As a bold and ambitious entrepreneur embarking on your very first startup adventure, cash flow projection models are probably one of the last things on your mind. You’re certainly not alone in that regard, but if forecasting models and projections are not prominent in your broader business plan, the odds for success are heavily stacked against you. 

Nearly 20% of businesses fail in their first year. If you’re lucky enough to make it through that, you could still end up being one of the 50% of businesses that don’t make it past year five. 

Businesses fail for lots of reasons, but for most, it boils down to lack of investment, poor cash management, or simply running out of money. Fortunately, these are all things that a solid cash flow projection model can help with. 

See how your startup can leverage the power of automation to maintain 100% accurate books 100% of the time. 

What Is A Cash Flow Projection Model? 

We’ve all heard of cash flow. It’s simply money in versus money out, right? That’s true, and it’s good to have a solid grasp on that, but looking at cash flow on its own only presents a picture of the here and now. 

What about tomorrow? What if something unexpected happens, like an investor pulling out at the last minute or a global pandemic bringing the market to its knees?  

A cash flow projection model is a comprehensive breakdown of all the money you expect to move in and out of your business over time, considering how certain hypothetical situations may affect cash flow. It allows you to see your current working capital and your “cash zero” date. (Cash flow forecasting, another term you may have heard, strictly predicts cash flow in the future based on past performance.)

Businesses that don’t take advantage of cash flow projection modeling are often reactive. In other words, they find themselves regularly behind the curve, grappling with situations as they occur. On the other hand, businesses that embrace cash flow projections tend to take a proactive approach, leaning into obstacles and perhaps even leveraging them to their advantage. 

Good cash management is a lot like a game of chess—you always want to think several steps ahead, assessing a range of scenarios each time you play a move. Cash flow projection models, when done right, keep your business nimble, swift, and adaptable, ready to weather any potential storms that may come your way. 

How To Do A Cash Flow Projection Model

A cash flow projection is only as good as the numbers that go into it. Be diligent with your bookkeeping, maintain accurate P&L statements, balance sheets and cash flow statements, and your forecast will provide a lot more value. 

The five steps below describe how to prepare a basic 12-month cash flow projection. Note that GAAP prescribes a more specific cash flow statement format for forecasts with more complex inputs and for businesses with over $5 million in revenue. But this is an excellent place to start:

1. List your estimated sales income.

If you’re an existing business, look back over the previous year’s figures to get an idea of what you can expect from sales in the coming 12 months. For example, if you hit a seasonal high or low, chances are that will happen again. 

If you’re a new startup or small business owner with no sales history, look at your expenses to determine how many sales you’ll need to cover those costs, and use that amount as a conservative estimate.

It’s also good practice to analyze past trends, benchmark various metrics, and consider future market and revenue expectations to make reasonable assumptions about cash projections. The advantage of cash projection modeling comes from considering how the assumptions may vary in multiple scenarios and how the resulting cash flows may look.

2. List any other cash inflows or receivables.

Any income that doesn’t come from sales belongs in this category. Bank loans, deposits, investments, grants, tax refunds, royalties, and franchise fees all count as cash inflow for your cash flow projection. 

3. List all cash outflows and expenses.

How much does it cost to make your goods or services available to your customers? In considering this question, include all expenses, such as operational and administrative costs. You should also consider fixed costs like salary, rent, energy bills, etc. 

To ensure you've covered all your bases, think about your outflow in specific expense categories, such as purchasing, advertising, travel, repairs, license fees, etc. 

4. Combine the above into a simple spreadsheet.

In this step, you’ll prepare a straightforward spreadsheet with cash sources (income) and cash uses (expenses) in rows, dividing these up into as many individual groups as you can (rent, travel, salary, etc.). You should have something that resembles the monthly cash flow projection example below:

Cash Flow Projection Template

Cash Flow Projection Template

5. Start modeling with your cash flow projection. 

Now that you have your cash flow projection in place, you can start thinking about cash flow projection modeling. 

In basic terms, modeling supposes different scenarios and tells you how it will impact your business if it stays on its current course. This helps the company choose the scale of business operations. Some scenarios that startups would be wise to consider as part of the modeling exercise include:  

  • The growth of your subscriber base when business is booming versus a possible slowdown due to market circumstances
  • The effect of releasing possible new products in the development pipeline
  • Scaling up (or down) in hiring to match business growth
  • An increase or decrease in production or development costs
  • The potential effects of receiving investor funding, or an investor pulling out funds

The most important metrics for any startup are the net burn rate (the total amount of cash a startup is losing per month) and revenue run rate (a forecast of annual earnings based on data from a short period of time, such as 30 days). Modeling various scenarios will help the company understand the extent of its current cash runway and plan the timing and amount of fund injection for the business to support its growth plan.

This stage can get complex; even the most diligent leaders will consider outsourced CFO services or using AI-powered tools to get the best possible results. 

Looking For A Simple, Accurate System For Cash Flow Management?

Cash flow management can seem daunting for any startup, but with a cash flow projection model in place, you’ll be able to make better business decisions and grow confidently. 

At Zeni, we combine the power of AI with the expertise of a finance team to give startups a simple way to manage everything finance-related, from bookkeeping and accounting to invoicing, bill paying, yearly taxes, budgeting and forecasting, and more. 

Built specifically for startups, Zeni provides daily, real-time visibility into all aspects of your financial situation and streamlines and automates many basic financial functions. (Among other things, the Zeni Dashboard automatically calculates your net burn, runway, and cash zero date!) Not only can you use Zeni to show how future variables might impact your cash flow in seconds, but you can also manage other essential financial functions quickly and accurately. 

Interested in seeing how Zeni works? Book a demo with us today, and we’ll show you!


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