Tips for preparing a cash flow projection

A cash flow forecast or projection is something you should do on a regular basis, whether you’re just starting your business or you’ve been operating for years.

It’s basically an estimate of the amount of money you expect to flow in and out of the business over a set period of time.

When applying for business finance, it’s important to present a professional cash flow forecast that demonstrates your ability run profitably.

Why does the bank need a cash flow forecast?

Lenders offer a number of business loan facilities including equipment finance, trade finance, overdrafts and lines of credit.

However, banks are very particular about the types of business owners they lend money to.

They want to know that they are lending money to someone who can run a profitable operation and pay their loan back with interest.

Because of this, the bank would like to see a business plan and a cash flow projection.

This shows that you’ve estimated your potential income and expenses over a period of time.

The forecast can be based on your historical financials or, if you’re just starting out, the profit forecasts for a similar-sized business in your industry.

The main question the bank will be asking is whether your application and situation makes sense.

Good cash flow management means you can run your business smoothly so you need to explain in your application why getting finance will help you continue to do this.

Of course, it may not be a matter of needing finance for the next few pay cycles – you may be looking to expand the business.

The bank will be comparing your cash flow forecasts with industry benchmarks so be realistic with how your business stacks up.

Your accountant can help you do this but we actually know the benchmarks that some banks use when considering your cash flow forecast.

Even if your projection doesn’t meet these benchmarks, we may be able to find a lender that can help.

Please call us on 1300 889 743 or complete our online enquiry form to speak with one of our business loan specialists about your finance needs.

A cash flow projection isn’t the same as a P&L statement

Projecting cash flow is not the same as a profit and loss (P&L) statement.

A P&L is a statement that details the revenue, costs and expenses for your business over a given time period, typically over a financial year.

A cash flow projection, on the other hand, is just that – a forecast.

You’re trying to figure out the money that will be going in and out of your business over a year.

Depending on your business and industry, you may project high cash inflow at the start of the financial year when you sell your products.

However, you may experience high cash outflow at the end of the financial year since you would have already generated your revenue at the start of the 12 months.

At the end of the period, you’re still having to pay your fixed costs like rent and salaries.

In addition, you’re having to spend money on ordering new stock or raw materials to prepare your next lot of stock for sale.

What should be in my cash flow forecast?

A cash flow projection can forecast as little as a month or a quarter of a calendar year but banks usually like to see a 12-month forecast.

Your income and expenses should be broken up by month and should either be based on your own historical figures or industry benchmarks.

Use this profit and loss (P&L) template to forecast your cash flow month on month.

Disclaimer: This is a tool only. You should speak to a qualified accountant to get an unbiased health check of your cash flow position.

Types of cash inflows

• Sales revenue.
• Royalties or licensing fees paid for a product or service your provide.
• GST rebates or tax refunds.
• Loans that are paid back to you.
• Loan drawdowns from an existing business loan.
• Government grants or rebates.
• The sale of assets.
• Equity pumped into the business from personal savings or investments.

Unlike a P&L, your inflows will be based on cash receipts from customers, not sales figures.

New business owners will often say they made a sale of $200,000 but they won’t actually see that revenue until 3 months down the track. The banks won’t recognise it as revenue!

So although you may have “made the sale” in May, your invoice won’t actually be paid until August – that’s where you’ll enter this into your cash flow forecast spreadsheet.

It’s when you have huge gaps in your cash flow that banks can have a problem.

They want to see that you’re mitigating these black holes with your own capital.

Types of cash outflows

• Costs of Goods Sold (COGS).
• The cost of buying new assets.
• Interest and ongoing or one off bank fees.
• Insurance.
• Loan repayments.
• Rent.
• Employee salaries and superannuation.
• Marketing and advertising.
• General operating costs such as IT, telephone and bookkeeping.

Some types of cash outflows are fixed such as rent and employee salaries.

Other costs are variable such as stock or raw materials you need in order to meet your inventory and, ultimately, your sales targets.

People new to business often don’t factor in or underestimate the costs of wages, income tax instalments and GST.

These are costs that come around every quarter or 12 months but it’s a huge sum of money.

The timing of these tax obligations can make a huge difference to your profit position.

It’s important to speak with a good accountant so you can build a strong cash flow management strategy.

What if I’m a property developer?

It’s common for developers to apply for a business loan in order to manage their cash flow position.

That’s because it may take a year or two to turn a profit from their investment when they sell their block of units, commercial office suite or whatever project they’re working on.

Whether you need an overdraft facility on your commercial or residential development loan or a line of credit, you should also include sales receipts from buyers as evidence of cash inflows.

It’s also important to include your monthly loan drawdowns as a cash inflow.

Be careful though: your loan drawdowns may be inflows but the interest and ongoing fees you pay on that loan facility will be outflows.

Of course, you may have the option to pay interest only for the next year or two with some loan facilities.

This means your outflows will only account for interest payments and not your principal payments.

Another outflow to consider as a property developer is Capital Gains Tax (CGT) and Goods and Services Tax (GST).

CGT applies when you make a capital gain when selling the property but you’re also liable for a GST on the sale price.

However, you can actually claim GST credits on purchases that relate to selling that property such as solicitors and real estate agent fees. This would count as a cash inflow!

For example, you may spend $1.1 million constructing a block of units in month one but in month two, you may receive a $100,000 GST rebate from the Australian Taxation Office (ATO).

You may also be eligible for grants from your state government if you’re developing affordable housing like a boarding house.

It’s important to speak with your accountant!

Cash flow for other types of businesses

If you’re in the export, distribution or manufacturing business, your cash flow forecast tends to look worse than most retail businesses.

When exporting overseas, for instance, the products will have to be packaged, checked at local customs, make the trip, checked off at overseas customs and finally reach the client.

There can be a huge delay in receiving payment.

Similarly, in the manufacturing industry, it’s rare that a customer will pay more than a deposit for the stock or equipment they order.

There are a lot of costs that are born upfront by the manufacturer that aren’t recouped until later.

A property developer, for instance, will have no inflows for two years.

For businesses that contract or sub-contract, such as those involved in building and trade work, the bank will be relying on the contracts that you have in place.

These contracts may pay in installments or it could be months until you get paid subject to the completion of the project.

Showing that you have regular and ongoing contracts is crucial to getting approved.

Businesses involved in direct sales like software businesses have really strong cash flow at the start of the year but there future cash flow forecast won’t look as strong.

They’ve already collected their revenue from their sales so if they haven’t made a plan to invest some of that money back into the business, it can be very dangerous.

For example, if they need to hire new staff or software engineers, they may not have the means to pay their salaries since that money would have already been spent.

Luckily, we know lenders that take a common sense approach and recognise that each business has very different cash flow cycles.

Call us on 1300 889 743 or complete our free assessment form and to find out if you qualify for a business loan.

Savings and investments can count as cash inflows

Some business owners have significant savings or investments that are generating interest or a return and they actually use this as capital to fund their venture.

For example, if the legal ownership of your business is via a trust, the trust could also hold other assets such as residential property, term deposits or investments.

Receipts for these investments will count as cash inflows.

You may be entitled to grants!

Apart from tax concessions like GST rebates, the government offers several business grants.

Most of these grants are difficult to qualify for, particularly if you don’t work in a Primary Industry.

However, most businesses are eligible to apply for a research and developments (R&D) tax concession.

This can help to improve your cash flow position when preparing your cash flow forecast.

Bear in mind that won’t likely see all of this grant money flow into your business.

R&D consultants will take a percentage of this grant and you’ll also be taxed!

So for a $10,000 grant, you may only see $5,000.

Speak to your accountant!

It’s important you speak to an independent and qualified accountant when preparing your cash flow forecast.

If you’re applying for your first business loan, you’ll also need to provide the lender with a business plan.

Your accountant can help you with this as well but to get a head start, check out this business plan template.

This is the exact template that one of our major lenders uses when assessing a business plan for a loan application!

Apply for a business loan

We can help get you prepared for your business loan application and choose the right lender for your business needs.

We have nearly 40 lenders to choose from and we have strong negotiation power with all of them.

Because we know the key decision-makers, we can also help you to qualify for a competitive interest rate and favourable loan terms.

Call us on 1300 889 743 or complete our free assessment form to discover if you qualify for a business loan.