Your Complete Guide to Cash Management (Part 3): 13 Week Rolling Cash Forecast
February's three part series on cash management for tech startups
Welcome back to our three part series on Cash Management. This is part three, and we’re about to get down and dirty with cash forecasting.
A refresher on what you may have missed:
Part I: Bank Accounts
Stages Covered:
Startup
Growth
Maturity
*Redflags*
Investment Policy Template you can download
Part II: How to Negotiate Your Venture Debt?
Revolvers vs Term Loans
Fees
Typical Debt Covenants
Negotiation Points
Venture Debt Players and Sizing
*Red Flags*
Part III: 13 Week Rolling Cash Flow Forecast (THIS WEEK’s POST)
How cash enters the building
How cash leaves the building
The 13 week cash forecasting template you can download
The goal here is simple: get every way that cash ENTERS and LEAVES the building on one sheet.
Cash forecasting should be done over three timeframes: Short term, medium term, and long term.
Short term: 0 to 3 months (one quarter)
Medium term: 3 months to 12 months (one fiscal year)
Long term: Multiple years (three and five year planning)
The 13-week forecasting model is beautiful in the sense that it’s just short enough to be “precise” and “reliable”. And it also provides a longer term view than a weekly or monthly forecast. It’s not too hot, not too cold.
And for anyone who’s ran a sales forecast call, you know all too well that a fiscal quarter is 13 weeks. Most software companies maniacally forecast their pipeline over that period, meeting weekly to discuss changes in pipeline. Yet they fail to take the same approach with their cash.
The template you’ll find below was inspired by a rolling forecast Michael Girdley posted. I’ve modified it to fit the tech businesses I operate within (as I’ve never worked for a company that sold something you could “touch”, and the only “warehouse” I’ve explored is Home Depot).
In terms of how this has helped me - I’m not a CPA, so the first thing I designed with my Controller was a 13 week cash forecast. I needed to sleep at night knowing every way cash entered and left the company’s accounts. This forecast was my security blanket; it kept me warm at night.
The components of a 13 week cash forecast
Current Cash Position
Bank Account #1
Bank Account #2
Bank Account #3…
Note that any increase from interest will automatically show up here, rather than as an inflow. At least that’s how I do it; close enough for government math.
You are looking at the change week over week in your total cash balance.
Using the weekly fluctuations, you can get to your Cash Burn (if that’s what you’re into).
Cash Burn (or change in cash)
I do this WITH and WITHOUT Collections (which can be fed in from the lower rows).
Why do it both ways? First, I like to check that the Revenue we are collecting isn’t glossing over anything weird in expenses and cash outlays.
Plus, I like to do a “doomsday” scenario on how much we are burning if we shut off revenue completely (not realistic, but need to always think of the downsides, as the first few weeks of COVID showed).
With Collections
Actual Rolling 4 Week Burn
This is literally a sum of the last four weeks to create a rolling “month”
Actual Rolling 13 Week Burn
This is literally a sum of the last 13 weeks to create a rolling “quarter”
Average 4 Week Burn x 13
This is a proxy for “quarterly burn,” using averages to smooth for week to week variances.
Without Collections (same notes from above apply)
Actual Rolling 4 Week Burn
Actual Rolling 13 Week Burn
Average 4 Week Burn x 13
Cash Inflows
Product Line #1 Collections into Bank Account X
Product Line #2 Collections into Bank Account Y
Product Line #3 Collection into Bank Account Z
I probably don’t have to say this, but collections are not the same thing as revenue. This represents when a sale clears and hits your account.
And I think it’s important to break this out by Product Line and by Bank Account. As a CFO you should always know which product lines feed into which bank accounts, and be able to tease out if any produce lines are having collections problems.
This is also where your funding would go if you take in cash. But make sure to subtract it out of the burn totals above, as it’s not a true change in operating cash burn to the business.
Cash Outflows
Employees Salaries & Wages
Contractors (e.g., development resources)
Professional Services (e.g., book keeping, lawyers, audit)
Sales commissions (probably paid out monthly or quarterly)
Software purchases (remember - you are tracking the actual cash outlay, and it can be large if you are prepaying annual contracts)
Marketing Events (often prepaid)
Rent
Credit Cards
Laptops
Debt Payments
The biggest cost for software / tech companies will be salaries and wages. You probably pay people every other week (I still can’t get the terms semi monthly vs bi monthly straight in my head; same with effect and affect). It’s probably ~70% of your cash outflow.
One of the biggest “aha” moments from the forecast is when you see the real time impact of annual prepaid software purchases. This is often one that people get mixed up on, or underestimate, as they accrue the cost over 12 months, but they pay the entire whack up front. And this impact compounds when you either buy a lot of software at once (like in Q4, when there are discounts to be had) or have a crowded renewal schedule (I’ve worked places where like 75% of our tools were up for renewal in Q3, because a year ago we had raised money in Q3 and finally had cash to buy stuff).
A smaller, but still important, consideration is all the money you are paying for laptops. These are capitalized on the balance sheet, but are a real cash expense. I remember looking at the forecast around January, when a bunch of new hires started, and being like holy shit, should we just buy stock in Best Buy? Also, why the hell are we buying all our laptops from Best Buy?
And finally, you can check the credit card balances you’ve paid down. I like to look from left to right and see if this is rising over time or staying pretty steady.
(PS - if your company prepays for event sponsorships, you’ll see the impact here before you see it on the P&L. Those can be expensive.)
This section takes on a whole new level of importance if you have debt on your balance sheet that you need to pay down. You don’t want to miss your debt service payments. The nice thing is they should be very well known, so you can put them into the forecast sooner rather than later - you don’t need to actually wait for them to occur.
Change
Inflows less Outflows, my dudes
Receivables
Accounts Receivable Beginning Balance
New Invoices
Collections this week
Ending Accounts Receivable Balance
Payables
Accounts Payable Beginning Balance
New Invoices
Invoices Paid Out
Ending Accounts Payable Balance
In these last two sections I’m diving into our cash conversion cycle (CCC). How fast are we able to “get” money from people? And how long are we able to wait before we “pay” people.
I also like to check what my Receivables balance is at any time. Every CFO has a rule of thumb (maybe it’s $1,000,000, or 10% of your annual revenue) that they keep in the back of their head as a sanity check.
And without further adieu (spelling?), here’s the template so you can create this on your own
