Cash Flow Forecasts Lenders Accept

Key takeaways

• Monthly, not annual - annual figures hide the months you run out of cash.
• State every assumption explicitly so it can be tested.
• Reconcile to actuals - an unexplained step-change destroys credibility.
• Include GST, PAYG and tax. Their absence is the most common tell.

What structure do lenders expect?

Cash in, cash out, monthly, with an opening and closing bank balance for each month. Not profit - cash. A profitable business can run out of money, and the forecast exists to show whether and when that happens.

The distinction between sales and receipts is where most forecasts fail. If your customers pay in 45 days, a sale in March is cash in May. A forecast that books revenue in the month of sale will show cash you do not have.

What gets a forecast dismissed?

• The hockey stick. Flat history followed by a sharp uplift, with no explanation of what changed. If there is a real reason - a signed contract, a new site - say so and evidence it.
• No seasonality. Almost every business has some. A perfectly even twelve months signals that the forecast is one number divided by twelve.
• Missing tax. No GST remittance line is the single fastest way to signal the forecast was not prepared by someone who has run a business.
• Ignoring the new loan. The facility you are applying for has repayments. They belong in the forecast.
• No reconciliation to actuals. The forecast should start from where the accounts actually are.
• Only one scenario. A single optimistic case tells a lender you have not thought about what happens if it does not land.

How do you make it credible?

Credibility comes from testability. A lender is not checking whether your forecast is right - it cannot be - but whether the person who built it understands their own business.

1. Write the assumptions down. Debtor days, creditor days, gross margin, growth rate, wage increases. Each on its own line, each a number someone can question.
2. Anchor to history. Show last twelve months actual next to the forecast, so the reader can see the relationship.
3. Include a downside case. Revenue 20% lower, debtor days 15 days longer. Show what happens and what you would do about it.
4. Show the facility working. Demonstrate the peak drawn balance stays within the limit you are requesting, and that the facility clears at some point in the cycle.
5. Have your accountant review it. An accountant-reviewed forecast carries more weight, and they will catch the tax lines.

A forecast with an honest downside case is more persuasive than an optimistic one, not less. It tells the lender you have already thought about the scenario they are worrying about.

Frequently asked questions

How far ahead should a cash flow forecast go?

Twelve months monthly is the standard request, and longer for a development or a facility with a longer term. Monthly granularity matters more than length - annual figures hide the months where cash runs out.

Should the forecast include the loan I am applying for?

Yes. Show the drawdown, the repayments and the resulting cash position. A forecast that omits the proposed facility does not demonstrate the thing the lender needs to see.

Does my accountant need to prepare it?

Not necessarily, but an accountant-reviewed forecast carries more weight and they will catch omissions such as GST and PAYG. If you prepare it yourself, have them review it before it goes to the lender.

Should I show a worst case?

Yes. A downside scenario with a stated response is more persuasive than a single optimistic case, because it shows you have already considered what the lender is worried about.

Related reading

• Business Overdrafts and Working Capital
• Business Acquisition Finance
• Startup Finance Without Property Security

Sources

• Cash flow management for small business — business.gov.au
• Moneysmart - business finance — ASIC