on April 14, 2022 (last modified on April 11, 2022) • 12 minute read
What if you had a crystal ball that could tell you how much money your SaaS would bring in 1 month from now, 3 months, or even 12 months?
It turns out that a cash flow forecast with accurate data can act as your own crystal ball for your SaaS company.
In this post, we’re sharing what cash flow forecasting is, why it matters, and 6 best practices for creating accurate forecasts.
At it is most basic, cash flow forecasting is all about analyzing your historic cash positions and using that to project what your SaaS’s free cash flow will look like a month, quarter, or sometimes a year from now.
The cash flow forecasting formula consists of the following three components:
So, here is a simple cash flow forecasting example. Let’s say you run a social media scheduling SaaS app that did $10,000 in free cash flow last month. You’re growing at 5% month over month and have a 2% churn rate. Knowing these key metrics along with your expenses, you can use the cash forecasting method to create a basic forecast for the next quarter or on a rolling 12-month basis.
In fact, 91.67% of the companies we surveyed have created a cash flow forecast.
For added context, our survey included results from 24 SaaS companies. 66.67% are SaaS companies and 33.33% are agencies or consultants working for SaaS.
Seeing that most SaaS companies have a cash flow forecast makes sense seeing how it can help with all of the following:
Related: How to Calculate Growth Rates in SaaS: Start with These 12 Growth Metrics
Now that you know what a cash flow forecast is and why it matters, according to our research, here is everything that needs to be included in one.
Note: A cash flow forecast works the best when you have been in business for a few years and have a relatively predictable model. Now, if you are a newer SaaS company or your business has wild fluctuations based on seasonality or other industry trends, you should work with an experienced accountant or accounting firm that knows more advanced cash flow forecasting tactics.
It’s not easy to know which KPIs to track for sales, marketing, and customer success in a SaaS company. There are many possibilities, and so much to do! Why not start with the basic metrics that determine the health of your company?
If you want to track these in Stripe, you can do it easily by building a plug-and-play dashboard that takes your Stripe customer data and automatically visualizes the right metrics to allow you to monitor your SaaS revenue performance at a glance.
You can easily set it up in just a few clicks – no coding required.
To set up this Stripe dashboard, follow these 3 simple steps:
Step 1: Get the template
Step 2: Connect your Stripe account with Databox.
Step 3: Watch your dashboard populate in seconds.
Many SaaS founders get excited by the idea of creating a cash flow forecasting. However, the first time or a two they create one, they tend to make certain mistakes that can make a cash flow forecast relatively worthless. Here are some of the best practices that can help you avoid them.
On the surface, this seems basic. However, as your SaaS grows, it gets more complicated accounting for every single revenue stream (including any funding) and all of your expenses. Without this information, you are going to have a worthless cash flow forecast.
“In order to forecast cash flow it is extremely necessary to identify inflows and outflows,” says Arnaldo Casadiego of Callbell. “This helps us to have a clear picture of the state of the company. It is also extremely important to identify and adjust those balance deficits in advance so that in difficult times we have an important cash flow backup. Finally, something that has helped us is to make decisions based on real data about our company. In this way, we have been able to forecast what our cash flow is and how we can handle any situation in the future.”
Steven Walker of Spylix adds, “Now the important part: Review your estimated cash flow against every odd that can happen & look for the parallel data that might be possible & combine them as well with your estimation.”
Your cash flow forecast will only be accurate as the data that is included in it.
“One of the best ways to ensure your cash flow forecasts are accurate is to use accurate data in the first place,” says Nazy Rafaeil of Jovani. “Inaccurate data can cause your forecasts to skew or create inaccuracies. As a SaaS business, you need to use modern FP&A software and integrate it with your back-end systems to remove any inaccuracies or formatting errors in your raw data.
The strategy that has worked for us is to be diligent with client payments. Late payments and overdues are some of the biggest problems when it comes to cash flow forecasting. We’re very particular about customer payments. All of our digital invoices reiterate our rules for making payments on time. When you get paid on time, your cash flow forecasts are automatically much more accurate.”
Related: How to Analyze Data: 30+ Experts on Making Sense of Your Performance
Susan Gagnon of Costumes Heaven adds, “To ensure an accurate cash flow forecast for SaaS, you must know the company’s cash usage like the back of your hand. SaaS businesses are complex, and it is easy to forget an expense or two. But even this can prove to be the difference between having an accurate or inaccurate forecast.
The strategy that worked best for me was plugging detailed data into my model. The more data you have, the more accurate and dependable your predictions will be. However, make sure that the information is usable and relates to your firm’s financial health. You must have data on your existing customers, contract renewals, newly acquired customers, etc.”
For example, Aygul Mehdiyeva of FS Code says, “As a WordPress Software company, we use different strategies and tools to predict cash flow as accurately as possible. Considering the most common cause of inaccurate cash flow forecasts is mainly caused by inaccurate data, we use the following approaches and tools:
A cash flow forecast can also allow you to model out the impact of potential pricing changes.
For example, Tom Hamilton Stubber of TutorCruncher says, “At TutorCruncher we charge, as most SaaS businesses do, a monthly fee for our services so it’s quite easy for us to predict what money is coming in month-on-month. Besides this, we started employing a new strategy that involves charging people upfront which means we get insights much quicker into a customer lifecycle and find out whether they’re going to convert into a customer. This helps us forecast pretty accurately!”
Besides listing out your cash inflows and outflows, it can help to categorize your expenses in your budget as well as in your chart of accounts.
“The best way to ensure an accurate cash flow forecast through SaaS is to organize expenses to shape up into a fixed budget,” says Carl Panepinto of Storm Internet. “This will allow you to deal with both fixed and variable costs within the company. Budgeting also helps in understanding spending obligations. We were not incorporating record-keeping into our business operations for a long time. But now, we keep track of weekly and monthly sales. Add to that, we make estimates like revenue costs, marketing trends, and product management expenses. This helps with close assumptions to actual earned money.”
One of the few times where it doesn’t make sense to do a proper cash flow forecast is if your SaaS is brand new. In order to have an accurate forecast, you need historical sales and expense data. You won’t have that in your first year of business.
“The only time you have any excuse to be unable to accurately predict your cash flow is during your first year in business,” explains Rodolphe Pierre-Louis of ActionVFX. “In your first year, a lot of things are new and you haven’t yet built up any history to look back on. Once you’re over that 1-year mark though, you should have enough data to start forecasting.
Here are a few strategies that have worked well for ActionVFX.
Whether you use your cloud accounting software, like Xero or Quickbooks, or dedicated forecasting software, this will make your process more efficient and accurate.
“The best way for any SaaS business to ensure an accurate cash flow forecast is to invest in software that uses real-time data to make predictions and eliminates the tediousness of doing it manually,” says Roy Morejon of Enventys Partners. “Software is absolutely crucial for accurate forecasting because it helps to eliminate human error and greatly increases efficiency, allowing SaaS businesses to regularly assess models and make informed real-time decisions.
When linked with accounting software, cash flow software is the single most reliable way to make predictions, and helps businesses visualize the cause and effect of any event on their future cash.”
And Databox can help you do just that. Databox is a custom finance dashboard software that allows you to visualize, analyze, and report on financial performance in one place.
While creating your first cash flow forecast in a spreadsheet can be a valuable exercise to learn the basics, keeping your forecasts in manual spreadsheets long-term is rarely a good idea. For one, it is susceptible to human error. Plus, it is not real-time.That’s where using dashboard software, like Databox, can come in handy. Your cash flow forecast can live in a real-time dashboard that anyone you grant access to can access. Plus, you can make use of our real-time data calculations feature. This allows you to easily calculate metrics from multiple sources, so you can have a more accurate cash flow forecast.
Ready to give Databox a try? Create your free Databox account here.
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