plan.
It decreases the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank to guarantee enough working capital to last the period.
It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. When you can predict how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.

Free cash flow forecast template

To make this a lot easier, we’ve created a business cash flow forecast template for Excel that you can start using right now.

Access Template

The template has three essential pieces:

Beginning cash balance. This is the actual cash you expect to have on hand at the beginning of the month. It should include bank accounts, PayPal, Venmo, anything you use that’s currently holding just business funds. This information can be found on your balance sheet .
Sources of cash. These are all of your cash inflows each month. It can include cash sales, receivables collections, repayments from money you’ve loaned out, etc.
Uses of cash. This is every expense your business may incur, including payroll, payments to vendors, utilities, rent, loan payments, etc.

Here’s an example of a completed cash flow projection for a three month period:

Hana Enterprises, Inc.

Cash Flow Projection

January to March 2022

As you can see from the example above, Hana Enterprises expects to have a cash shortage in March. This results from a negative net cash flow (when more cash goes out than comes in). Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.

Hana Enterprises has several options to avoid this shortage in March. They might secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables, or take other cost-cutting measures to reduce their overhead expenses.

When you’re ready to get started, download your copy of the cash flow forecasting sheet here .

How Bench can help

Use Bench’s simple, intuitive platform to get all the information you need to project your cash flow. Each month, your transactions are automatically imported into our platform then categorized and reviewed by your bookkeeper. Bench helps you stay on top of your business’s top expenses so you can make informed budgeting decisions on the fly. Explore our platform with a free demo .

Tips for improving your cash flow spreadsheet

Keep in mind: a cash flow forecast isn’t something you create once a year and never look at again. It’s a living, breathing business tool you should review and update on a monthly basis.

Though projections are helpful, they can’t perfectly predict the future. As the months pass, you should expect to see that your projections aren’t quite matching up with your actual results. That means it’s time to re-run your forecast to take into account these differences.

To improve the accuracy of your cash flow worksheet, consider the following:

Account for extra pay periods. If you pay employees bi-weekly, make sure your projection takes into account any months with three payrolls.
Remember annual payments. If certain insurance policies, subscriptions, or other expenses are paid annually rather than monthly, be sure to include them in your spreadsheet.
Remember estimated tax payments. For most calendar-year businesses, estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.
Don’t forget about savings. Try to allocate a portion of any cash surpluses to save for lean months.
Identify seasonal fluctuations. If you’re expecting a period of time with lower sales, make sure your forecast reflects this so you can have enough cash on hand to ramp up when business picks up again.
Don’t forecast too far out. Creating a rolling 12-month cash flow forecast that you update at the end of each month can help you identify issues before your business faces financial troubles, but don’t try to forecast more than 12 months out. The longer the reporting period you want to forecast, the more likely you’ll end up spending a lot of time creating a cash flow projection that doesn’t provide any useful information.

Your cash flow forecast is key to good cash flow management . Try to account for all cash sources and uses in your projection and maintain an emergency fund or backup plan to ensure you don’t get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don’t compromise growth or put your business in jeopardy.

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How To Build A Cash Flow Forecast For Your Startup In 8 Steps

November 17, 2023

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.

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:

Assess your breakeven point : when can you realistically expect to be profitable
Estimate a valuation for your business , even if you are pre-revenue
Include in your pitch deck or business plan
Understand how much you need to raise for your fundraising

Expert-built financial model templates for tech startups

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 Sheets is fine), you can check this Excel template for accounting 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
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).

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.

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.