What are cash flow forecasts and why are these important when obtaining business funding?

How to create a cash flow forecast to support your company’s finance application

Operating with positive cash flow helps your business to pay its bills, conduct day-to-day trade with minimal issues, and plan confidently for the months and years ahead. But how do you know that there will be sufficient cash available when it’s needed?

Cash flow forecasts lay out your company’s expected inflows and outflows over a given period. These projections are crucial when obtaining business funding, as they indicate whether your business can repay the lending over the whole term.

Forecasting your business’s cash needs also helps you manage fluctuations in trade. It gives you the opportunity and time to generate additional working capital when necessary, so you don’t slip into negative cash flow.

How do cash flow forecasts work?

A cash flow forecast includes the money predicted to come into and go out of the business during the set period as well as the actual amounts, which are added for comparison once known.

The net cash position is the difference between inflows and outflows and shows whether you have a surplus of cash or a shortfall - if there’s a cash shortfall, you’ll have time to secure additional funding if necessary.

The information in a cash flow forecast is a crucial part of the lending process as financiers use it to guide their decisions on risk and the company’s ability to repay. As well as providing a view of a company’s liquidity, an accurate and comprehensive cash flow forecast shows lenders that you understand the importance of cash in your business. 

Cash flow forecasts when seeking funding

A cash flow forecast is an integral part of a finance application and underpins your company’s ability to repay. Here’s why it’s so important when obtaining business funding:

Lowers your perceived risk to lenders

Lenders always assess the risk of default that a borrower presents. They do so partly by looking at the cash flow forecast a business provides with their lending application. If the forecast shows healthy cash flows for a prolonged period and good historical cash management, they’re more likely to sanction lending and potentially offer better terms.

Demonstrates your ability to repay

A cash flow forecast shows your company’s capacity for repayment over time. Cash availability is a fundamental precursor for a successful finance application and shows that the business can afford to pay its short-term liabilities without issue.

Instils trust

Providing a healthy financial picture of your business via sensible cash flow projections helps you reassure financiers that you’re a ‘safe’ proposition for borrowing. Instilling trust and confidence in this way is important and can lead to preferential interest rates and terms.

Using cash flow forecasts when applying for business finance

UK Business Finance can help you develop a comprehensive and realistic cash flow forecast that supports your lending application. We’ll help you find the best deals and secure the right type of funding for your business – please get in touch with one of the team to find out more.