Finances and Taxes

Cash Flow Series #1: Intro to Cash Flow Forecasting and Prepping Your Model

Andi Smiles Small business financial consultant 
What Is a Cash Flow Forecast_ How to Prepare a Cash Flow Forecast - Gusto

Gusto + Jirav Cash Flow Forecasting Series

The Gusto editorial team has partnered with Jirav and financial pro Andi Smiles to create a three-part Cash Flow Forecasting educational series. This series aims to walk businesses through building their own 18-month business forecasts step by step, giving them key tools and information to help them through the aftermath of the COVID-19 pandemic.

If you get lost during the process, use these links to get back on track:

Part 1: Set goals and fill out your Prep Sheet tab (You are here)

Part 2: Build your cash flow forecasting model

Part 3: Use your model to make projections

As the COVID-19 pandemic continues to unfold and state’s reopen, many business owners are wondering how they can reopen safely, keep their employees on payroll, and cover their operating expenses. Is it really possible to balance the three? And even if you can, how do you also plan for more uncertainty?

In a perfect world, we’d have a magic eight ball that tells us what we need to do to keep our businesses up and running, even in the most uncertain times. Unfortunately, there’s no plastic ball to say to us, “Signs point to yes.” But, there is financial modeling. One form of financial modeling called cash flow forecasting can help you map out and plan what your business needs to do to grow and handle crises.

When done right, your cash flow forecast can even act as that long-dreamed-of magic eight ball. But, instead of relying on chance, you’re relying on real numbers to tell you, “Yes—definitely.”

What is cash flow forecasting?

So what’s cash flow and why is cash flow forecasting so great? Cash flow is the actual cash that comes in and goes out of your business in any given period. It’s the cash you have to pay your bills, inventory or manufacturing costs, payroll, and debts.

Forecasting helps you predict how much money will come into your business, based on different factors, and if there’ll be enough to cover your expenses. Even if your forecast tells you that you won’t have enough revenue, knowing in advance helps you determine if you should apply for a loan, when to apply, and how much you’ll need.

The truth is, cash flow forecasting is a process. It isn’t something that you can do in an afternoon. But putting in the time now can help ensure the long-term sustainability of your business. We often focus on profit as the indicator of a healthy business, but having adequate cash flow ensures that your business can pay its bills, remain operational, and that it doesn’t take on more debt than it can handle.

This has never been more important than right now, when customer behavior is changing in unprecedented ways, and supply chains, teams, and workplaces are being disrupted by capacity limitations.

Now that you know why cash flow forecasting is so important, we’re going to go through the process step by step. This article focuses on the prep work you’ll need to do before you start forecasting. Don’t skip this step! What you do here is the foundation for the actual forecasting process.

You can also follow along with our video breakdown of this process below:

Let’s get started.

Step 1: Set goals

When it comes to goal setting, we recommend setting goals for the next six months. Ideally, you’ll forecast your cash flow annually for 12 months. But, since this is your first time, keep the process manageable by sticking to a shorter time frame.

What types of goals should you set? That’s up to you and what challenges your business is currently facing. Some of your goals could be acute, like how to handle reopening your business during the COVID-19 pandemic. Others could be long-term, like growing your revenue 300% in the next five years.

Here are a few examples of the type of goals you could set:

  • Number of total customers
  • Number new customers every month
  • Percentage growth per month
  • Dollars of revenue growth
  • Cash on hand
  • Staffing goals

When setting your goals, don’t choose more than 10. Choose goals that are foundational to other goals. For example, maybe you want to build a $50,000 emergency fund for your business. Before that, you’ll need to increase your total number of customers. Which means you’ll need to focus on customer acquisition and retention.

Before setting your goals, identify the status quo. Where are you at right now with each goal? Based on where you are now and the forecasting time frame, what’s a realistic target to set?

Finally, determine your key performance indicators, or KPIs, for each goal. As our friends at Jirav, a business planning and forecasting software company, so eloquently put it, “KPIs provide a bridge between goals and activities.” In other words, KPIs measure the results of what you’re actually doing to reach your goal.

Your KPIs should be specific and measurable. For example, “earn more revenue” isn’t a helpful KPI. But measuring the number of leads you generate and your conversion rate, both of which impact the amount of revenue you earn, are actual numbers you can track.

Step 2: Identify drivers

Drivers are the factors that contribute to the success or failure of your goals. Unlike KPIs, which measure the results of your actions, drivers are the actual activities that need to occur to hit the results you’re measuring.

Types of drivers include: 

  • People: Who do I need to hire or retain?
  • Products: What makes money in my business? (This can be people who perform services or products.)
  • Expenses: What expenses are necessary to keep my business operational?
  • Cost of goods sold: How much does it cost to produce my product or purchase inventory to resell?
  • Hours: How many daily production hours are necessary? How do my operating and production hours impact my staffing needs?

Drivers are a holistic way of looking at the financial, operational, and people areas of your business. They point to the cause-and-effect relationship between these facets of your business.

To identify your business’s drivers, start by thinking about your revenue. What are all the factors that contribute to earning income? Factors could be advertising, salespeople, or what you sell in your shop. Jirav recommends asking yourself:

  • What people and products in my business generate revenue?
  • Who are the people I need to hire to fulfill orders and support my customers?
  • What are my operating expenses to help with all of this?

In this step, you’ll need to identify and list all the key drivers in your business.

Step 3: Prepare to build your financial model

During the forecasting process, you’ll build out your financial model with actual numbers. But before you do that, you need to lay out and understand each area of your business. Here’s what you need to identify before forecasting your cash flow.

Our cash flow forecasting template has a Prep Sheet tab where you can capture this information. Later, when you go through the forecasting process, the information from the Prep Sheet will auto-populate the forecasting template.


Products and services: List all the products and services you sell and their prices. If you have a high volume of products, like a retail store or restaurant, keep things simple by grouping the products into general buckets. For example, a restaurant could have dine-in, take-out, and catering revenue.

On the Prep Sheet tab, list the price of each product or service and the current monthly quantity sold. If you’re grouping products or services into general buckets, use the average price for the group and the total monthly quantity sold for all the products or services in the grouping.

Prep Sheet_Revenue

Sales channels: Where do you sell your products? Online? In person? At events or trade shows? List out each sales channel. The Prep Sheet doesn’t have a place to list this information, but it’s still helpful to identify your sales channel because these will impact your forecast.

Payment methods: When do your customers pay you for your products or services and what are your payment terms? For example, are customers required to make a 50% deposit for your services? Do they pay at the time of purchase? Do you have a retainer model? Or do you offer your customer payment terms, like 60 days to pay their invoices?

Drivers: List your revenue drivers and how these drivers interact with each other. For example, if you work with clients every month, you have two drivers: new clients and existing clients. One way these two drivers interact is that the previous month’s new clients get rolled into the next month’s existing clients.

Another example of a revenue driver is seasonality and how a particular time of year impacts your sales volume.


People: Based on your products and services, sales channels, and revenue drivers, how many people do you need to hire or retain to earn revenue? How many employees do you need per customer? For example, if you operate a restaurant, how many customers can one server handle? If you own a retail store, how many employees do you need per hour of operation (for example, two employees per every eight hours you’re open)?

On the Prep Sheet tab, list your current and projected future employees, their titles, and their annual salaries. For current employees, put Month 1 under the Start Date column. For projected employees, put the month you think you’ll need to hire them. You can adjust this later when you do your forecast.

Prep Sheet_Workforce

Drivers: What factors contribute to your staffing plan? Depending on how you build your model, you can either have your revenue driving your staffing or your staffing driving your revenue. This is a crucial decision to make while building your model.

For example, say you’re a restaurant and each server can handle 10 tables. During the summer, you open outdoor seating, which includes 20 additional tables. Every night your restaurant is at capacity. You’ll need to hire two more servers. In this example, seasonality drives customer growth, and customer growth drives your staffing plan.

Benefits: When you hire employees, there are additional costs beyond paying their salary, like the cost of benefits. 

On the Prep Sheet tab, put your employee benefits expense as a percentage of the employee salaries. For example, if you pay an employee $100,000 per year and spend $30,000 on their benefits, the benefit percentage is 30%.  

Here’s how to figure out your benefits percentage:

Total annual benefits cost / Total annual salaries = Benefits percentage

Prep Sheet_Benefits

Cost of goods sold

Manufacturing and inventory costs: If you only sell a few products with inventory and manufacturing costs, you can list the total cost of each product. But if you sell dozens or even hundreds of products, it’s simpler to estimate the average inventory or manufacturing cost across all your products or product groups.

On the Prep Sheet tab, list the cost of each product or service under the Revenue section.

Prep Sheet_COGS

Payment terms: When do you pay for your costs of goods sold? Do you pay at the time of purchase or do you have payment terms? If you have payment terms for multiple vendors, you can average the terms.

On the Prep Sheet tab, you’ll list the percentage of your COGS that you pay under each of the following terms:

  • Immediately 
  • Under 30 days
  • Between 30–60 days
  • Between 60–90 days

The total percentage of these four terms should be 100%. If you don’t have payment terms for your COGS, then put 100% next to Immediately.

Prep Sheet_COGS #2

Drivers: What drives your cost of goods sold? Examples could be materials costs, production time, and waste.

Operating expenses

Fixed expenses: What are your fixed operating expenses? Fixed expenses stay the same, regardless of staffing and revenue changes. An example of a fixed expense is rent for your storefront. Regardless of if you have five employees or one employee, your rent will stay the same. List your fixed expenses and their costs.

The Prep Sheet tab has a table where you can enter the name of your fixed monthly expenses and the amount.

Prep Sheet_Fixed Expenses

Expenses with drivers: What expenses have drivers? These expenses will vary based on their drivers. For example, your advertising budget could be driven by your sales goals and conversion rate. The higher your sales goal, the more you’ll likely spend on advertising.

Under the Fixed Expenses section of the Prep Sheet tab is a table for Variable Expenses. Here you’ll list the different types of variable expenses you have, the current monthly amount, and the drivers associated with each expense.

Variable Expenses

Capital expenses

Capital expenses are investments you make in your business, usually in the form of assets. Assets can be fixed, like the purchase of property or equipment, or intangible, like trademarks and patents.

Capital expenses with drivers: What capital expenses have drivers,and what are those drivers? Maybe you buy a laptop for every employee. In this example, your staffing is a driver. 

The Capital Expenses section of the Prep Sheet tab is divided into two tables. The first is staffing-related expenses. Here, you’ll put any capital expenses that are related to staffing.

Prep Sheet_Staffing Cap Ex

Capital expenses without drivers: What capital expenses are you planning in the next six months that don’t have drivers? For example, you may need to purchase new computer equipment because your current equipment is obsolete. This purchase happens regardless of your revenue, sales volume, or staffing.

The second table of the Capital Expenses section is for general capital expenses that aren’t related to staffing changes. Here, you’ll list the assets you plan to purchase, their cost, and when you plan to purchase them.

Prep Sheet_General Cap Ex

Current assets and liabilities

Liquid assets: What liquid assets do you have? The most common example of a liquid asset is the cash you have in your checking and savings accounts. 

On the Prep Sheet tab, enter your current cash in the bank. This step is important because what you have now affects the overall cash flow in your projection.

Prep Sheet_Cash in bank

Payment you receive: When do your customers pay you for your products or services, and what are your payment terms? For example, are customers required to make a 50% deposit for your services? Do they pay at the time of purchase? Do you have a retainer model? Or do you offer your customers payment terms, like 60 days to pay their invoices? 

On the Prep Sheet tab, enter the percentage of customer payments that you receive in the following time frames:

  • Under 30 days
  • Between 30–60 days
  • Between 60–90 days

If you receive all your payment at the time of service or sale, enter 100% for Under 30 Days.

Prep Sheet_Payments received

Fixed assets: Fixed assets are items your business owns—like land, buildings, equipment, machinery, and vehicles—that increase the overall value of your business but cannot be converted into cash quickly. 

On the Prep Sheet tab, put the starting value of your fixed assets. The starting value is everything your business owns now.

Prep Sheet_Fixed assets

Liabilities: What payments are you currently making towards your debt obligations? Examples of liabilities could be credit card debt, business loans, mortgages, and vehicle payments.

The Liabilities section of the Prep Sheet tab has a place for you to put in the starting balance of all of your current liabilities. 

Prep Sheet_Liabilities

Accounts payable: Another type of liability is accounts payable, which is money you owe your vendors for items you purchase. Remember how you listed your payment terms for your cost of goods sold? You also want to list your payment terms for your operating expenses.  

On the Prep Sheet tab, you’ll enter the percentage of payments you make to vendors for operating expenses for the following time frames:

  • Under 30 days
  • Between 30–60 days
  • Between 60–90 days

If you don’t have payment terms and pay for all your operating expenses up front, put 100% on the Under 30 Days line. 

Prep Sheet_Notes payable

And that’s it! Having this information laid out before you start forecasting will make the forecasting process easier and clearer. Now it’s time to move on to part 2 in the process: Click here to learn how to use the cash flow forecasting template and build your own forecast.

Andi Smiles
Andi Smiles Andi is a small business financial consultant and coach who teaches business owners to take control of their finances. She’s helped hundreds of self-employed folx organize and understand their business finances, while also uncovering their emotional relationship with money.
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