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 forecasts and projections don’t feature prominently in your broader business plan, the odds for success are heavily stacked against you.

More than 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.

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What is a cash flow projection model?

We’ve all heard of cash flow. It’s just money in versus money out, right? That’s true, and it’s good to have a solid handle on that—perhaps by hiring an excellent bookkeeper—but it only focuses on 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, taking into consideration how certain hypothetical situations may affect cash flow. It allows you to see at a glance how long your current working capital will last. (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 often tend to be reactive. In other words, they find themselves regularly behind the curve, grappling with situations as they occur. On the other hand, businesses that do embrace cash flow projections tend to be proactive, leaning into obstacles and perhaps even turning 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

First of all, remember that 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. Done right, a cash flow projection should tell you at a glance how long you’ll be able to run the business, when your “cash zero” date is (when you’ll run out of money) and when you might be able to afford to expand.

The five steps below describe how to prepare a basic 12-month cash flow projection. For projections that have more complex inputs—and for businesses with more than $5 million in revenue—GAAP prescribes a different, more specific format for presenting cash flow statements. steps:

1. List your estimated sales income.

If you’re an existing business, simply look back over the previous year’s figures to get an idea of what you can expect from sales in the coming 12 months. If you hit a seasonal high or low, chances are that will happen again. If you’re a new startup with no sales history, look at your expenses and work out how many sales you’ll need to hit in order to cover those costs, and use it as a conservative estimate. It’s good practice to analyze past trends, benchmark various metrics, consider future market expectations, and revenue expectations to make reasonable assumptions using which cash projections are made. The advantage of cash projection modeling comes from considering how the assumptions may vary in multiple scenarios, and what the cash flows may look like accordingly.

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 the purpose of 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, make sure you include all expenses, such as operational and administrative costs. You should, of course, also consider fixed costs like salary, rent, energy bills, etc.

Think about your outflow in terms of specific expense categories, such as purchasing, advertising, travel, repairs, license fees, etc. to make sure you've covered all your bases.

4. Combine the above into a simple spreadsheet.

In this step, you’ll prepare a very simple 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 cash flow projection example below:

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 operation of the business, time of expansion, new product introduction, and pricing of products and servicing. 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 possible 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). 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, and even the most diligent CFOs will consider outsourcing or using AI-powered tools to get the best possible results. Typically the more data you have, the more accurate your cash flow projection modeling will be; hence the importance of having a good cash flow management system right from the beginning of your startup journey.

Are you a startup business owner 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 with confidence.

Here at Zeni, we combine the power of AI with the expertise of a finance team to give startups like yours 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 full visibility over all aspects of your financial situation at all times, 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 your cash flow might be impacted by future variables in seconds, but you can also manage other essential financial functions quickly and accurately.

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