How to create a cash flow forecast for your startup

For early-stage and growth-stage startups, having a cash flow plan can be the difference between building a thriving, successful company and running out of money. According to a CB Insights' 2026 analysis of startup post-mortems, 70% of failed startups cite running out of capital as a primary cause of failure.

When you can accurately predict the flow of money in and out of your business, you’ll be able to make smarter business decisions and ultimately avoid running out of runway.

Read on to learn more about what a cash flow forecast is, what benefits it provides, and how to build one for your startup.

A cash flow forecast is a breakdown of the expected money that is coming into and going out of your business, typically over a set period of time. While customer payments for the goods or services that your startup provides would be considered “cash in,” the money that flows out of your business to cover bills and vendor payments is considered “cash out.” The sum of the two — cash in combined with cash out — is your net cash flow.

The estimates in a cash flow forecast are largely based on historical business performance benchmarks, helping you create a cash outlook that is as accurate as possible for any given time period, be that a week, a month, a quarter, or a year. Keep in mind that the further out you’re forecasting, the greater the likelihood for error since there are increased variables that could impact cash flow over an extended period.

When it comes to staying on top of your cash position, there are a few concepts that are important to understand:

• A cash flow forecast projects the actual liquid cash you expect to have on hand at the end of each period (week, month, quarter). It's forward-looking and focused on timing. For example: "We expect $180k in the bank at the end of March after a $40k AWS bill clears on the 15th."
• The budget is your planned spending and revenue targets over a period, typically annual. It's about what you intend to spend, not when the cash actually moves. For example: "We've budgeted $500k for engineering salaries and $120k for marketing in 2026."
• Your cash flow statement is a historical accounting document that shows cash movements that have already occurred, broken into operating, investing, and financing activities. It lives in your financials alongside the income statement and balance sheet.

Each of these three components helps you, as a founder, gain visibility into your financial health, track spending trends over time, and make better capital allocation decisions. 

As your forecasting your cash flow, you can use one of two common methods:

• Direct method: Builds the forecast line by line from actual cash transactions — expected customer payments, upcoming payroll runs, known vendor bills. This method is more accurate for shorter forecasting horizons (under 90 days) and is the most precise for cash management. 
• Indirect method: Starts with projected net income, then adjusts for non-cash items (depreciation, accrued expenses) and changes in working capital. Indirect cash flow forecasting is best for long-term strategic planning (12+ months) and when your accounting runs on an accrual basis. Founders use this method when needing to model scenarios like an upcoming fundraise or planned expansion.

Most startups use the direct method for short-term planning and the indirect method when presenting to investors or modeling longer-term scenarios.

More often than not, you can trace the failure of a business back to consistent negative cash flow. Thriving companies proactively manage their cash flow to ensure that they remain cash flow positive. When your business is regularly bringing in more cash than it has going out, that’s when growth opportunities start to open up — and proper cash flow forecasting can be the key to finding the right rhythm.

Here are a few of the ways that a cash flow forecast can benefit your company and help you achieve your business goals:

• Smarter budgeting. Because a cash flow forecast gives you a detailed projection of where your company’s cash is coming from and where it’s going, you can get a sense of which expenses are essential to your business, and which ones are more of a nice-to-have.
• Short- and mid-term strategic planning. A good cash flow forecast can serve as the backbone of both your business strategy and your cash management strategy. For example, by giving you a sense of your liquidity baseline in the coming months and quarters, a cash flow forecast can help inform decisions about how to use your cash, such as choosing to produce a new product or service or investing excess cash so that it earns yield until you need to access it.
• Bottleneck anticipation. By giving you a line of vision into your company’s near- and mid-term cash expectations, a cash flow forecast can allow you to catch any potential gaps or cash flow shortages early. This in turn allows you to plan accordingly, such as by managing your expenses or leveraging a business loan to cover expenses for a period of time where temporary negative cash flow is anticipated.
• Trend awareness. Getting into the habit of cash flow forecasting and keeping an eye on how your cash flow tracks over time can help you anticipate regularly occurring cash flow trends, which will ultimately support more thoughtful planning over time.

As you create cash flow forecasts more regularly and begin comparing each forecast to the actual results in a given time period, it will get easier to forecast with greater accuracy and plan more efficiently.

Building a cash flow forecast means breaking down an itemized list of cash inflows and outflows for each period to determine your net cash flow. Here's a checklist you can walk through:

Step 1: Choose your forecast horizon

Short-term (4–12 weeks): For your day-to-day operating cash management, like tracking payroll, vendor payments, and near-term collections. Update your short-term forecast weekly.

Medium-term (3–12 months): For strategic planning, hiring decisions, and fundraising prep. Medium-term forecasting should be updated monthly.

Long-term (12–36 months): For investor pitches and board reporting. Remember that it’s quite difficult to forecast beyond 12 months with a high degree of certainty. You should treat these as directional forecasts rather than exact expectations.

Tip: The further out you forecast, the less accurate it will be. Run both a short-term forecast for your daily operations and a long-term forecast for investor pitches and general long-term plans.

Step 2: Gather your data sources

• Pull your opening cash balance from your bank account (or primary banking platform).
• Export the last 3–6 months of transactions from your bank and accounting system (QuickBooks, Xero, etc.) to establish historical patterns.
• Pull upcoming invoices from your AR system and known bills from your AP system.
• If you use Stripe or another payment processor, note the payout lag (typically T+2 for standard US accounts, longer for new accounts or international) so your "cash in" lines up with when funds actually land.
• Pull payroll schedules from your payroll provider — including both W-2 employees and 1099 contractors, who likely run on different payment cadences.
• If you've raised or are closing any form of capital, confirm the expected close date with your lawyer rather than the signing date. SAFEs and convertible notes often take 2–4 weeks to hit the bank; priced equity rounds can take 4–8 weeks; venture debt and bank lines typically fund 2–6 weeks after term sheet and may release in milestone-based tranches rather than a single lump sum.

Step 3: Categorize your inflows and outflows

Your exact cash inflows and outflows will be different than any other company, but there are a handful of common categories you’ll likely run into. 

Typical startup cash inflows may include:

• Customer payments (these may include cash sales, Net-30 AR collections, subscription renewals)
• New investments (SAFEs, convertible notes, priced rounds — track these by expected close date, not signing date)
• Stripe/processor payouts 
• Interest income from treasury or money market accounts
• Tax refunds or R&D credits
• Loan or line-of-credit draws

Your cash outflows might be:

• Payroll (W-2, including employer taxes and benefits)
• Contractor payments (typically Net-30 payment terms)
• Cloud and SaaS tools, such as AWS, GCP, Notion, Slack, etc. — often billed monthly or annually
• Prepaid annual SaaS subscriptions — note that these will appear as large one-month outflows but then will not be billed again until the following year
• Rent and utilities
• Sales tax remittance (monthly or quarterly, depending on your state — see the Federation of Tax Administrators state agency directory for specific deadlines)
• Inventory deposits (for ecommerce or retail companies)
• Professional services (legal, accounting, tax prep)
• Owner compensation
• Interest or principal payments on debt
• Marketing and ad spend 

Step 4: Set your assumptions

• Document every assumption clearly. What are your close rates on deals in the pipeline? Do you have an expected collection timing on AR? Document your hiring plan and anticipated vendor price increases.
• Use historical data to set defaults. If your Net-30 invoices have historically been paid in 42 days on average, forecast at 42 days, not 30.
• Flag any assumption you're uncertain about. These uncertainties will serve as the foundation for your scenario-planning calculations (more on this below).

Step 5: Validate your forecast

• Compare your forecast's first month against actuals at month-end. Aim for a variance of 5–10% on total inflows and outflows.
• If the variance exceeds 15%, you should revisit your assumptions that drove it — it could be that timing conventions are wrong, a recurring line item is missing, or collections are over-optimistic.
• Build a simple variance review into your monthly financial close process.

Although we would like our singular forecasts to come to fruition, unfortunately, it’s not usually the case for startups. Scenario planning gives you a range of outcomes based on the different levers that actually impact your cash position. Most startups can model their cash flow using three scenarios driven by 2–3 key variables.

The core levers for most startups:

1. Collections timing — how fast AR actually gets paid (or how many deals close on time)
2. New sales — how many new customers you can close and how fast 
3. Hiring plan — your team’s growth over time (your single biggest controllable outflow)

Here are a few ways to model different scenarios:

Base case: Use your historical averages and current pipeline. AR collects at your typical payment recovery (e.g., 42 days), new sales track against a conservative conversion rate on qualified pipeline, and hiring happens per your planned roadmap.

Best case: Collections accelerate (let’s say, AR at 30 days), sales outperform by 20–30%, and you can afford to accelerate hiring by 1–2 months.

Worst case: Collections stretch to 60+ days, new sales come in 30–40% below plan, and you need to freeze hiring or cut roles.

So, which variables do you need to model cash flow scenarios?

• Monthly net burn = Total cash outflows − Total cash inflows (for that month)
• Runway = Ending cash ÷ Monthly net burn
• Example: $1.2M ending cash with $150k monthly net burn = 8 months of runway

It’s generally recommended for founders to keep at least 18–24 months of runway, flexing up or down depending on macro indicators and the fundraising environment, with a clear plan in place to cut burn if your runway falls below 12 months. 

Now, what happens if you realize you’ve fallen into a worst-case scenario? Or, you find yourself aligned with your best-case scenario? Here’s how you can adjust your roadmap depending on where you’re at:

• Base case: Continue hiring on schedule, pursue your expected growth investments.
• Best case: Evaluate whether to pull forward investments (hiring, marketing, new product lines) or save the extra runway, but avoid over-committing to long-term contracts against what could be temporary upside. 
• Worst case: If worst-case lands your runway below 12 months, identify ways to cut costs, accelerate your AR collections, and bridge financing options now before you’re just a few months away from running out of money. 

Your goal with scenario planning and tracking is to know in advance what decisions you'll make under different conditions, so you're not scrambling when reality diverges from the plan.

A cash flow forecast is only as useful as its most up-to-date inputs. Without a system for maintaining it, forecasts drift from what’s happening on the ground rather quickly. 

Build an assumptions log. At the bottom of your forecast spreadsheet (or in a separate tab), maintain a running list of every assumption baked into the model:

• What the assumption is (e.g., "Net-30 AR collects at 42 days on average")
• The data or reasoning it's based on
• Who owns it
• When it was last reviewed

Identify who should own the forecast maintenance, and how often they should review it.

• Owner: One person should own the forecast — typically a finance lead, head of operations, or the founder at early-stage companies. Shared ownership means no ownership.
• Weekly update: Refresh the next 4–12 weeks with actual bank balance, recent transactions, and any new known inflows/outflows.
• Monthly review: Compare forecast vs. actuals for the prior month, document variance, and update assumptions where reality disagreed with the model.
• Quarterly reset: Revisit all assumptions against the past quarter's data. Update defaults (e.g., if AR has been collecting at 48 days instead of 42, update the assumption).

How should you compare your actual cash flow performance with your forecast?

• Under 5% variance: Forecast is performing well. No assumption changes needed.
• 5–15% variance: Investigate the cause. Usually timing, not structural.
• Over 15% variance: Structural issue. Revise assumptions and potentially the forecast methodology.

5-item maintenance checklist to ensure accuracy:

1. Update the opening balance against the actual bank balance and flag any discrepancies.
2. Compare the prior month's forecast vs. actuals across every line item.
3. Document variance explanations in the assumptions log.
4. Update forward-looking assumptions where the data has changed.
5. Add any new recurring line items (new SaaS subscriptions, new vendor contracts, new hires).

What's the difference between a cash flow forecast and a budget? 

A budget is your plan for what you intend to spend and earn over a period (usually a year). A cash flow forecast projects the actual liquid cash you'll have on hand at specific points in time, accounting for when money actually moves.

How often should I update my cash flow forecast? 

Short-term forecasts (4–12 weeks) should be updated weekly. Medium-term forecasts (3–12 months) should be updated monthly. All forecasts should be reviewed against actuals at month-end.

How do pre-orders and dropshipping affect my forecast? 

Pre-order revenue should be forecasted as cash inflow on the payment date — not the fulfillment date — since customers pay upfront. For dropshipping, model inflows on the customer payment date and outflows on the supplier payment date; the gap between them is your working capital requirement.

How should I handle perishable or slow-moving SKUs in my forecast? 

With perishable SKUs, anything you don't sell in time becomes a write-off, so only forecast inventory purchases against what you're realistically confident you'll sell through. Slow-moving SKUs are a different problem: the cash leaves your account when you buy the inventory, but the revenue might not show up for 90+ days. Plan for that gap in your cash flow model. Otherwise, you'll look healthier on paper than you actually are.

Is a personal guarantee or collateral required to get financing during a cash flow gap? 

It depends on the financing type. Traditional bank loans often require personal guarantees and/or collateral. Revenue-based financing and platform capital (Shopify Capital, Stripe Capital) typically don't require either. Lines of credit fall in between.

How fast can I typically access emergency financing if my forecast shows a gap? 

Revenue-based financing can fund within 24–72 hours. Platform capital is often near-instant. Traditional business loans take 2–6 weeks. SBA loans can take 30–90 days. Plan your forecast with enough buffer to accommodate whichever option you'd realistically use.

What data access do lenders typically request when evaluating my business? 

Most modern lenders request read-only access to your ecommerce platform, marketing tools, analytics platforms, and bank account (or bank statements). Traditional banks may also request tax returns, profit and loss statements, and a business plan.

Want deeper financial guidance for your startup? Mercury Insights delivers finance strategy, benchmarks, and the data you need to make better business decisions. Explore Mercury Insights.