Why would a bank manager want to see a cash flow forecast

Why would a bank manager want to see a cash flow forecast?

By Russell Bowyer

Why is a cash flow forecast important to banks and their managers?

Banks offer many financial services to businesses. But they don’t always require a cash flow forecast. For example, when you first open a business bank account, cash flow forecasts are not normally necessary. Therefore why would a bank manager want to see a cash flow forecast? Let’s take a look…

Why would a bank manager want to see a cash flow forecast in 20 seconds…

Why a cash flow forecast is important to your bank manager is so they can build trust in you and your business. Being able to produce professional forecast reports, together with being on top of your numbers, will help to earn their trust. Your bank manager needs to see a cash flow forecast in order to approve loan applications. They will use your forecasts in conjunction with your management accounts and historical accounting information to confirm your business is viable and able to comfortably repay the loan. The combination of the forward period reports together with historic data will help to build a picture of credibility.

When is a cash flow forecast important to banks and their managers?

Why would a bank manager want to see a cash flow forecast

Why a bank manager would want to see a cash flow forecast is usually when the business owners are seeking to borrow from the bank concerned. When a business requires bank lending, the bank manager wants to know that they are lending money to a profitable operation. They need to be sure the business will have the ability to pay their loan back with interest.

The business doesn’t have to be profitable for all forecast periods

Whilst the bank may not need to see a profitable business right away, they will need to see that the business does turn a profit in the forecast period. But whether or not a profit or loss is shown in the forecast period, what’s more important is the cash flow. The cash flow needs to demonstrate the ability to make loan repayments.

Your bank manger will also want to see your historical financial information, together with management accounts. But this only shows half of the picture. The loan and the repayment thereof is in future periods. A cash flow forecast will demonstrate how the loan is covered by future profits and cash flows.

Why is a cash flow forecast important?

The bank manager will usually want to see a business plan with your cash flow projection. The business plan and projections will show that you’ve correctly estimated your potential income and expenses over forward periods. This will demonstrate the businesses ability to be able to afford the loan.

Assumptions used in preparing your forecasts need to consider historical data, but can be adjusted to reflect planned changes to the business going forward

But it’s important to prepare these forecasts whilst using sound assumptions. The assumptions used need to be based upon historic data. But they can be adjusted for what’s planned for the business going forward.

For example, it might be the loan will help the business to achieve high future sales. The loan might be to help purchase larger premises. This could be to support the higher sales volume. It could alternatively be a loan application to purchase plant and equipment.

It might be this new equipment will make the business more efficient. Whatever the change is, your figures and the assumptions that back them up, must stand up to scrutiny.

But where for example, there is a significant difference to the forecast numbers vs historical information, any differences need to be explained. This explanation can be in your assumptions which will form part of your business plan.

But above all, your bank manager needs to believe your cash flow forecasts. Don’t use rash assumptions or assumptions that have not been though through.

The template is excellent – very easy to use. You can produce a professional set of forecasts very quickly.”

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Tim Moorhouse – testimonial to Cash Forecaster Software

Cash flow forecast benefits and drawbacks

There are drawbacks to cash flow forecasts for sure. The biggest drawback when forecasting what might happen in the future is estimating your business sales. Your other numbers are relatively straight forward to forecast. Many of which will be based on the sales you forecast.

For example, if your business has a ‘cost of sale’ for each sale made, these numbers will be known. You will therefore be able to estimate your forecast cost of sales, but this will be based on the estimated sales. The drawback being that if the sales forecast is wrong, the cost of sales will be wrong too.

More Reading: How is it possible to have high sales and high profits and run out of cash?

Cash flow forecast benefits

Putting the above cash flow forecast drawback to one side, the benefit of providing one to your bank manager is they are more likely to lend if you produce these forecast reports.

It is therefore suggest that so long as your forecasts are based upon sound reasoning, and despite the drawbacks, if your manager asks for cash flow forecasts to support a loan application, provide one.

More Reading: What is normally included in a cash flow forecast for forward periods?

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