Win Lenders Over With This 10-Step Cash Flow Forecasting Method

As a Australian business owner you’ve probably heard the term ‘cash flow forecasting’ when applying for a business loan.

This important financial document can make or break your loan application so it’s crucial you know what it is and how to create one. 

Here at Smart Business Plans, we specialise in cash flow forecasting specifically to support business loan applications. If you’d like to do your cash flow forecast for you, just call 1300 262 098 or reach out online.

Or, if you’d like to try yourself, in this 10 step guide we’ll take you through the process of creating a cash flow forecast that will impress the bank and get you that business loan you need.

What is a Cash Flow Forecast?

Before we get into the nuts and bolts of creating a cash flow forecast, let’s first understand what cash flow forecasting is and why it’s so important. Cash flow forecasting is a financial planning tool that estimates the amount of money that will flow in and out of your business over a certain period. It’s a crystal ball of sorts, giving you and your potential lenders a glimpse into your business’s future.

For Australian businesses, cash flow management is especially important. According to the Australian Securities and Investments Commission (ASIC), poor cash flow is one of the top reasons for business failure in Australia. In fact, their 2020-2021 report showed that 41% of companies that went into external administration cited inadequate cash flow or high cash usage as a major reason for their downfall.

Why Do Banks Need Cash Flow Forecasts?

Banks and other lenders ask for cash flow forecasts as part of a loan application for two reasons. Firstly it shows you can repay the loan. Providing an accurate cash flow forecast is crucial as it demonstrates to the bank that your projections are reliable. By showing your projected income and expenses you’re essentially proving to the bank you’ll have enough cash on hand to meet your loan repayments.

Secondly it shows your financial literacy and planning skills. A well prepared cash flow forecast shows you understand your business’s financials and are managing your finances proactively. This gives lenders confidence and makes them more likely to approve your loan application.

How to Create A Cash Flow Forecast

Now that we know why a cash flow forecast is important, let’s get into the cash flow forecasting process to create one that will impress the bank.

Step 1: Choose Your Time Period

The first step in creating your cash flow forecast is to choose your period. For most business loan applications banks will require a 12 month forecast. But always check with your lender as some may require longer periods for larger loans or long term investments.

Step 2: Collect Historical Financial Data

If you’re a established business start by collecting your financial records from the past 12 to 24 months. This includes bank statements, profit and loss statements and previous cash flow reports if available. It is important to compare this historical data with actual cash flows to identify discrepancies and improve cash flow management. This historical data will be the base for your projections.

If you’re a new business with no financial history you’ll need to rely on market research, industry benchmarks and realistic estimates based on your business plan.

Step 3: Cash Inflows

Next list all your expected cash inflows. This includes:

1. Sales revenue

2. Loans or investments

3. Asset sales

4. Tax refunds

5. Grants or subsidies

Make sure to account for any seasonality in your business. For example if you have a beachside café in Bondi you’ll get more revenue during the summer months.

Step 4: Cash Outflows

Now list all your expected cash outflows. This includes:

1. Cost of goods sold

2. Salaries and wages

3. Rent and utilities

4. Loan repayments

5. Tax payments

6. Marketing and advertising costs

7. Equipment purchases or leases

Don’t forget to include expenses like insurance premiums, or quarterly BAS payments.

Step 5: Calculate Your Net Cash Flow

For each month in your forecast period subtract your total cash outflows from your total cash inflows. This will give you your net cash flow. A positive number is a cash surplus, a negative number is a cash deficit.

Step 6: Opening and Closing Balances

Start your forecast with your current cash balance. For each subsequent month your opening balance will be the previous month’s closing balance. Your closing balance for each month is the opening balance plus the net cash flow.

Step 7: Cash Flow Gaps

Review your forecast to find any months where your closing balance goes low or negative. Managing these cash flow gaps is crucial to maintaining healthy business cash flow. These are your cash flow gaps and you’ll need to develop a plan to fix them. This might include:

1. Negotiating better payment terms with suppliers

2. Implementing more aggressive debt collection practices

3. Reducing non-essential expenses

4. Exploring additional funding options

Step 8: Notes and Assumptions

To add context to your numbers include notes on any significant variances or unusual items. Also state your assumptions. For example if you’re forecasting 20% growth in sales explain the basis for that growth.

Step 9: Scenarios

Create at least 3 scenarios for your cash flow projection: best case, worst case, and most likely. This will show the bank you’ve thought through different scenarios and have plans in place for each.

Step 10: Review and finalise

Before you submit your cash flow forecast to the bank review it thoroughly. Check for any calculation errors, make sure all numbers match your other financial documents and that your projections are realistic and achievable.

Presenting Your Cash Flow Forecast

When presenting your cash flow statement and forecast to the bank, consider including a summary table that highlights key figures.

FAQs

What is a cash flow forecast for a loan?

A cash flow forecast for a loan is a financial projection estimating future cash inflows and outflows, typically over 12 months. It demonstrates to lenders a business’s ability to repay the loan while meeting other obligations. In Australia, where 41% of business failures are due to inadequate cash flow (ASIC, 2021), this forecast is crucial for loan approval and financial planning.

How do you calculate cash flow for a business loan?

To calculate cash flow for a business loan:

1. List all expected cash inflows (sales, investments)

2. Detail all anticipated cash outflows (expenses, loan repayments)

3. Subtract outflows from inflows for each period

4. Add net cash flow to previous balance Include proposed loan repayments to show impact. For Australian businesses, consider the average loan amount of AUD 407,000 (ABA, 2023) when projecting repayments.

How do you forecast cash flow for a business?

To forecast cash flow:

1. Analyse historical financial data

2. Consider business plans and market trends

3. Project monthly income and expenses

4. Factor in seasonal fluctuations

5. Create multiple scenarios (optimistic, pessimistic, likely) In Australia, where 55% of businesses use cloud-based accounting software (ABS, 2022), leverage these tools for accurate forecasting.

How do you estimate cash flow in a business?

Estimate cash flow by:

1. Reviewing past financial records

2. Adjusting for known future changes

3. Considering sales cycles and payment terms

4. Accounting for seasonality

5. Including all cash sources and uses For new Australian businesses, use industry benchmarks from the ATO’s small business benchmark data to inform estimates.

How to calculate financing cash flow?

Calculate financing cash flow:

1. List cash inflows from financing (loans, stock issuance)

2. List cash outflows (loan repayments, dividends)

3. Subtract outflows from inflows Only include actual cash movements. In Australia, where business lending grew by 12.8% in 2022 (RBA), accurately tracking financing cash flow is crucial.

How much cash flow is good for a business?

Good cash flow covers at least 3-6 months of operating expenses. It should allow a business to meet obligations, invest in growth, and maintain a safety net. In Australia, where the average small business has 27 days of cash buffer (Xero Small Business Insights), aim for a higher buffer to ensure financial stability.

How to do a 3 year cash flow projection?

For a 3-year cash flow projection:

1. Analyse historical data and business plans

2. Research industry trends

3. Project month-by-month for year 1, quarterly for years 2-3

4. Include all cash inflows and outflows

5. Create multiple scenarios

6. Regularly update projections For Australian businesses, consider the government’s 3-year economic forecasts in your projections.

What is the 12 month cash flow projection?

A 12-month cash flow projection is a month-by-month forecast of cash inflows and outflows for the upcoming year. It helps manage liquidity and is often required for loan applications. In Australia, where 1 in 5 businesses experienced cash flow issues in 2022 (ABS), this tool is essential for financial planning and demonstrating business health to stakeholders.

What now?

We’ve helped more than 3,300 Australian business owners over the past 15 years. If you’d like us to help you with cash flow forecasting, a business plan, or a bank loan, call 1300 262 098 now, or book an appointment directly using the button below.