Cash Flow Projection For Bank Loan (How to Prepare & What to Include)

One of the reasons for cash flow projections for a bank loan is to demonstrate to the bank that your business will be cash flow positive after the loan is drawdown.

A cash flow projection for a bank loan is best reported with a forecast period of 12-months or more, but a 36-month cash flow projection with profit and loss, and balance sheets included is recommended. The cash flow projection must demonstrate the business will be profitable and cash-flow positive.

If after reading this article you are feeling overwhelmed about preparing cash flow projections for your bank loan, please take a look at Cash Forecaster Software, as this makes this task very easy and quick to do for a very small investment.

Cash forecaster is a cash flow forecast template created in Excel, but if you don’t have time to create formulas, work out cash flow timings and what income and expenditure to include in the projected cash flow forecasts vs the profit and loss statement, this Excel template software is ideal for any business that needs a cash flow projection for a bank loan, fast.

The cash flow projection reports you send to a bank for the purposes of a loan need to include professional reports that have been prepared carefully, using sound assumptions that stack-up, and that will stand up to scrutiny by the bank.

What is a cash flow projection?

A cash flow projection (or forecast) is an estimate of the money you expect to flow in and out of the business over a set period. It’s important that a cash flow projection for a loan shows that the business will be profitable and cash flow positive when the loan advance is included in the forecast.

Why do banks need a cash flow forecast?

The reason why the bank need a cash flow projection (or forecast) is to demonstrate that the company they will be lending money to is a profitable business, and that the company will have sufficient cash flows to repay the loan with interest over the period of the loan.

Alternative to cash flow projections for bank loan

Did you know that if you increase profits and cash flows using one of the 7-ways to grow a business, or a multiple of these 7 ways to increase business profits, you may not need a bank loan in the first place.

You can use our Increase Profit Software to work out how to increase your business profits, which after implementation will increase business cash flows, and thereby save the need for the bank loan in the first place and save the cost of interest on loans.

What should the cash flow projection for bank loan include?

Your cash flow projection for a bank loan should include monthly figures over at least a 12-month, but preferably a three-year period and include the following cash inflows and outflows:

Cash inflows in cash flow projection for bank loan

1. Gross sales revenue including VAT, sales tax or GST.
2. Bank loan advances or drawdowns.
3. Proceeds from asset sales.
4. Rental income if the business has investment property.
5. Other investment income.
6. Government grants or rebates.
7. Tax refunds.
8. Royalties or licensing fees.
9. VAT, sales tax or GST rebates.
10. Shareholder equity funds.
11. Director loan receipts.
12. Factoring or invoice discount receipts.
13. Any other income.

Make sure to include the gross cash inflows from customers including VAT, sales tax or GST in your cash flow projections, which are different to the forecast profit and loss account, where the numbers are shown net of VAT, sales tax or GST.

But also, the amounts included in the cash flow projections should be based on the timing of when these are received from customers, not when they are invoiced.

So for example, if your customers take 30-days to pay their invoices, factor this 30-day timing difference into your cash in-flows. However, on the projected profit and loss statement, the sales will be included in the month the customers are invoiced instead.

For example, if your business made net sales of £10,000 in March, but this is received 30-days later, gross with 20% VAT added, the cash flow in March would be zero for March sales, but April’s cash flow will include £12,000 (i.e. £10,000 + £2,000 VAT at 20%). However, the projected profit and loss will include £10,000 for sales in March.

If you offer longer payment terms than 30-days, perhaps 60-days or even 90-day terms, this is when accurate figures and timings of cash flows vs profit and loss forecast become even more important.

This can make cash flow for a business even more of a challenge, especially if suppliers offer shorter payment terms than you offer to your customers. The cash flow impact is made worse if the company is expanding rapidly, when it has a significant disparity between payment terms offered to customers vs that received from suppliers.

This is what can cause over-trading, where a company can quickly run out of cash and ultimately go out of business and into liquidation.

One way to combat over-trading and to avoid running out of cash, is to factor or invoice discount your sales invoices, as factoring companies will advance around 85% of amounts invoiced within days from being invoiced. However, factoring companies charge for these advances, and this can be an expensive way of financing a business.

On top of that, if you are considering factoring or invoice discounting, this is another consideration when you prepare your cash flow projections for bank lending requirements.

Cash flow projections for banks can become quite complex when you need to consider lots of difference cash flow timings, which is why you may like to consider using our Cash Forecaster Software instead, which does all these calculations for you, including factoring or invoice discounting.

Cash outflows for cash flow projection for bank loan

1. Costs of goods sold (COGS), or payments to suppliers.
2. Premises rent and utilities.
3. Insurance costs.
4. Overheads including printing, postage, IT, telephone, travel and motoring costs, repairs and so on.
5. Employee wages and employment costs and taxes.
6. Bank loan repayments.
7. Bank loan interest.
8. Bank charges.
9. The cost of buying new fixed assets.
10. Marketing and advertising costs
11. Accounting and bookkeeping costs.
12. Factoring or invoice discounting costs.
13. VAT, sales tax or GST payments.
14. Company tax payments.
15. Director’s loan repayments.

When you include costs and outgoings in your cash flow projections and profit forecasts, make sure to take account of payment timings, i.e. when these are included in the cash flow forecast vs when the costs are included in the profit and loss.

For example, if your suppliers offer 30-day credit terms, the costs included in the forecast profit and loss will be in the month before they are paid. But also, the amount included in the profit and loss projection will be net of VAT, sales tax or GST, whereas the amount included in the cash flow projection will be gross of VAT, sales tax or GST.

But also, you need to take account of cash-flow timings with regards to VAT, sales tax and GST payments to the government, which are often paid quarterly. For example, VAT collected on sales over a 3-month period are netted off against VAT paid over the same 3-month period, and then paid to HMRC in the UK about a month later.

Similar cash flow timings apply to payroll costs, where the net pay to employees is usually paid in the month it was incurred, but the tax deductions are normally paid to the government in the following month.

With regards to cost of goods sold (COGS), you also need to think about stock-timings too.

If you pay for stock in one month, this stock may last over the next few months, which affects what is shown in the profit and loss account, but the full amount paid for the stock will be included in the cash flow projection when it is paid. But you also have to factor into your cash flow projections when the stock is actually paid for, when supplier payment terms apply.

Cash flow projections for bank and cash flow timings

People who are new to preparing cash flow projections for banks don’t always think about factoring in the timings associated with amounts invoiced to customers, stock movements, supplier invoices and payments, loan advances and repayments, wages costs, VAT, sales tax and GST. Not to mention the impact of tax on profits, and the timing when this is paid too.

This is why you are best to engage the services of a professional accountant to prepare your cash flow projections and profit and loss, or purchase our Cash Forecaster Software to help in its preparation for the bank loan.

Balance sheet in cash flow projection for bank loan

Your cash flow projection for a bank loan should also include a projected balance sheet, which can either be included on the reports at the end of each month of the forecast period, or at the end of each 12-month period. The balance sheet will include assets, liabilities and owner equity.

The amounts included on your projected balance sheet will include amounts outstanding from customers if payment terms are offered, amounts owed to suppliers if you receive payment terms from them, and any stock the business holds too.

In addition to these, the projected balance sheet will also include the fixed assets the business owns, like property, plant and machinery too.

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