Cash forecasting: a quick guide for busy FP&A teams (updated for 2024)

Why is cash flow forecasting important?

Regardless of your business model, cash flow forecasting is a requirement for every business.

It’s up to the FP&A team to ensure their cash flow projections are accurate and done in a timely fashion because the executive team and other business leaders will partner with the finance department to make strategic choices that guide the business.

In other words: cash flow forecasting, along with strong cash flow management, decides where the business can head. 

You have to get it right.

And that begins with getting the correct data: budgets, expenses, sales, investments, taxes, assets, liabilities, debts...

Liquidity is also critical for companies, and better financial forecasting tools help FP&A build more accurate what-if scenarios and model different options based on different levels of liquidity.

So here's the tl;dr:

More accurate cash forecasts lead to more accurate decisions for FP&A and the business.

Why do cash forecasting in SaaS?

SaaS companies operate on a recurring revenue model.

As such, SaaS CFOs use financial ratios like the LTV/CAC ratio (which compares customer lifetime value and customer acquisition cost), among other KPIs and metrics, to measure and predict growth sustainability.

The subscription model is great because it means money flows into the business at regular intervals well into the future.

And while subscriptions can vary in their length...

Generally, a SaaS company can count on a stable MRR (monthly recurring revenue).

So the question then becomes: how much of that is liquid cash?

After all, SaaS companies don't collect a sale's total value until the final payment is made. That's the nature of subscription businesses.

Churn is also a problem, and hard to predict. 

On the flip side, growing NDR is a top consideration. 

So for the savvy CFO who wants to strategically leverage her cash to hire in critical areas and grow the business, it helps to know how much cash the business will have.

Hence: the cash flow forecast.

Of course, that's one only example. FP&A teams should regularly conduct cash flow forecasts to gauge the sustainability of current business practices and create different pro forma scenarios based on business performance.

...so how do you actually do cash forecasting? 

Let's get into it. 

The two methods of cash forecasting: direct forecasting vs. indirect forecasting

There are two standard methods of forecasting cash flow: the direct method and the indirect method.

Direct forecasting

The direct method is bottom-up, with all the associated perks and annoyances: it's more accurate (especially in the short term) but highly manual and time-consuming.

This cash flow forecast method asks FP&A teams to plot cash influxes and expenses by arbitrary chunks. It creates a granular view of the business's cash at the end of the reporting period.

Indirect forecasting

The indirect method is top-down and more common for external reporting. It provides a high-level view of expected cash flow, so it's more helpful for long-term direction and strategy.

The indirect cash flow forecast method asks the FP&A team to use forecasted financial statements. Teams then consolidate those statements to forecast cash flow.

How to do cash forecasting: 9 steps for an accurate direct cash flow forecast

The direct forecasting method for forecasting cash flow is your bottom-up approach.

Since it requires you to roll up plenty of historical financial data from company accounts, AP, AR, payroll, etc., and have realistic sales projections, it's time-consuming to do by hand.

But it's also highly accurate, especially in the short term.

1. Determine your future scope

Most forecasts work in intervals of 30, 60, 90, 180, and 365 days.

There's no right or wrong forecast scope to pick. We recommend doing multiple forecasts in the short term (30, 60, and 90 days) and the long term (180, 270, and 365 days).

2. Break your forecast into "business chunks"

Chunking your forecast will make it easier to complete.

We recommend breaking your forecast into chunks that make sense for your business. For example, if you pay biweekly, then biweekly chunking makes sense.

Your reason behind this cash flow forecast can also inform this decision: if you're trying to ensure you have enough cash on a quarter-by-quarter basis because that's when you report to the board, then a 90-day chunk makes more sense.

The shorter your chunks, the more accurate your cash forecasting model becomes. But it'll also be more tedious to do by hand.

And the inverse is true for longer chunks.

3. Identify expected inflows

Expected cash inflows are any of the following:

• Expected outstanding payments from customers
• Tax refunds
• Expected asset sales
• Expected cash sales based on past business performance
• Interest payments

You can look at previous income statements, historical data, and past business performance to get an idea of how much cash coming in you should expect.

A few caveats to consider:

1. Base expected sales on realistic forecasts. You'll likely need to create three scenarios: on, above, and below plan.
2. Make informed assumptions about how long it takes for customers to make payments, including those who stop.
3. Ignore accrual-based accounting. Only focus on the cash your company receives.

And, although it's obvious, working capital changes like new credit cards are not cash inflows because they're credit, not cash.

Now it's time for the next step.

4. Forecast your accounts receivable (AR) and bank accounts

Once you've identified your expected cash inflow sources, it's time to understand how your accounts receivable and bank accounts will look.

Plot these expected cash inflows onto the timeline you created in the previous step. For each chunk, keep a running tally of your AR and company bank accounts.

This will give you a good idea of your net income in your cash flow projection at any given chunking moment.

5. Identify expected outflows

You're going to repeat your expected cash inflow process with expected outflows.

Some examples of expected cash outflows include:

• Operating expenses like payroll and inventory
• Capital expenditures like rent
• Loan payments and other outstanding debt repayments
• Tax payments

Consulting your previous financial data and cash flow statements will help you anticipate your expected cash outflows.

6. Plot your accounts payable (AP) and cash outflows

Again, plot your expected cash outflows and payments according to the chunks you made earlier.

Feel free to consolidate these numbers like you did to make your spreadsheet cleaner.

(You can use Cube's drilldown function to see the composite values. Cube users—no need to worry about losing information!)

7. Keep a running tally of your net cash flow

Now flatten out your expected cash inflows and outflows per chunk.

Here you have, at a glance, your cash balance for any chunk in the scope of your cash flow forecast. You have a few net cash flow guardrails, so to speak.

You know precisely when your positive cash flow and negative cash flow chunks are.

8. Calculate your total cash reserves

Now it's time to add your cash flow to your operating cash reserves.

You should make this a rolling calculation; i.e., each chunk should build on the previous chunk.

In other words, your previous opening cash balance needs to factor into your current closing cash balance.

Now you have a cash forecast showing you your future cash flows—and net cash balances—at regular intervals for a given timeline.

9. Plan to course-correct negative cash forecasts

You know at any point in your forecasted chunks whether your total cash reserves are negative (or too low for comfort).

This is the time to put on your financial planning hat, revisit your other models or headcount planning, and figure out how to get more cash into the business.

If it helps, you can create a pro forma cash flow statement based on your completed cash forecast.

And that's it! You just completed a direct cash flow forecast.

If you're interested in finding your projected free cash flow, add back in all expenses that don't support operations and/or maintain capital assets.

How to do cash forecasting: 10 steps for an accurate indirect  cash flow forecast

This is your top-down forecasting approach.

Because it's top-down, you begin with your ideal end state—or a disastrous end state, if you're setting guardrails—and work backward to show how to get there.

The indirect cash flow forecast is much better when forecasting cash flows for an external stakeholder.

Let's get started.

1. Create a projected income statement and balance sheet

Your first step is to create a forecast income statement for your forecasting period. How much actual cash do you want to have? Consider the kinds of cash surpluses you'd like to have, or start with an arbitrary number to get more information.

You should also make a projected balance sheet at the end date of the forecast period.

2. Identify loss

Identify the net income or loss for the period on the forecasted income statement.

3. Calculate the change in the accounts receivable (AR) at the beginning and end of the forecast period

To represent the cash value that was included in the projected income statement but that hasn't been completed, you'll subtract your increase in AR from your income.

And to balance this out, you're going to add that decrease in AR to income to represent the cash collected in the period for revenue recognized in a prior period.

4. Determine the change in accounts payable (AP)

Now you're going to do the same thing with your AP. You need to find the difference between the AP on the balance sheet at the end of the cash flow projection and what you have at the beginning of the period.

You should add any expenses that have not yet been paid in cash and subject the expenses to account for the cash spent during the period.

5. Restore depreciation expenses

Depreciation expenses are recognized on the income statement but have no impact on cash.

So you should add them back in to cancel them out.

6. Balance the AR for other applicable assets

Now it's time to take stock of your other assets, like fixed assets and notes receivable, and decide whether or not you need to balance them out.

Once you've done that, move to the next step.

7. Balance at AP for other applicable liabilities

These might include cash payments like taxes payable and prepaid revenues.

8. Adjust for expected business earnings and payments

Adjust your net income for earnings and loan repayments.

By this point, you might need to experiment with different sales or conversion rates to get the cash flows you want.

9. Adjust for the purchase and sale of future investments

Add amounts for purchases and subtract for sales of future investments not already included in the forecasted income statement and balance sheet.

It's best practice to err on having more cash than not, so even if you can't anticipate buying future investments or assets, you should create a scenario where you've reasonably estimated what that transaction could look like.

10. Finally, reconcile your items

Reconcile all these numbers to calculate your forecasting period's net cash inflow or outflow.

As we did in the direct method, add this amount to the opening cash balances at the beginning of the period to get the estimated closing cash balance at the end of the forecast period.

And now you're done! That's how you do a cash flow forecast with the indirect method.

Overcoming SaaS cash flow forecasting challenges

FP&A at SaaS companies typically encounter common challenges when generating cash flow forecasts. These range from inaccuracies in data gathering, as mentioned above, to using overly optimistic or pessimistic estimates from the business.

Here are a few common SaaS cash flow forecasting challenges and how to overcome them. 

1. Inaccurate SaaS cash flow forecasts

The most common cause of inaccurate cash flow forecasts is inaccurate data. That can result from human error, but it can also occur due to incorrect data formatting, mistakes in spreadsheet formulas, missing data, and more.

Modern FP&A software integrated with your back-end systems eliminates most inaccuracies by automatically gathering the required cash flow forecasting data. 

2. Being too optimistic or pessimistic about cash flow forecasts

Teams can either motivate themselves to reach higher stretch goals or “sandbag” a bit to ensure they surpass any expectations.

It’s essential for FP&A at SaaS companies to understand and account for those human influences when preparing SaaS cash flow forecasts. 

3. Adjusting SaaS cash flow forecasts for expected growth

If you expect your company to grow, you should also expect costs to grow. You’ll need more people, laptops, and SaaS software licenses for those employees.

Don’t forget to adjust your cash flow needs to account for the increased costs associated with company growth.

4. Estimating SaaS customer churn

The SaaS model makes it easy to instantly see active customer counts and accurately track customer growth and churn. However, you never know what tomorrow might bring…like a pandemic.

Unfortunately, turning off a SaaS subscription is almost as easy as turning it on, so your churn rates could fluctuate frequently. 

5. Relying on new SaaS customers for growth

Forecasting SaaS cash flow from new customers is as easy as multiplying the number of users times the subscription prices. New customer growth is then the engine of your company's growth.

Be sure your SaaS cash flow forecasts consider the required sales and other resources needed to reach your new customer targets. 

The best cash forecasting software solutions 

Best-in-class FP&A and finance teams at SaaS companies know a dedicated FP&A software solution will help them overcome critical challenges while providing more insights, more time to collaborate with the business, and more flexibility to react to whatever tomorrow brings.

These solutions are especially helpful, easy to use, and quick to deploy when they leverage the spreadsheets already in use by FP&A.

SaaS companies seeking an FP&A software solution should keep three things in mind when evaluating potential providers:

Fast and easy deployment

No one wants to spend months rolling out a complex software solution.

FP&A at small and mid-sized businesses want software that delivers value within days and can be deployed without IT teams, expensive consultants, or long projects.

Ease of use

Any new FP&A solution has to be cloud-based, accessible from any web browser, and able to easily use the tools you’re already using, like Microsoft Excel and Google Sheets.

The flexibility to work when, how, and where you want is also essential in our work-from-anywhere reality.

And don’t forget that any solution must integrate with the source data systems already used by FP&A and elsewhere in your company. 

Scale and flexibility

FP&A collaborates with every business area, so your solution must support your always-changing needs and a wide range of use cases.

Even as your business grows and changes, be sure you can easily add new capabilities, data sources, and processes. 

The best cash forecasting software for FP&A teams:

1. Cube

Cube provides a simple and intuitive experience, making it an excellent choice for SaaS companies that want to get started fast with scalable, enterprise-grade technology at a reasonable price.

2. Workday Adaptive Planning

Workday Adaptive Planning offers strong capabilities outside of Finance and FP&A, which makes Adaptive Planning a good choice for large SaaS enterprises seeking a transformational, company-wide FP&A solution. 

3. Anaplan

Anaplan is suitable for large SaaS enterprises with a strong IT team ready to lead a large transformation initiative.

4. Planful

Planful is ideal for larger SaaS companies with big FP&A teams that want to expand their scope of influence beyond Finance.

5. Vena Solutions

Vena is ideal for SaaS companies that need the fixed process and planning guidance of pre-built FP&A solutions or have the resources to uniquely customize those pre-built solutions for their own needs.

Want to see some more? Hop over to our guide to the best FP&A software tools. 

Conclusion: Cash forecasting has never been easier

That's our mini guide on cash forecasting in a SaaS business.

As you know, FP&A can uncover some pretty ridiculous revelations about how to best manage a business.

But sometimes you need the right tool to help you 😉