Cash Flow Modeling Techniques

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Last Updated on March 9, 2022

Just like the water cycle for the Earth and blood circulation for the human body, cash flow for a business is vital. In fact, many businesses fail to run for longer than three years due to poor cash flow.

Not only is cash flow necessary for a business’ survival, but it is also needed in order for the business to grow and thrive. This is why any business owner, no matter the size of their company, should possess a cash flow model. But what is a cash flow model? What does it do for a business? And what is included in an effective cash flow model?

What is a Cash Flow Model?

A cash flow model allows business owners to predict future financial performance based on a number of factors that impact the movement of money. These can include income, expenditure, and debts. They also take into account market trends, such as interest rates and wage increases at any given point in time.

Cash flow models will include both historical, real-time, and projected data. These will result in information that can be used for investments, sale of equity, or reduction of debt.

Cash flow models will have specific objectives in mind, meaning a business may have several cash flow models in order to accommodate different goals. An optimal cash flow model will be detailed enough to be conducive to meeting set goals but not to the point of inundating a user with unnecessary information. Why is a cash flow model important?

Importance of a Cash Flow Model

A well-made cash flow model will allow business owners to predict and plan for the future. Because it takes into account all applicable factors, including those that may be more volatile, the financial well-being of the business is easier to ensure even when there is a twist in the road ahead.

Cash flow models allow business owners to implement harvested data in planning and enacting necessary changes that will impact liquidity and solvency. These are factors that should be considered before potential economic crises. Creating a cash flow model is not a matter to be postponed until such events occur.

In addition, a cash flow model will highlight the key drivers of cash flow, which ideally leads to a focus on maximizing the impact of these drivers. In this way, cash flow models not only help sustain businesses but assist in increasing overall cash flow, the primary objective of any business.

The more data that is available, the more flexibility business owners possess for investment ventures. The availability of data and the resulting net gain also has a positive impact on investors’ impression of the business, which opens more doors to funding and lower interest rates. These are all positive steps toward reducing debt for the business, thereby reducing liability and building equity.

Inputs and Steps

Depending on the business and objective, a cash flow model’s input section will differ. However, this section will always contain actual data and forecast data, the latter of which will be affected by the former.

It is important to tailor this section to the objectives that are to be met, as this will influence the data that is input. Key cash flow drivers should be highlighted, with other factors affecting cash flow being included. Regardless of what business the cash flow model is for, the input section should contain revenue data, expenditures, and taxes.

Reporting periods will also vary depending on the objective, ranging from daily to monthly. Short-term or long-term cash flow data may be needed for insight into liquidity and solvency, as well as other business characteristics.

The input section should be easy to understand and update. Having a clear goal in mind when creating a cash flow model will ensure that enough data is present but not more than is necessary.


The output section of a cash flow model displays the results of the input data. This information is vital to the making of decisions for the business as it reflects the projected financial results based on historical data. Based on output data, changes may be made.

Like input data, output data needs to be easy to view and comprehend. Input data will be grouped together in one section of the cash flow model, as will output data. Most data in the output section is based on formulas, as projected data is fluid.

Cash Flow Categories

Cash flow is divided into three categories that are always included in cash flow analysis. These categories are operating cash flow, cash flow resulting from investments, and cash flow resulting from financing activity.

Operating Cash Flow

This is cash flow resulting from company operations, which is typically the primary method of driving revenue. Expenses, both cash and non-cash, are accounted for in this category.

Operating cash flow is an indication of a company’s ability to cover these expenses and debts. Depreciation of physical assets is an example of a non-cash expense.

Cash Flow Resulting from Investments

This category covers cash earned from investing in physical assets, securities, or the sale of such. Physical assets acquired by the business are known as PP&E, or Property, Plant, and Equipment. The revenue resulting from these assets or the sale of such property contributes to cash flow from investments. Acquiring new businesses is also a method of creating cash flow through investments.

Cash Flow Resulting from Financing Activity

Cash flow resulting from financing activity is related to the funding of the company, especially with regards to dividends, equity, and debt. When investors purchase the company’s equity or debt, the cash raised in this manner is considered cash flow resulting from financing activity. Repurchase or repayment of equity or debt is also included in this type of cash flow.

Final Thoughts

Cash flow is vital to the well-being of a business, whether it is an SME (Small to Medium Enterprise) or a corporate giant. Neglecting this vital aspect of a company’s finances leads to the downfall of many businesses. Having a well-made cash flow model, on the other hand, leads to increased cash flow and opens up new opportunities for growth. This holds true even when economic crises may loom on the horizon.