No one could have predicted a global pandemic in 2020—much less the resulting damage done to businesses of all sizes across industries.

It's tough enough attempting to predict what tomorrow will bring. Having a good cash forecasting model can give you a pretty good idea.

Estimating your cash inflows and outflows for a given period of time using historical data and other metrics lets you know where your large or small business is heading financially. It can also help you prepare in the event of uncertainty.

This guide will introduce you to cash forecasting models, their benefits and challenges, and some tips for keeping your business's cash flow healthy.

Baremetrics offers everything you need to stay cash-flow positive. Want to learn more? Consider a free trial of Baremetrics.

All the data your startup needs

Get deep insights into your company's MRR, churn and other vital metrics for your SaaS business.

What is Cash Forecasting?

Before we get into benefits and challenges, let's dive into what cash forecasting is in a nutshell.

A cash forecasting model helps you estimate future cash flows or where your business will be financially down the road and helps you make sure you have the money you need to meet future obligations while managing your working capital.

Ever hear the phrase, "Plan for the worst—expect the best"?

Cash forecasting models work much the same.

It lets you plan for a multitude of good or bad scenarios. Modelling enables you to focus on the cash inflow you assume you'll collect, such as accounts receivable and the debts you expect to have or accounts payable.

The typical cash forecast includes a few of the same items you'd see on the normal balance sheet, such as:

  • Beginning cash balance. This is the amount of cash you think you'll have at the start of the reporting period.
  • Cash inflow. These are the amounts you expect to pull in from revenue. Amounts can include those from cash sales, accounts receivable, or online sales.
  • Cash outflow. These are the usual expenses your business incurs throughout any given period, such as utility payments, payroll, rent, and loan payments.

To prepare for various circumstances, you can adjust the amounts in each item to see how it would affect your cash position—but more on that in a moment.

The Benefits of a Cash Forecasting Model

Cash forecasting benefits businesses of all sizes – not just large corporations. This process is essential and can help you:

  • Make future plans. Cash forecasting lets you visualise what increases and decreases in your sales might look like as you review actual current trends and imagine possible scenarios. It gives you insight into whether you should bring on new staff, offer raises to current staff, or invest in additional marketing.
  • Predict possible issues. Forecasting cash flow can help you predict where you might experience shortfalls and surpluses. Cash flow projection also helps with budgeting for short months—do you need to establish a business line of credit? Reinforce your receivables terms?
  • Decrease your reliance on business loans or credit cards. All businesses need a short-term backup from time to time but decreasing your reliance on credit helps you in the long run. If you stay on top of your actual cash flows, you can ensure your bank account can always meet expenses.

Curious how Baremetrics can help you solve cash forecasting issues? Take the free trial today.

Want to Reduce Your Churn?

History Hit uses Baremetrics to measure churn, LTV and other critical business metrics that help them retain more customers. Want to try it for yourself?

Cash Flow Forecasting Model Challenges

Cash forecasting is a much better idea than not forecasting—but that doesn't mean that it's not challenging. Some of the challenges in the forecasting process you may face include:

  • Factors outside your control. A cash forecast model is a prediction, at best. It's at the mercy of uncontrollable factors, some of which you may not see coming—much less have any control over, such as the economic downturn of 2020.
  • Limited data or inaccuracies. A forecast is also only as good as the figures and metrics you input. Being meticulous with bookkeeping, cash management, accounting reports, and all other financial data is important.
  • Information overload. A cash flow forecast can sometimes offer more info than you're able to process. Rather than taking the data and making business decisions, some owners get overwhelmed and don't do anything. Working with a cash flow forecasting model template can help.

Run Various Cash Forecasting Models

Building out cash forecasting models is a must for all businesses—but especially in difficult economic times when decision-making is in the spotlight. It's then that having multiple cash forecasting models is especially worthwhile.

As an example, you're facing reduced revenue. You can create forecasting models for best-, middle-of-the-road-, and worst-case scenarios to reduce your labour costs. Your middle-of-the-road scenario might just mean reducing staff hours. A best-case scenario might mean you don't have to cut hours or employees.

Using a cash forecasting model, you can evaluate the impacts of any future scenarios. You might think you need to lay off employees, but your sales may not dip as you expected.

Today, the variables that affect your cash flow shift almost daily. Your cash forecasting models should be reviewed regularly—if not weekly, then at least once every month. An added benefit of frequent monitoring also means you'll catch warning signs, such as lessening revenue or additional expenses, much faster than with no forecasting method at all.

How Baremetrics Can Help

Cash flow forecasting is a vital part of running a business—especially a subscription-based business. Whether you need to cut costs or predict sales, having a clear picture of your bank balance is important. That's where Baremetrics comes in. We can offer you real-time data and all the metrics you need for tangible business insight.

Want to see how Baremetrics can help? Consider a free trial today.

be honest

How well do you know your business?

Get deep insights into MRR, churn, LTV and more to grow your business