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Cash flow planning 101 for SaaS startups

The prospect of cash flow planning can be overwhelming for founders and those without experience in finance. We’ve put together this practical guide for founders, CEOs and business leaders, to help you understand the basics. We’ve also included a FREE Excel template for scenario planning!

Why should you care?

“MRR is not the same as cash in your bank account.”

When building a subscription business, it’s easy to get carried away with all the metrics surrounding it: MRR, Churn Rate, ARPA… they’re all useful for certain scenarios, and we should all be measuring them.

But SaaS metrics don’t cover the cash flow aspect of your business, which is a vital component of, well… keeping the business afloat. It’s that important. MRR is not the same as cash in your bank account, so in order to understand your financial standing you need to do some additional planning.

Ideally, you’d hire someone to take care of the cash flow side of your business — a CFO or Finance Director with prior experience. But, especially in the early days of a business, that’s not practical or realistic.

With the help of Martin (ChartMogul’s resident finance expert), we’ve put this quick guide together. First of all, I wanted to get Martin’s take on the importance of financial planning:

Martin“Thorough ​financial planning helps us to prepare for the uncertainty the future holds, thus allowing us to quickly react to changes and make faster decisions to stay on track. Without financial planning, we wouldn’t even know the track that we want to stay on.”

2 definitions you need to know

Finance is full of acronyms; there’s no avoiding them. Here are two we use in this article:

  • OPEX: Operational expenditure
  • GAAP: Generally Accepted Accounting Principles – a set of guidelines issued by the Financial Accounting Standards Board (FASB)

Finance Cheat SheetGet the above definitions and more in The Ultimate SaaS Finance Cheat Sheet (a free PDF download):

  • Revenue recognition schedules
  • Deferred revenue
  • Cost Of Goods Sold (COGS)
  • EBITDA
  • Tax terminology (both US and worldwide)

Download it here!


Rule #1: Cash flow planning is NOT accounting

There are some key differences between cash flow (or liquidity) planning and accounting. In fact, your accounting numbers are likely to vary greatly from any cashflow planning you do; this doesn’t mean that both are not useful, however.

When it comes to financial accounting:

“Financial accountancy is governed by both local and international accounting standards. Generally Accepted Accounting Principles (GAAP) is the standard framework of guidelines for financial accounting used in any given jurisdiction. It includes the standards, conventions and rules that accountants follow… in the preparation of financial statements.”

For a startup, accounting is essentially the practice of complying with various aspects of the law when it comes to reporting and recording a business’s financial transactions.

Conversely, when we look at cash flow planning:

“Cash flow forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent. Cash flow is the life-blood of all businesses—particularly start-ups and small enterprises.”

In summary, cash flow planning has a more immediate practical benefit — the efficient operation of your business.

4 things a simple cashflow planning process can do for you

1. Visualize your burn rate and runway

VC-funded startups, by definition, are running on limited resources, with a looming deadline when they’ll run out of cash. Whether you like being reminded of this intimidating deadline or not, it’s important to know what your runway looks like so you can plan expenses accordingly.

2. Simulate different cash flow scenarios

The good, the bad, AND the ugly. It’s a good idea to simulate each one of these scenarios in order to plan for the future. The goal of this exercise is to reduce uncertainty and have a plan for handling a range of different situations. As humans we’re optimists, pre-disposed to assume the best-case outcome. Scenario planning helps you visualize those other cases too.

3. Optimize expenses across the company

When you lay all your expenses out in a spreadsheet, you’re likely to pick up on obvious things that don’t make sense. Like the fact that you’re paying for individual licenses when you could upgrade to a business plan for a tool. These things are almost invisible otherwise.

4. Increase forecasting accuracy

More accurate forecasting allows all-round greater confidence in making decisions, reporting business performance to investors and planning expenses for the coming months. Doubt slows down decisions, and decisions are one thing startups can’t afford to take slowly.

Common mistakes in cash flow planning

Timing confusion

When does your money actually come in and when does it go out?
For some businesses, monthly planning might not be granular enough. For us, most of the money we collect in one month is deposited into our account at the beginning of the following month (so money from February comes in early March). If you pay anything annually (like a SaaS invoice or insurance), this needs to be considered in the OPEX plan.

Over-optimism

(Always assuming the best case)

As I mentioned above, humans are optimists. We always want to see (and believe in) the best outcome from any scenario. Overly-optimistic planning is very common, especially when it comes to OPEX — there is basically always a surprise expense that you need to cover. Adding in an additional buffer for these unexpected expenses is usually a good idea. Scenario planning helps you predict the outcomes of a range of events, while still shooting for the best one.

Forgetting growth in costs

Planned increase in headcount is an obvious component of any financial plan. But there are other costs associated to such growth that are often forgotten — some minor, others more serious:

  • Minor: Plan expansion in SaaS tools such as Zendesk, Slack, Google Apps
  • Medium: Salary raises & bonuses for existing staff, increase in travel budget
  • Major (potentially): Office expansion or migration, increase in advertising budget, increased headcount in non-core positions (finance, ops, HR)

Lack of detail

It’s tempting to avoid the hassle of planning everything in fine detail, and lumping such smaller details into a line called something like “Misc. SaaS: 4000 USD / month”. While this may feel okay, all of the real benefits of proper planning silently disappear. To make matters worse, the output still feels like proper planning — you’re not likely to consider the accuracy when making decisions based on predicted scenarios. Dangerous!

The ChartMogul process

Cash flow planning at ChartMogul comprises three main elements:

  1. Expense tracking
  2. Scenario planning
  3. Revenue tracking

The tools we use

Candis.io (focused on the German market – alternatives include tools like QuickbooksKashflowXero)

Candis saves a lot of time with expense tracking, simplifying a lot of the process of tracking expenses by:

  • Auto-importing transactions from credit cards, bank accounts, paypal etc. as well as receipts from emails and manual uploads.
  • Auto-matching of transactions with receipts.
  • Preparing accounting in accordance with German GAAP (Relevant to German companies only)
Candis OCR
Candis does some smart OCR on your invoices to pull out the relevant details. (source: http://candis.io)

Microsoft Excel
Because what else? Google Sheets and other tools have come a long way in terms of more advanced functionality for finance professionals, but Excel still remains the CFO’s tool of choice for its better macro and pivot table support.

Our close-of-month workflow

The following process happens at the end of each calendar month:

  1. Bulk export the month’s expenses from candis.io
  2. Import CSV into an Excel sheet
  3. Cleanup of the CSV file and classification of expenses
  4. Copy and paste into the Excel Financial Planning template (see below)
  5. Run Excel macro to update pivot tables and consolidate expenses

Try our scenario planning template

Scenario planning spreadsheet

This Excel template is a slightly simplified version of what we use at ChartMogul to make business decisions with greater confidence.

You can download it for free here in .xlxs format (no email required):

Download template

How to use the template

First, fill in the global parameters at the top of the sheet:

  • First month: The starting month for the planning
  • Markup for expenses: A % buffer to allow for unexpected monthly expenses.
  • Tip: Try to plan OPEX in as much detail as possible throughout, so that any buffer is encapsulated here, and only here.
  • Cash collection rate: An estimated % of gross MRR collected as cash. MRR is not a reflection of actual cash in the bank, due to things like annual payments, billing system fees and other irregularities.

For the first scenario, fill in the scenario parameters:

  • Scenario name: e.g. “Best case” or “Plan A”
  • EITHER Revenue growth MoM in $ OR Revenue growth MoM in %: Enter the expected monthly revenue growth for this scenario.
  • Then fill in the required fields in the scenario:
  • Cash in accounts – beginning of month: Fill in the first cell only (it’s calculated from the 2nd cell)
  • Expenses – Actual or as Planned: Fill in each month’s expenses, according to actual expenses or, for future months, planned expenses.
  • MRR / Revenue – Actual or as Planned: Fill in the first cell only to represent your starting MRR.
  • Manual adjustments: This row exists to add any costs or adjustments that aren’t included in the plan. This could be cash collection fluctuations or smaller inflows of cash. You can also use it to quickly look at how planned hires affect the company’s cash flow.

Once this is complete, repeat for up to two additional scenarios you’d like to plan — this could be your “middle case” and “worst case”, or something else more specific to your business strategy.

Got each scenario planned out? Great! Now you should take a look at the projected Cash in account chart below, which will look something like this:

Scenario planning chart

How we use the output

First things first: Take a look at the numbers. Do they seem sensible to you? If they clearly don’t line up or feel right, you’ll need to look back into the expenses and try to understand where things went wrong.

Secondly: Now we’re getting to the fun part (no, really). Typically what we do from here is take a look at the manual adjustments. It’s this row where we can play with different mini scenarios, and quickly get an output estimate of the impact of different events on our future cash flow. Use the manual adjustments for:

  • Cash collection adjustments: If your cash collection turns out higher or lower than expected, you’ll want to tweak it manually here to reflect reality.
  • Different hiring scenarios: Want to see how that all-important first VP hire would impact your plan? Or perhaps whether you could grow your Inbound team before raising the next round? The manual adjustments row is your friend.
  • Funding: For major planning around funding rounds, you’ll want to break out into an entirely different model (stay tuned, we might cover this in the future…) but for a quick estimate you could add funding here too.
  • Smaller forms of cash inflow: Government grants or loans, or other forms of financial support can also be added here to give a quick sense of their impact.

Join the discussion!

Are you doing your cash flow planning differently? Did you find a great way to simulate scenarios without getting too deep into macros and pivot tables? Let us know in the comments below! We’d love to hear your ideas or feedback.

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