In the first article in this series on How To Obtain Business Financing, we discussed how you can prepare for finding financing for your company. In the second, we discussed the types of business financing that are available and the paperwork you’ll need for loan applications. This third article in the series discusses creating financial forecasts for your business and understanding the importance of cash flow forecasts.
Preparing Financial Forecasts for a Business
In preparing for funding, you’re forced to dive into the nitty gritty financial details of your business. That’s a good thing, because the most important part of preparing for financing is fully understanding your company’s financial forecasts to the point that you’re comfortable explaining them to a loan underwriter.
Financial forecasts include three basic reports that you’ll need to create:
The most important report is the Cash Flow forecast because you’ll need to know how much cash your business will need before you begin looking for financing. Also, a loan underwriter will likely require a cash flow forecast as part of the loan application process. What your banker really wants to know is whether you understand how to correctly forecast cash flow for a business—and if you’ll be able to repay a loan obligation.
I’ve seen many business plans that have in-depth details about everything except the financial forecasts. Developing financial forecasts can be intimidating, but skipping them often leads to a failed business. Without this knowledge you have very limited insight into the potential of the business—and whether you should undertake launching the business in the first place. The only way for you to truly decide whether to go forward is to convince yourself, first and foremost, that you’ll be able to pay your bills (and pay yourself) with the net proceeds from the business.
As you put together your financing plan, ask for a realistic amount. The worst scenario is one in which you run out of cash before the business starts to break even. Cash flow problems are cited as one of the prime reasons for small business failures. When forecasting the company’s cash flow, it’s important to include as much detail as possible. That typically means forecasting for each month of the company’s first three years. By forecasting for each month’s cash flow you’ll be able to know what month you might be short on cash and take action before you run out of money.
Launching and managing a business is hard work. Most businesses take several years before they become financially stable. That’s a long investment of your time. Preparing financial forecasts forces you to fully understand this undertaking and make a wise, informed decision based on facts rather than assumptions.