Cash Flow Forecasting for SaaS

Cash is king as the saying goes, running out of cash is a deadly force that has claimed the lives of many startups. Cash flow forecasting is how you’re going to combat these forces.

I’ll go over terms to know, what to include in your forecast, and the common mistakes founders make.

Before we start, I want to point out that no one is immune to cash flow woes. Don't be fooled into thinking that just because you have funding you're in the clear. Failing to prepare for the end of your runway could mean having to cut costs with layoffs later.

Here are a few terms you probably already know but since I'm on a mission to make startup financial services accessible to everyone, I'll start with the basics.

Cash Flow: Money coming in and money being spent.

Net Cash Flow: Money in minus money out, leaving you with either a positive or negative number for each month.

Operating Cash Flow: the amount of money generated by normal company operations; excluding funding, investments, and long term-capital expenditures. 

Cash Flow Forecasting: ACCURATELY projecting your cash inflows and outflows over a forward-looking period (next month, next quarter, next year, etc.) 

Cash flow forecasting is important because you can use your financial data to make hiring decisions, time your fundraises, and identify where you need to allocate more resources or spend less.


What goes in and out? Some of the more critical items below

Cash in: 

  • Existing Customer Contracts

  • Renewals

  • New Contracts

Cash out:

  • Salaries

  • Office Space

  • Vendors and Suppliers

  • Travel and Entertainment (yes, happy hours cost the company money)

Common mistakes to avoid:

  • Revenue does not equal cash in the bank. Don’t count your chickens before they hatch, people pay late sometimes.

  • Not every client is going to renew. Be realistic with retention.

  • We know your sales team is incredible but be on the conservative side with the "closed won" deals for the month and if there is seasonality of your business, adjust your forecast.

  • If you pay employees bi-weekly, 2 months of the year will have 3 pay periods, plan for them, they could make or break your business. 

  • Bank fees are large and unforgiving. If your payroll is automated, make sure you have sufficient funds before payroll is processed.

  • Account for growth - Contractors, new hires, and freelance projects all cost money and are often left out of planning.

  • Employees don't only cost their salary. They attend conferences, trainings, and put software on company cards. Don’t leave out the other costs of your team.

  • Taxes.

Once you have your cash flow numbers laid out, you can start to make improvements if you’re negative (spending more than you’re making) or keep on the right trajectory if you’re positive. 


A few ways to improve cash flow:

Negotiate receivable terms: Don’t let a net 90 contract throw your business’ cash flow off, work with your clients to get paid in a timely manner.

Wait to hire or outsource: Hiring can be a sign of growth and yes that is exciting on the journey to profitability and product market fit but remember that new hires increase your burn rate. Have the discipline to hire only when necessary.

Move from monthly to annual contracts: get your clients to pay upfront and get more cash in your account.

Control your spending: only spend money on the “need to haves” for your team to operate. Cut the extra tools and fluffy spending. 

There will always be unexpected costs of running a business but you can minimize the damage by having an accurate forecast with a bit of a cushion. 

If you have any questions or might need some help with any hairy finance issues, we’re here for you. Book a no strings attached consult here.

Briana Radomsky