I want to create pro-forma financial statements including direct cashflow statement and use it for cash-flow management (monthly). Is it a good idea?
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I want to have overview of also of balance sheet and P&L and do not want to hold separate model for cash flow forecasting/management.
Yes, of course this is a good idea. We help a lot of Founders build these financial models - get our free financial model templates to get started. It’s a collaborative process because we have built a ton of models but the Founders know their business best.
Three statement modeling is a bit more complicated than simply projecting an Income Statement and cash position. The three financial statements fit together tightly, and mistakes can make the Balance Sheet not balance. So not everyone should undertake this, you may be better off just projecting your revenue, costs and then putting some lightweight working capital adjustments to net to a cash balance.
How to build out a Cash Flow projection when making a 3 Statement Forecast
You want to begin by isolating 4 or 5 Key Performance indicators (KPI) for your business. Let those metrics drive your business (for a list of common SaaS Metrics, click here). They might be # of users/customers, revenue per user/customer, churn rate, customer acquisition cost, etc.
Once you have these metrics, use them to drive your Income Statement. Be realistic about your growth rates and costs so you don’t end up with an overly optimistic model.
Use the Net Income from the P&L to flow into the the Cash Flow Statement and Balance Sheet. Don’t forget to accurately project how much Cap Ex you will need to invest in. Also, you will have Changes in Working Capital to account for. Most businesses that start growing quickly need a lot of Working Capital. You will make these assumptions on the Balance Sheet and the differences will materialize on the Cash Flow Statement.
A lot of Founders don’t build a proper Cash Flow Statement because it’s hard, but you need the 3 Statement Model to accurately predict your Cash Burn and Runway. It’s a great exercise and I find Founders really understand their business after connecting everything in the model. :)
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