Inside the CFO Playbook: How to Do Financial Forecasting

Business owners understand their craft deeply. They know their customers, product, and the levers that drive growth. 

But when it comes to financial forecasting? There’s a gap. Most of us didn’t go to school for accounting, and it’s not an easy discipline to pick up. 

That’s why in this article: 

• We’ll walk through a real-world financial forecasting scenario where you get to decide how to handle a cash flow shortfall.
  
• Cover why P&L and cash flow forecasts don’t always match up, and how CFOs build their forecasts to understand both profitability and cash balance.
  
• Share a plug-and-play financial forecasting template (with video walkthroughs) you can implement in your business, today.
  
• We offer a free 30-minute consultation with our head of CFO services, Karen Rinehart.

Let’s dive in. 

Start Here

The material covered in this article originally appeared in our Inside the CFO Playbook webinar series, led by indienro’s 30-year accounting veteran Karen Rinehart. 

If you prefer learning in a presentation-style environment, you can access the webinar replay link here.

Real World Scenario: Cash Crunch

You’re building a cash flow forecast for Acme Incorporated. You have enough revenue to cover costs, and even have profits to reinvest.

• Cash in the bank: $20,000
  
• Debt: $50,000 (line of credit)
  
• Revenue: $80,000/month
  
• Costs: $50,000/month
  
• Profit: $30,000/month

However, there’s a problem — even though you’re profitable on paper, you’re facing a cash shortfall.

The line of credit? It has a zero-out clause, and the entire $50,000 is due at the end of the month. You’re allowed to re-borrow the full amount the very next day, but since customers don’t pay until the beginning of next month, you’re facing a cash shortfall. 

What can you do? 

You’ve probably overcome a cash crunch before, so you know the options: use personal assets to make up the shortfall, rush to make some sales before the end of the month, offer existing customers a discount for early payment, negotiate with creditors/vendors/landlords to delay payment, or even delay payroll.

No solution feels great. They’re all painful in their own way. But at least you knew about the shortfall in advance, with plenty of time to plan.

The Hard Part of Financial Forecasting

When does the cash crunch hit? How big is it? What levers can we pull? 

Business decisions are never simple, but they’re easier when you have all the information in front of you. 

The trouble is just how difficult it is to anticipate the future. Forecasts run anywhere from a few days to a few years, and the wider your time frame, the more variables and scenarios you have to consider.

What happens if we hire new sales staff? Move into a new building? Launch a new product line? Have a bad year? It can be overwhelming to try and answer those questions, but with a bit of diligence, you still can plan for the unexpected.

How CFOs Approach Financial Forecasting

Rule number one: your P&L and cash balance are different things.

We worked with a residential pool builder during Covid. He believed accounting was only useful for tax returns, and as a result, wasn’t as familiar with his profit margins as he perhaps should’ve been. 

Covid quadrupled his revenue, and since he had cash in the bank at the end of the month, figured everything was fine.

However, the reason he always had cash was because he took 40% deposits from new customers, but because of the backlog, didn’t get to new builds for three months. He was using deposits to build TODAY’s pools, and all the while, didn’t realize he was building at a loss. 

This sort of thing doesn’t just happen to small businesses — it happens to corporations too. Can you imagine a world without iPhones? It almost happened. 

Apple had a great year in 1995, and invested a ton of cash in product development. They thought they had enough cash reserves to last, but because they didn’t pay attention to some fundamental metrics, insiders say they were just three months away from insolvency by the end of 1997. 

That’s why CFOs separate P&L statements from cash flow forecasts — timing matters.

From Profit to Cash: The Missing Link

Cash is king. But mismatches in payment timing can make it tough to understand profitability, 

Take sales on credit? You’re responsible for upfront costs, even though you haven’t received any money from customers. The same is true for expenses; credit purchases may not impact your bank account today, but they will in the future.

So, how do CFOs handle timing mismatches? Accrual accounting.

You probably know the difference between cash vs accrual already, but as a refresher, cash accounting works just like your household budget — it tracks when money actually changes hands. Accrual accounting, on the other hand, registers when revenue/expenses are earned/incurred, regardless of when the actual payment happens.

Many small business owners use cash accounting because it’s easier to handle. However, accrual accounting gives a more accurate long-term picture, and it’s necessary for Generally Accepted Accounting Principles (GAAP), compliance, lenders, and major investors. 

Cash Flow Framework

The ultimate goal is, of course, profit. But growing businesses make large up-front investments, in cash, that they recoup over time. 

In the meantime? The objective is to never run out of cash in the bank.

Here’s how we keep track.

Our biggest inflows come from customers, with lenders and investors also playing a role, while investments and payroll generate outflows.

The next step is to decide how far out to forecast. 

• Short: 13 weeks or less. We’re just making sure we can keep up with the day-to-day.
  
• Medium: ~12 months. We have some stability and room to plan for the rest of the year.
  
• Long-term: ~3 years. Here, we’re planning for major capital improvements, growth, and likely pitching investors to cover the investment.

The Forecasting Flywheel: A Continuous Process

Whether you’re building your P&L or cash flow forecast, this process remains the same: start by identifying the levers that are likely to have the most impact. 

For a P&L, that’s revenue. 

For cash flow, it’s customer payment behavior. Are they on time? Late? Do they pay up front, or monthly?

Once we’ve identified our levers, the next step is to make assumptions about how those levers may behave, and play the what-if game to see how those scenarios play out. What if we increase revenue? How much can we save every month? How much can we afford to invest? What happens to our cash balance if a customer doesn’t pay on time? Or if we lose a major account?

Then, we make the best decision we can based on our assumptions. But remember, the farther you project, the fuzzier the picture gets — which is why regularly comparing actuals vs assumptions, and adjusting your forecasts accordingly, becomes so important.

Best practices for strong cash flow forecasting:

• Regularly analyze actual vs forecast
  
• Update frequently
  
• Build both conservative and optimistic scenarios
  
• Involve non-finance team members
  
• Tie decisions to triggers

Need Help Building Out Your Forecast?

Book a free 30-minute consultation with head of CFO services Karen Rinehart. Bring your spreadsheet, and we’ll work through any gaps and questions you may have.