F2F #48: Founder Power-up: Model Your Cash Flow

This week's issue is written by my good friend Greg Scown. Greg is the co-founder of TextExpander, which he and his co-founder sold to Summit Partners in 2022. He maintains a stake and continues to serve on the board. I've hosted Greg on the Life on Mars podcast twice: most recently, talking about company culture, and last year talking about life after an exit. If you're founding a company in Barcelona, definitely let Greg know.

One of the best ways to grow your business is to model your future cash flow. Knowing when and how much cash you'll have lets you advertise, hire, market, and spend in general without fear. It also shows where and when you should be more cautious.

Background

In 2003, I founded TextExpander (née Smile) with Philip Goward. In our division of labor, I was responsible for day-to-day finances. We made our annual budget together. For the first year or two, we found it difficult to increase our spending due to uncertainty. We knew how much we had in the bank, but we didn't know how much to expect in the future.

After a while, we decided to project our cash flow out one year. Once we'd done this, we were able to create future line items for advertising and hiring. We ran successful print ads, which increased our sales. We hired someone to handle weekend support so we could take a break. Modeling our cash flow set us free.

Exercise: Project Your Cash Flow

Make a spreadsheet with column headers for each of the coming 12 months. For the rows, create two groups: income and expenses, each with specific entries. Here's a Google Sheet you can duplicate and tailor to your needs.

Estimate Your Income

Project your income. Don't be optimistic. If anything, underestimate. If you're growing, use last year's income as a baseline. If you're growing fast (20%+), use last year's income multiplied by one plus half your growth rate (for example, 20% growth → 1.1). If you're flat, use last year's income multiplied by 0.9 (that is, -10% growth). If your income is lumpy, be sure to put it in the correct months. If your income is fairly smooth, it's okay to average.

This is especially difficult for enterprise sales, as they take a long time to close and often involve large amounts. If you're new to this, take the time you think it will take to close a sale and double or triple it.

Plot Your Expenses

Make a list of the past year's expenses. Separate the list into monthly and annual expenses. For annual expenses, make note of the month in which they land. To ensure you don't miss annual expenses, go back through your bank and/or credit card statements for the past year. Give yourself bonus points if you're able to do this in Xero, QuickBooks, or a similar tool.

Create row titles under the expenses group with the name of each expense. Fill the columns for the month or months in which you expect to incur the expense with the amounts, including any expected increases. If you had non-recurring expenses, make note of them as you do this exercise. If you think you'll have non-recurring expenses in the coming year, make a row for that and fill in your estimates.

Checkpoint

Now that you've got a handle on your income and expenses, go ahead and add a row to the top of the sheet for your Starting Bank Balance. Fill this in for the first month. Add subtotals to your income and expenses groups. Add a row to the bottom of the sheet for your Ending Bank Balance. Calculate that using the formula: Starting Bank Balance - Expenses Subtotal + Income Subtotal. Set the next month's Starting Bank Balance to be equal to the previous month's Ending Bank Balance.

The Fun Part: What's Next?

Now, you've got something you can really play with. Let's say you want to up your game in SEO or GEO (Generative Engine Optimization). Solicit proposals from agencies. Add a line to your expenses. You'll see immediately if you can afford it or not. The same is true for increasing your spend on AWS, adding a new tool, or taking on a new contractor.

Maintenance

I strongly recommend you track your actuals and the differences against your projections. It's probably easiest to do this by duplicating your income and expenses groups beneath your projections, then filling in the actual numbers once per month, making note of the differences. If you're wildly off, you'll want to change your future projections.

The Ask

• Are you starting your own company?
• Already running a company and want to chat about it?
• Would you be willing to introduce friends who are starting their own companies?
• Would you like to discuss cash flow modeling or review your model?

If any of these apply, please send me a note. You can reach me at founders@gregscown.com. Thanks!