10 best practices today's strategic CFO can use to improve cash flow forecasting in SaaS

Finance teams still using spreadsheets often face challenges in accurately forecasting cash flow for SaaS businesses. In addition to the inherent difficulties associated with building and updating spreadsheet-based models, forecasting in SaaS is uniquely challenging because revenue is deferred, customer acquisition costs (CAC) are spread over customer lifetime value, and pricing models are complex. 

This guide was developed for SaaS finance leaders to provide actionable tips to help overcome these challenges for more accurate cash flow forecasting. 

10 cash flow forecasting best practices for SaaS CFOs

1. Use historical data as the starting point

Past performance doesn’t guarantee future performance, but it does give you a starting point. Factors like seasonality, cash usage patterns, cost structure, and customer behavior usually don’t change materially, at least in the short term—unless there’s a deliberate change.

Therefore, it is important to look at historical data for cash flow forecasting to better understand sales peaks, expense patterns, even customer usage patterns, and plan accordingly. For example, if your sales have grown at 15% year-on-year, then that becomes your starting point for the current forecast.

While some historical data points don’t change significantly, others may require careful analysis every time you develop a cash flow forecast. For instance, your business’s cash needs and revenue growth can vary even in the short term. It's also a good idea to segregate fixed and variable costs to ensure favorable outcomes. You can also consider doing a cohort-based cash flow analysis to understand variations by customer segments and behavior. For all of this, do make sure that your source data is accurate to get the best possible results. 

2. Evaluate the reliability of your assumptions

All forecasts begin with assumptions that are, ideally, at least reasonably accurate. However, even reasonable accuracy can be hard to achieve because there are several uncertainties to consider. 

For example, how exactly do you account for cyclical variations? What are the risks of newer technologies or better products replacing your product’s demand? Are there any global economic and geopolitical factors at play?

With so many uncertainties involved in cash flow forecasting, the assumptions made for one forecast will not necessarily apply to the next. 

‍“The quality of your cash flow forecast is only as good as the assumptions that underpin it. Top CFOs create DSO-based processes by customer that are continuously tested, validated, and refined, rather than treating them as fixed truths.” – Kirk Kappelhoff, Drivetrain Director, Strategic Finance 

The following three practices can help you test and validate your assumptions to improve your cash flow forecasting: 

Develop a strong rationale for each assumption

For each assumption you make, you should be able to clearly articulate your rationale. Doing so will help to ensure they are well-researched and credible enough to support decision-making.

For example, if you're assuming a growth rate of 10% over the next decade, list the factors driving that growth. If you’re assuming a drop in interest expenses, create a debt schedule that supports your assumption. 

Beyond doing the research needed, developing a strong rationale for each assumption requires that you critically evaluate your thinking, which often makes any interrelated factors you might not have considered and/or flaws in your logic more readily apparent.   

Document and categorize the sources informing your assumptions

Documenting the sources of the information your assumptions are based on and categorizing them as high, medium, or low, based on the quality of the source ensures transparency among all stakeholders regarding the credibility of the assumptions and the logic behind the projected outcomes. 

Solicit Input from experienced leaders across departments

Assumptions are always more reliable when they have been calibrated by those closer to the day-to-day  realities of the business.

Build a cross-functional review committee, involving representatives from the sales, marketing, product, and other key teams to validate your assumptions.

For example, the sales team leader can confirm the feasibility of the projected 7% month-on-month growth rate and the need to have contingency measures in place to mitigate any risks.

3. Add context to your assumptions with industry benchmarks

If you’re assuming the growth rate over the next year to be 15%, nearly twice the industry growth rate of 7% for the same timeline, ask yourself why.

Did you launch a new innovative product that’s expected to accelerate growth? Do you have a competitive advantage over others to support your growth assumption? 

If you can’t find a good reason, you either haven’t fully evaluated your assumptions (see the second tip above), or you simply don’t have sufficient data upon which to make a reliable assumption. If it’s the latter, reviewing your assumptions against reliable industry benchmarks can help.

Industry benchmarks provide a reality check for your business by highlighting areas where you might be overestimating or underestimating performance. Building and maintaining a financial dashboard that includes relevant benchmarks alongside cash flow efficiency metrics specific to your business can help you better track and understand your cash flow within the context of business performance. 

‍“Cash flow benchmarking isn't about conformity; it's about reality-testing your assumptions.” – Kirk Kappelhoff

It is helpful to review any benchmarks you’re using because outdated numbers could lead to incorrectly validating an assumption, which can make your forecast less reliable.  

4. Develop a deep understanding of your revenue and cost drivers

Revenue and cost drivers—sales volume, pricing strategies, customer retention rates, fixed and variable costs, and growth-related expenses—determine how much money your business earns from the sale of products and services and what it costs to operate the business. 

An exact estimation of every revenue and cost driver is practically impossible, but a deep understanding of what moves the needle is vital to forecasting its impact on cash flow. 

In terms of expenses, this includes the cost of goods sold (COGS) and other costs such as operating expenses (OpEx), research and development (R&D) costs, sales and marketing (S&M) expenses, and overhead.

For revenue, it’s not only important to understand all the different ways your business earns revenue, but also when that revenue can be recognized.  

Driver trees can be very useful for illustrating the relative influence each driver has on cash flow. In this context, a driver tree is a diagram that maps out the relationship between the core drivers of cash flow efficiency and the desired cash outcome (usually expressed as a metric). 

Because it starts with a goal (the desired cash outcome), building a detailed driver tree can help SaaS CFOs and finance teams create more informed and accurate cash flow forecasts that are well aligned with the company’s strategic priorities. 

Sensitivity analysis also plays an important role here as it helps test the assumptions to evaluate how changes in key drivers impact cash flow. This information makes it possible to proactively plan responses to impacts caused by changes in key drivers. For example, let’s say you find that an increase in CAC could lead to a significant decrease in your cash runway. In this case you could consider adjusting your marketing spend to fill the gap.  

‍“Cash flow mastery requires moving beyond surface-level metrics to a deeper understanding of the true operational drivers underneath.” – Kirk Kappelhoff

5. Factor in current and anticipated market conditions 

Macroeconomic trends, evolving customer behavior, and shifts in the competitive landscape not only influence your demand, pricing, and operational costs, but also have a significant impact on the cash flow forecast. 

Using a dashboard to monitor market trends and trigger the necessary responses based on shifts in leading indicators can help you stay ahead of them. Proactively anticipating any shifts in the market, instead of passively reacting to them, can protect your company’s cash flow and financial health. 

6. Optimize your cash management 

Delayed customer payments or changes in payment terms with suppliers can increase working capital needs and reduce liquidity. Therefore, to manage cash flow timing effectively, you need to optimize your accounts receivable (AR) and accounts payable (AP) processes. 

Analyzing AR practices will help you identify problems like delayed payments, incorrect invoicing, and lack of follow-up on aging receivables. Finding and fixing such issues is critical to mitigating cash flow risks. 

On the flip side, optimizing your AP practices means maintaining a strong relationship with your vendors. Doing so will help you negotiate favorable payment terms, such as making payments as late as possible, and also get some flexibility or concessions during challenging cash periods.

7. Implement rolling forecasts to improve forecast accuracy

Rolling forecasts allow SaaS business leaders to constantly review and update their cash flow predictions based on new data, factoring in the impact of changing market and economic events in real time.

By regularly reviewing and updating your forecasts, you can factor in the impact of events as when they happen and make more timely adjustments. Rolling forecasts also allow you to continuously fine-tune your forecasting model. 

‍“The traditional monthly or quarterly cash flow update is obsolete in today's dynamic environment. Leading SaaS CFOs implement weekly rolling forecasts with structured refresh processes, creating a continuous view of liquidity that enables faster, more confident decision-making.” – Kirk Kappelhoff

While implementing a rolling forecast requires more effort, doing so improves forecasting accuracy, giving CFOs more confidence in their cash flow forecasts and provides greater agility in responding to unexpected impacts to cash flow.  

8. Use scenario planning and what-if analysis to better prepare for potential impacts to cash flow  

Scenario planning and “what-if” analysis are two powerful methods for improving your cash flow forecasting because they allow you to anticipate and plan for all possible outcomes to more effectively manage your cash flow and cash reserves. 

They’re also pretty useful for testing your assumptions. Further, sharing the results with other departments like sales, marketing, and product, will help you refine the assumptions based on their input. 

9. Consider the impact of a usage-based pricing model

Compared to the traditional subscription-based business models, forecasting cash flows with usage-based pricing is even more complex. This is because the revenue is driven by a highly variable factor—product or service consumption by the customer.

If your business uses a usage-based pricing model, it’s important to analyze and factor  historical usage patterns into your cash flow forecasting assumptions. This information is useful because you can generally expect that past usage patterns would continue. For example, using a cohort analysis can help you identify customer behavior and trends across industries or review seasonality spikes. Also, remember to factor in both committed minimums and variable consumption patterns to estimate the baseline revenue. 

10. Regularly conduct variance analysis to refine your forecasts 

Comparing forecasted cash flows with the actual data helps in identifying inaccuracies, understanding customer behavior patterns, reviewing market trends, and refining the assumptions accordingly. This helps improve the accuracy of the forecasts and enables SaaS finance leaders to make more informed business decisions.

‍“The most valuable cash flow forecasting insights often come from systematic variance analysis. By treating each forecast miss as a learning opportunity rather than a failure, elite finance teams continuously refine their models, dramatically improving accuracy over time.” – Kirk Kappelhoff

Regularly conducting a cash flow variance analysis by different segments, such as customer, industry, or usage patterns can help SaaS CFOs drill into details for more granular insights and make better, data-backed business decisions.

The right technology is essential for effective cash flow forecasting

With all the complexities associated with managing cash flow for a SaaS business, especially with respect to revenue recognition and the variability associated with usage-based pricing, cash flow forecasting tools have become essential for all but the smallest startups.   

Strategic CFOs are finding that advanced financial planning and analysis (FP&A) software, especially a platform with built-in artificial intelligence (AI)—makes it far easier to account for uncertainties, mitigate the associated risks, and adapt their cash flow forecasting models accordingly. Drivetrain, a comprehensive FP&A solution was built for all of these things and more.

Drivetrain is an AI-native platform that provides the full range of features needed for robust and reliable FP&A, including cash flow forecasting. Here are some of the features Drivetrain provides to help you create more accurate cash flow forecasts:    

• Rolling forecasts and predictive forecasting capabilities 
• Scenario planning and what-if analysis
• Advanced analytics tools for detailed cash flow trend analysis
• Customizable forecasting models including driver-based modeling
• Subscription revenue modeling with multi-currency support
• 800+ integrations that ensure your cash flow data and the data in your  models is always up-to-date 
• Customizable and interactive reporting dashboards for visualizing cash flow metrics and drilling down into the underlying data
• Automated cash flow reporting and the ability to easily generate ad-hoc reports in real time. 
• A familiar, Excel-like platform with plain English formulas and flexible templates that make it fast and easy to build and refine custom models for your cash flow forecasting.

‍Learn more about how Drivetrain can help you scale your SaaS business by tracking, managing, and forecasting your cash flow more accurately.