Creating A Cash Flow Projection Model: Template And Benefits

Cash flow management is vital to every business owner, especially startup founders working to scale with limited runway. One of the best ways to deploy your resources more effectively is to build a cash flow projection model.

This is a tool for predicting when money will move in and out of your business in various hypothetical scenarios.

In this article, we’ll provide a cash flow projection template you can use to estimate your cash inflows and outflows for the year ahead, then guide you step by step through creating your own personalized model that accounts for real-world uncertainties.

Cash flow projection template

What is a cash flow projection model? 

We’ve all heard of cash flow. It’s simply money in versus money out, right? That’s true, and it’s good to have a solid grasp on that, but looking at cash flow on its own only presents a picture of 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 over time, considering how certain hypothetical situations may affect cash flow. It lets you see your current working capital and your zero cash date.  

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 are often reactive. In other words, they find themselves regularly behind the curve, grappling with situations as they occur. 

On the other hand, businesses that embrace cash flow projections tend to take a proactive approach, leaning into obstacles and perhaps even leveraging 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 agile, swift, and adaptable, ready to weather any potential storms that may come your way. 

How to do a cash flow projection model

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. 

The five steps below describe how to prepare a basic 12-month cash flow projection. Note that GAAP prescribes a more specific cash flow statement format for forecasts with more complex inputs and for businesses with over $5 million in revenue. But this is an excellent place to start:

1. List your estimated sales income

If you’re an existing business, look back over the previous year’s figures to get an idea of what you can expect from sales in the coming 12 months. For example, 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 to determine how many sales you’ll need to cover those costs, and use that amount as a conservative estimate.

It’s also good practice to analyze past trends, benchmark various metrics, and consider future market and revenue expectations to make reasonable assumptions about cash projections. The advantage of cash projection modeling comes from considering how the assumptions may vary in multiple scenarios and how the resulting cash flows may look.

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 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, including all expenses, such as operational and administrative costs. You should also consider fixed costs like salary, rent, energy bills, etc. 

To ensure you've covered all your bases, consider your outflow in specific expense categories, such as purchasing, advertising, travel, repairs, license fees, etc. 

4. Combine the above into a simple spreadsheet

In this step, you’ll prepare a straightforward 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 monthly 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 business operations. 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 potential effects of receiving investor funding, or an investor pulling out funds

The most critical 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, such as 30 days). 

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; even the most diligent leaders will consider outsourced CFO services or using AI-powered tools to get the best possible results. 

Can startups grow without using cash flow projections? 

The short answer is probably not. Not only do you need cash flow projections to make insightful decisions, but investors also need to see that you’re profitable. Without utilizing projections, you’re assuming everything will stay the same or get better. Life doesn’t happen that way.

The pandemic hit us too, but Zeni is our third startup, and we already knew the importance of financial projections. Without them, we wouldn’t have been able to manage the financial curve balls that the pandemic threw our way. 

Ultimately, projections are the best tool to help you prepare for the future.  We know planning 12 months into the future is daunting, but you can always find more support here.