How to improve cash flow projections with more accurate assumptions

Cash flow forecasting for SaaS businesses is driven by assumptions. Even minor deviations in assumptions about customer retention and churn or product growth and expansion, for example, can have a domino effect on cash flow. 

The more reliable and “logical” your assumptions, the more accurate your projections. 

This article discusses the significance of choosing the right assumptions for your cash flow projections. It also highlights the different factors that inform and influence these assumptions, and the role of cross-functional collaboration in refining them.

The right assumptions are crucial for reliable cash flow forecasts

Assumptions are the starting point for any forecast. They are the rationale for your forecasts and explain why the numbers in the forecast behave the way they do. 

Your assumptions need to be well researched, robust, and backed by data. Developing and using them correctly in your financial forecasting results in more accurate projections and also reduces the likelihood of deviations. Given that the SaaS industry is rife with uncertainties — economic downturn, market stagnation, lack of talent, and other exigent circumstances — business leaders and finance teams need to be extra mindful of the assumptions (and their reasoning) they feed into their forecasts.

The right assumptions also form the link between the business plan and the forecasts and enable cash flow optimization. A startup’s cash flow needs to align with its business goals and strategies. By refining assumptions and comparing cash flow forecasts against actual performance, industry benchmarks, and best practices, SaaS CFOs can identify opportunities to optimize cash flow performance—to support business’ growth plans, achieve profitability targets, and capitalize on investment opportunities. 

Examples of cash flow forecasting assumptions

Common examples of assumptions to include in your cash flow forecasts are:

• Revenue growth rate: Your revenue growth rate is the comparison of your revenue in one period to your revenue in another, and is expressed as a percentage. This includes subscriptions, services, and other recurring revenue channels.
• Cost of goods sold: COGS is the total of all costs related to developing and delivering the product or service to the customers. This includes hosting costs, customer support expenses, implementation costs, third-party software licenses, and other direct costs.
• Operating expenses: OpEx encompasses all the regular costs of running your SaaS business, such as employee salaries, utilities and office supplies, SaaS subscriptions, and cloud service usage. 
• Capital expenditures: CapEx is a long-term, one-time big investment in your business, such as buying software licenses, upgrading hardware or physical infrastructure components, and maintaining servers locally. 
• Working capital changes: Any changes in accounts receivable, accounts payable, cash, or assets need to be considered to arrive at more accurate projections.  
• Tax rate: This is what you expect to pay in taxes, factoring in tech-specific credits and deductions.
• Discount rate: This helps you calculate the present value of future cash flows based on your chosen rate of return.

Factors to consider in cash flow assumptions

Consider the following factors when selecting assumptions for your cash flow forecast:

1. Historical data and trends: The past performance (actuals) data of your SaaS business, compared with your cash flow forecasts, provides insights into recurring patterns, like seasonality or growth trends, and helps ground your projections in reality.
2. Industry benchmarks: Benchmarks ensure your forecasts align with market standards and highlight areas where you may be overestimating or underestimating performance.
3. Market conditions: Current and anticipated market trends, such economic conditions, competitive landscape, or shifts in customer behavior influence demand, pricing, and operational costs, which directly impact cash flow forecasts.

Drivers influencing your cash flow forecasting assumptions

Cash flow assumptions are informed and influenced by specific factors that provide clarity on how money flows into and out of your business. 

1. Revenue drivers

Revenue drivers determine how much money your business earns from the sale of products or services. These include: 

• Sales volume: A higher sales volume means more revenue and vice-versa.
• Pricing: Your pricing model impacts demand and profitability and directly influences revenue.
• Customer retention: A high net revenue retention means more recurring revenue and reduced acquisition costs.
• Market share: Capturing a larger market share results in more users and income.
• Seasonality: Seasonal demand fluctuations can lead to peaks or dips in revenue.
• Growth rate: Expanding products, markets, or customers fuels long-term revenue growth.

The revenue you earn flows into net income and then converts to actual cash flow. 

2. Cost drivers

Cost drivers determine how much money your business spends to operate, develop, and deliver its products or services. These include: 

• Fixed costs: These costs do not change and are independent of volume, that is, they remain fixed regardless of your product/service. SaaS fixed costs include rent, salaries, insurance, software licenses, and depreciation.
• Variable costs: These costs are linked to the sales volume of your product and fluctuate accordingly. Variable costs include COGS, sales commissions, software subscriptions, and customer support, as well as cloud storage and data processing charges.
• Growth-related costs: These are costs related to growth and customer acquisition activities, such as advertising costs, hiring plans, training programs, and infrastructure scaling costs.

Each cost assumption should reflect your business model's efficiency and your strategic priorities—whether you're focusing on growth, profitability, or market expansion.

3. Cash flow timing 

Cash flow timing revolves around two components: accounts receivable (AR) and accounts payable (AP). The timing of both your receivables and payables impacts your working capital position and operational flexibility. 

Delayed payments from customers can cause cash shortages, even if your revenue looks strong on paper. Meanwhile, negotiating longer/flexible payment terms with suppliers enables you to maintain your working capital without dipping into your cash reserves. 

4. Cash flow sensitivity 

Cash flow sensitivity determines how your cash flow forecast responds to changes in your revenue drivers, cost drivers, or cash flow timing. 

Essentially, it tests the “sensitivity” of your forecasts based on multiple scenarios and helps you plan better for any uncertainties. You can also conduct a what-if analysis to review potential outcomes based on changes in your assumptions or external factors. 

Key areas to focus on when developing assumptions

When creating assumptions for cash flow forecasting or financial forecasting, it’s important to base them on accurate data and adjust for any possible changes. These include:

1. Employee expenses

Employee costs are often the biggest part of a SaaS company’s budget, so it’s important to forecast them carefully. Planning for sales capacity will help you understand the number of employees you need to meet revenue and headcount planning will help you better predict the number of employees you need in different roles.

With both types of planning, consider past hiring trends, as well as promotions or restructuring needs. It’s also important to consider your employee attrition rate, breaking it down by department or role for accuracy. Additionally, include realistic timelines for recruitment and onboarding, allowing a buffer for any delays and other factors.

2. Revenue

Revenue projections go beyond historical data. They also include the timing of cash inflows. Business leaders need to consider AR collections and AR aging (i.e. overdue payments from customers and outstanding balances) and plan for managing bad debt effectively. It is also important to consider the impact of missing targets or exceeding targets on your overall revenue.

3. Vendor expenses

You can estimate vendor costs using past spending patterns, vendor contracts, and price trends. It is useful to add buffers to cover unexpected costs like price hikes or last-minute purchases. If you’re onboarding new vendors, plan for delays or set-up time to avoid surprises that could affect your timelines or budgets.

4. Travel spend

Travel costs and timings can vary widely depending on your SaaS business’ strategic objectives. If you’re expanding into new regions, plan for increased travel to set up teams or meet clients. Use historical data to forecast travel during peak periods like industry conferences or year-end visits. Also, consider the balance between virtual and in-person meetings to ensure your forecasts reflect current working trends (cost of travel vs. cost of communication tools).

Stress testing and adjusting your assumptions 

Once you’ve selected your assumptions, you need to validate them. This is where scenario planning and sensitivity analysis step in. Scenario planning helps you prepare for best-case, worst-case, and most likely situations. Similarly, sensitivity analysis or what-if analysis allows you to see how changes in one variable, like revenue or headcount, impact your overall plan.

From a process perspective, it is advisable to clearly document the assumptions used in your cash flow forecast and explain the rationale to other users of your forecasting model. Documentation makes it easier to track, review, and update the assumptions when new information becomes available.

Role of cross-functional collaboration in refining assumptions

Creating accurate financial forecasts relies on more than just historical data or industry reports. The reliability of your assumptions and the overall projections are also dependent on strategic inputs from different departments across the organization.

1. Revenue assumptions

Revenue assumptions are tightly tied to your sales team’s expertise. You get front-line insights into revenue patterns and customer behavior from sales teams. They also validate revenue growth assumptions based on pipeline data and market feedback. 

For example, if there’s a huge variance in projected vs. actual revenue, the sales team can explain whether this stems from pipeline issues, delayed deals, market shifts, even changes in customer behavior—and provide strategies to mitigate the challenges or capitalize on the opportunities.

2. Expense assumptions

Expenses are a shared responsibility across all teams. Each department contributes to cost assumptions based on its operational needs. For instance,

• HR provides hiring forecasts and associated costs for onboarding and training.
• Operations outlines infrastructure, production, or service delivery expenses.
• Marketing shares projected budgets for campaigns and outreach efforts.

3. AR and AP timings 

The timing of cash flow—when money is received and paid out—is an important aspect of forecasting. 

The finance or accounting team ensures that your AR and AP assumptions are rooted in customer contractual obligations, including minimum commitment fees and net payment terms (e.g., Net 30, Net 60), as well as your own vendor payment trends, such as flexible payment options or agreed-upon payment timelines. 

Drivetrain makes calibrating assumptions for accurate cash flow forecasting easier

The right assumptions ensure that your cash flow forecasts are more reliable and accurate— by anticipating future cash inflows and outflows, maintaining cash reserves, and making informed decisions about growth and investment. Even the slightest mistake can potentially upend your cash flow forecasting and financial planning models. This is where cash flow forecasting tools become invaluable. 

These software help automate your data collection and analysis, simplify calculations, provide real-time insights, and refine your assumptions based on historical data and scenario planning.

Forecasting is a critical part of financial planning and analysis. Drivetrain, a strategic financial planning software, automates data consolidation across disparate systems and apps, eliminating manual errors, ensuring data quality, and enabling CFOs and finance professionals to get real-time visibility into their business performance in real-time. 

The platform’s full range of FP&A features ensures your assumptions are based on reliable historical and current data—allowing finance teams to create more accurate budgets and forecasts, adapt assumptions to reflect changing market conditions, track their progress against targets and actuals, as well as identify and mitigate any bottlenecks to growth. 

In fact, its user-friendly, spreadsheet-like interface, built-in formulas in simple English, and cross-functional features enable even non-finance departments, including sales, marketing, operations, and HR, to easily develop the necessary financial models.

‍Learn more about how Drivetrain can help validate your assumptions to develop more accurate cash flow projections and enhance your financial planning process.