According to Alfred Rappaport, “Profit is a Theory, Cash is a Fact.” This underscores the importance of cash to every business, buttressing the fact that a business can survive for a long time without making a profit, but will die in days without cash or liquidity.
Welcome to Module 6 of Mastering Financial Modeling with Excel. This is the moment where we move from accounting to survival. We’ll examine the three main components of the cash flow statement and how they impact a business’s liquidity.
In previous modules, we calculated costs and profitability. We looked at the “Net Profit” line on the Income Statement and felt good about the business making money. But here is the hard truth that Fortune 500 CFOs know better than anyone: Profitability does not equal Solvency.
Yes, you can have a profitable month on paper, that is, sales are up, margins are high, but if that money is tied up in unpaid invoices or sitting in inventory, you cannot pay your staff on month-end. That is how successful businesses go bankrupt. They run out of fuel (cash) while the engine is running perfectly.
This situation affected my computer sales business in 2013, and it eventually closed down in 2015. Because we were selling computers on installment, we were making profits on paper, but there was no cash to finance operations, pay staff, and purchase more products. This became even more difficult when more customers defaulted on payments.
What is Cash Flow Forecasting?
What is cash flow, and cash flow forecasting? Cash flow is simply the movement of money into and out of a business during a specific period. And Cash flow forecasting is the process of estimating future cash inflows and outflows to predict the business’s liquidity position.
For example, Greenleaf Bakery projects that in March 2026, it will receive 5,000,000 from product sales (inflow), spend 2,000,000 on flour and labor (outflow), and repay 1,300,000 on a loan (financing outflow). The forecast shows a net cash flow of 1,700,000, meaning the bakery will still have cash left after covering obligations.
In the corporate world, Cash Flow Forecasting is the “Crystal Ball.” It is the only tool that allows you to see the future of your bank account. It predicts exactly when you will have a surplus to invest and, more importantly, exactly when you might run dry.
In this module, we are going to build that crystal ball for our model business, GreenLeaf Bakery. We will move beyond static numbers and build a dynamic, living timeline that answers the ultimate question: “Will we have enough money to keep the lights on next month?”
To master this skill, we will break down the “Cash Flow Engine” into five critical components, each linking to the next:
- Components of a Cash Flow Statement: First, we need to understand the anatomy of cash. We will distinguish between Inflows (the faucet) and Outflows (the drain), and learn why “Net Cash Flow” is the true measure of health.
- Building a Monthly Cash Flow Tracker: We will move away from simple lists and build a structured 12-month timeline in Excel. This tracker will serve as the skeleton of our financial model.
- Forecasting with Assumptions: How do you predict the future? We will learn to use driver-based assumptions (like sales growth rates and inflation) to project our inflows and outflows intelligently, rather than just guessing numbers.
- Automating Projections: A good model works for you. We will use Excel formulas to automate the entire forecast, so that a single change in your growth rate instantly updates your year-end cash position.
- The “Corkscrew” Calculation: Finally, we will master the most important link in financial modeling—connecting Opening and Closing Balances. We will calculate the Net Cash Flow and see how the closing balance of one month becomes the opening balance of the next, creating a continuous chain of liquidity.
By the end of this module, you won’t just be reporting what happened; you will be navigating what will happen. Let’s get started.
Subscribe, Like, Comment, and Share. Stay tuned for the next lesson: Components of Cash Flow Statement.