Why Do Banks Require A Cash Flow Forecast?

If you are the owner of a business that is either a new business start up or one that has been established for a number of years and require some form of finance then it is almost certain that in order to consider the proposition the bank or other lending institution will require sight of a cash flow forecast in addition to a number of other financial documents.

However, it has to be said that even if your business is fortunate not to require outside financial support the production of a cash flow forecast should provide you with a useful management tool to monitor the cash flow of your business. Producing such a forecast enables you to predict what your business current account balance is going to be in the coming months and assist in making such decisions as to whether you are well placed to take on a new order from a customer that may involve increasing your stock levels and employing additional staff. It helps identify any potential shortage of cash in the coming months.

If you are approaching your bank for say an overdraft facility or a business loan then they will no doubt wish to see a cash flow forecast to, as far as possible, be confident that the business can support the request for finance. This is particularly important for a new business start up that has no track record with the bank.

The bank’s business manager will study the cash flow forecast in great detail to make sure that it is robust and contains a realistic sets of figures such as income from sales, the timing of when those monies are forecast to be received, expenditure such as wages, stock purchases, rent, taxes, utilities and loan repayments and interest payments to name but a few. If you have produced a previous cash flow forecast that may be compared with the actual results which, if accurate, will give the bank confidence that the new cash flow forecast is realistic.

Quite simply, the bank requires a cash flow forecast to help provide it with peace of mind that your business will be able to repay the amount it wishes to borrow. If your business is applying for an overdraft facility it will want to see that the predicted cash flow means that the current account balance is maintained within the requested overdraft facility and ideally that the business current account fluctuates into credit with no hardcore element developing.

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