May 24, 2021

4 Tips for SaaS Cash Flow Forecasting

Paula Diaz
Marketing Coordinator

Cash is king! You’ve heard it a million times, but it’s true and worth repeating. Any company, SaaS or not, needs to keep track of the cash they have on deck in order to stay afloat. I talked with Haris Hadzic, Associate of Finance Strategy and Client Delivery, who helps our customers create and keep track of efficient cash flow forecasts that allow companies to make smart cash decisions. During his time at KPI Sense, he’s picked up a couple tips on cash flow forecasting:

  1. Understand your company’s cash usage
  2. Revenue doesn’t equal cash in the door
  3. Data matters
  4. Check your forecast regularly

What is Cash Flow Forecasting?

Before we get into the helpful forecasting tips, you need to know what cash flow forecasting is and its importance to your company

As we’ve established, cash is the lifeblood of any company. It’s vital to keep track of cash flow, which is the money moving in and out of your business during a given period of time. You are going to want to know when cash is leaving your business and when cash is entering in order to plan accordingly for the future and all your company’s endeavors. This is where cash flow forecasting comes in handy.

A cash flow forecast is a model that shows how much money your company expects to both receive and pay out over a set time frame using current and historical data. Essentially, it makes predictions on what your cash flow will look like in the future given your business operations and expenditures. This is a great tool to have since you can play around and see how different business strategies and their related costs will affect your cash balance in the future.

In short, cash flow forecasting helps you make present-day business decisions such as hiring new employees, buying new equipment, raising product prices, and adding to your product based on future cash roll outs. You need to have it for the survivability of your company.

Tip #1 – Understand your company’s cash usage

This sounds like a simple one, but businesses are complex and it’s easy to forget an expense or two. However, this makes all the difference when it comes to having accurate, dependable forecasts. You want to incorporate all of your financial activity and business expenses such as income, invoices, renewals, sales, operating expenditures, loans, taxes, rent, travel, and salaries – just to name a few.

It’s crucial you understand your company’s financial structure including A/R collections, contract compositions, performance obligations, and others in order to make an efficient forecast. This can seem overwhelming, especially for founders who aren’t finance experts - don't worry! We’re here to help.

Tip #2 - Revenue doesn’t equal cash in the door

For most companies, revenue measured on an accrual basis may not always align with your invoices sent on an annual or quarterly basis. So, if you've already collected an annual invoice make sure the future periods of your cash flow forecast isn't just looking at revenue (since that revenue has already been collected).

Tip #3 – Data matters

The more data you plug into your model, the more accurate the predictions will be. However, be careful with the data you do put in. Make sure it is thoughtful and will lead to predictions based on financial activity and business expenditures that impact your cash.

Cash from your existing customers, contract renewals, and new contracts will make up the foundation for your cash flow. Make sure to include all of your business expenditures to paint an accurate picture of your remaining cash balance each period.

As you go through business cycles over time and patterns start forming, the forecast will become a more accurate representation of your company’s cash flow. Still, it’s important to keep in mind that predictions can be wrong especially when black swan events occur. It’s crucial to stay alert and reactive for when forecasts do not play out in real life.

Tip #4 – Check your forecasts regularly

Many founders and CEOs take a look at their forecasts, make plans from them, and then don’t return to them until the next quarter or even year.  For best results, you’ll want to make sure you’re checking your forecasts on a regular basis. You should be comparing your actual data to the predicted data as often as possible. This informs you on how your cash flow is doing as well as how the forecast is performing. Then, you’ll be able to make real-time decisions knowing your cash balance, and be able to adjust your forecast model accordingly.

Cash flow forecasts are essential tools for growing SaaS companies. Not only will you be able to see what your cash balance will look like in the future, you’ll also be able to make present-day decisions such as decreasing cash burn rate to extend your cash runway. Using forecasts to make decisions is simple and effective, so it is critical to build an accurate financial model.

If you're finding yourself stumped with building a model for your company, we do it everyday and are here to help!

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