How to build a cash flow forecast for a business loan application

A cash flow forecast for a business loan is a month-by-month estimate of the money expected to come into and go out of your company's bank account, usually over the next 12 months, including the new finance and its repayments. It shows a lender whether the company is likely to have enough cash to repay.

The British Business Bank defines cash flow as the money flowing in and out of a business over a given period, and points out that a business can be profitable while having poor cash flow. That is why lenders often look beyond the profit and loss account to how cash actually moves.

A forecast is also a working tool. Built well, it helps you decide how much to borrow, when you need it and which type of finance suits the pattern of your cash. Our guide to what working capital is explains the wider picture.

Build the forecast in a spreadsheet with one column per month and one row per type of receipt or payment, then calculate a running bank balance. The British Business Bank sets out four broad steps: choose the period, list income, list outgoings and calculate the running cash position.

1. Set the period and opening balance. For a loan application, 12 months is common. Start with the actual bank balance on the first day.
2. List receipts by when cash arrives. Include customer receipts, other income, asset sales and the loan itself in the month it is expected to be paid out. Record income only when the money will reach your account, not when you invoice.
3. List payments by when cash leaves. Include suppliers, wages, rent, utilities, insurance, existing finance repayments, capital spending, and tax bills such as VAT, PAYE and corporation tax.
4. Add the new finance repayments. Show the proposed repayments from the month they start, at the amounts you expect.
5. Calculate net cash flow and the running balance. Receipts minus payments gives the month's net cash flow. Add it to the opening balance to get the closing balance, which becomes next month's opening balance.
6. Review the results. Look for months where the balance gets tight or goes negative, and check whether the pattern makes sense.

Lenders read many forecasts, so a clear, conventional layout helps. A typical structure looks like this:

• Opening bank balance
• Receipts: sales receipts, other income, new finance drawn, VAT refunds if any
• Total receipts
• Payments: cost of sales, wages and salaries, PAYE and pension, rent and rates, overheads, VAT payments, corporation tax, existing finance repayments, new finance repayments, capital purchases, directors' drawings or dividends
• Total payments
• Net cash flow for the month
• Closing bank balance

If you have an overdraft or revolving facility, show the available limit as a separate line so the lender can see headroom at a glance.

A forecast is only as credible as its assumptions. Write them down on a separate sheet so a lender can see how each figure was reached.

• Sales: what growth, if any, you expect and why. Link it to evidence such as signed contracts, an order book or past seasonal patterns.
• Customer payment timing: how many days customers actually take to pay, based on recent experience rather than your stated terms.
• Supplier payment timing: when you pay suppliers, and whether any terms are changing.
• Costs: planned recruitment, pay increases, rent reviews and price rises.
• Tax: VAT quarters, PAYE dates and when corporation tax is due.
• Capital spending: any equipment or vehicles you plan to buy, and how they will be funded.
• The finance itself: amount, timing, expected term and repayment amounts.

Lenders compare assumptions with your filed accounts, management accounts and bank statements. If the forecast shows a sharp improvement on recent trading, explain why in plain terms.

Lenders mainly want to know two things: whether the forecast is realistic, and whether it shows the company can comfortably meet repayments throughout the term. Each lender has its own approach, but these points come up often.

Consistency with your history

Receipts and costs that sit close to recent bank statements and accounts are more credible. Big jumps need evidence.

Headroom after repayments

Lenders typically look at how much cash is left after all costs and repayments, not just whether the balance stays positive. Our debt service coverage calculator shows one way lenders measure this, and our guide on how much your company can borrow explains how they size facilities.

The tightest month

Lenders often look for the month when the balance is at its weakest. If cash runs very low or turns negative, they will want to know how you plan to cover it.

Seasonality and timing

Quarterly VAT, annual insurance, seasonal sales and large one-off payments should all appear in the right month. A forecast with perfectly even figures every month can look unrealistic.

A downside view

Some lenders ask what happens if sales fall short. Preparing a cautious version, with lower or later receipts, shows you have thought about risk and still have a plan.

• Recording sales when invoiced rather than when cash is received.
• Forgetting VAT, PAYE or corporation tax payments.
• Leaving out the repayments on the finance you are applying for.
• Ignoring existing finance agreements, such as hire purchase or merchant cash advance collections.
• Building in optimistic growth with no evidence.
• Using round, identical figures every month.
• Not updating the forecast once actual results come in.

The British Business Bank recommends updating the forecast as regularly as you can. A forecast that has been tracked against actual results over several months is often more convincing than one prepared just for the application.

The shape of the forecast often tells you which kind of finance fits, before a lender sees it. Looking at when and why the balance dips can save you applying for the wrong product.

• A one-off dip, such as a tax bill or a large order: a short-term loan or a facility repaid over a few months may fit the gap.
• A recurring gap caused by customers paying slowly: finance linked to your invoices may track the problem more closely than a fixed loan.
• Regular seasonal swings: a revolving facility that you draw and repay as needed can match a pattern that repeats each year.
• A planned purchase of equipment or vehicles: asset finance spreads the cost over the working life of the asset, keeping cash free for day-to-day costs.
• Steady growth that needs more working capital: a term loan sized to the extra stock and debtors may suit.

Whatever the product, rebuild the forecast with the proposed finance included. If the balance still looks tight after repayments, a smaller amount, a longer term or a different structure may be more sustainable.

A forecast is usually one part of an application. The British Business Bank notes that brokers typically ask for full filed accounts, around a year of bank statements, current management accounts and a cash flow forecast explaining why funding is needed.

Our documents checklist sets out what lenders commonly ask for. If your forecast shows a gap driven by slow-paying customers, invoice finance may be worth comparing with a working capital loan.

Welcome Finance is a commercial finance broker, not a lender, working with UK limited companies, LLPs and partnerships of four or more partners. Your dedicated relationship manager, a real person available by phone, email and chat from first enquiry until the funds are paid, can talk through what lenders on our panel are likely to want to see and how to present your forecast clearly.

We do not charge you a fee. We are paid a commission by the lender when your finance completes. You can ask how much we will receive, and commission can differ between lenders, as explained on how we are paid. Lenders make their own decisions and approval is never assured. You can check your eligibility in about 60 seconds without affecting your credit score.