Guide to putting together a cash flow forecast to apply for a loan

Kelly Masson August 8, 2023
Woman planning her business

In my role as a Business Advisor, I talk to a lot of people who are interested in applying for a business loan. My job is to help them understand their financing options

One of the first things I need to know is how much they’d like to borrow. It’s surprising how many people can’t answer this question! 

Often people want to know how much they qualify for, or just want to borrow as much as they can. As a business owner, this might make sense to you. The more money you can get, the more you can use it to grow. But as a business lender, we need to be confident that you will be able to pay back the loan. We need to understand the full picture—exactly how much you want to borrow, how you will spend it, and how that spending will help drive revenues.  

To get that information we will ask for a cash flow forecast (also known as a cash flow projection), and this is a big part of how we learn about your business and make our lending decisions. In this blog post I’m going to walk through a short guide to putting together a cash flow forecast to apply for a loan. 

What is a cash flow forecast? 

Put simply, a cash flow forecast is a forward-looking estimate of how much money you think is going to flow in and out of your business over time. Most lenders will be looking for a month-by-month forecast, which means you will need to estimate your cash inflows and outflows for each month. There are three main components: Revenues, Cost of Goods Sold (COGS), and Operating Expenses, which we’ll dig into in a minute.

What does a cash flow projection tell us?

Your cash flow projection tells you a lot about your business. It gives you a way to understand your revenues and expenses for one thing, which can help us understand business viability. More crucially, it helps you understand if you will have enough money to do what you’re planning to do. 

That’s why, in addition to understanding your revenues, COGS, and operating expenses, you also need to know your sources of cash (i.e. your own cash contributions, contributions from equity investors, and funding from loans), and any one-time costs that you will incur at start-up, such as leasehold improvements, or equipment purchases.

Put all of this together, and you’ll understand how much cash you will have at any time, and how and when cash is going to be spent. 

  • If your projections ever show a negative cash position, that’s a sign you will need to either cut down on your cash outflows (expenses, capital purchases, loan payments, etc.), or increase your cash inflows (revenue, loans, equity investments, or personal cash contributions). 
  • If you have consistently positive monthly projected cash flows, that’s a good sign. But if they’re too positive and you’re ending your first year with a huge amount in the bank, that can be a red flag. It’s all about being as realistic as possible.

You may be thinking: “But wait, I can’t see into the future!”

Predicting the future is tough. In fact, it’s impossible! But don’t get hung up on that. No one expects perfection, but it’s critical that your projections reflect a realistic (i.e. not overly optimistic) scenario.

Let’s walk through some tips. 

Sources of cash

The first number you need for the cash flow projection is starting cash. If you are an existing business, you can look at your bank account to see what’s available. If you’re starting fresh, you can think about how much of your own money (or someone else’s) you’re investing into the business. 

Then, you can add any other cash injections in the month they will be received. So if you are expecting a gift from Aunt Martha in May, or for your loan to go through in April, those entries should go in those months.

Projecting your Revenues

Projecting revenues is one of the most difficult parts of preparing a cash flow projection. Put  simply, revenues are the money that you earn for selling your goods or services. 

The easiest way to estimate your revenues is to break your sales down into smaller component parts. This could look like estimating the number of sales you’ll have per hour, per day, or per week. Then multiply that out by the average unit price to estimate revenue for the entire month. 

To estimate how many sales you will have, you can look at similar businesses in your area. How many people per hour are buying a coffee at the shop down the road during different parts of the day? 

Or you can base revenue projections on capacity. For example, if you have three dog groomers working, and they can each handle five dogs per day, you can conceivably groom 15 dogs per day. However, you should always scale the full capacity number back to account for slower days, sickness, and that kind of thing. Maybe you can base your estimates on 80% of full capacity during busy times, and scale that back for times you know will be slower. 

Just remember to give yourself time to ramp up. It will probably take more time than you think to get to full sales. If you’re a start-up, giving yourself a few months with little or no sales will help you understand your cash needs more clearly. You should also account for seasonality—will you have more sales during certain times of year?

Projecting your Cost of Goods Sold

Cost of Goods Sold (COGS) are the direct costs that you incur when selling your product or service. This could include the costs of inventory you are reselling in your store, the cost of coffee beans, cups, and other ingredients at your coffee shop, or the cost of wages and shampoo if you’re a dog groomer. 

In many industries, you can estimate your Cost of Goods Sold based on a percentage of your revenues. For example, if you have a clothing shop and you always mark your product up by a certain percentage (say 100%), it is straightforward to estimate your COGS. For every $100 of revenue, you will have $50 in costs. This means you could estimate your COGS at 50% of revenues. But the best way to estimate your cost of goods sold is to really understand what goes into each product or service you sell. So take the time to break down your offerings to really understand your direct costs. 

Projecting your Operating Expenses

Operating expenses, sometimes also called fixed expenses, are the expenditures you make as a cost of doing business. This can include items such as: 

  • Rent
  • Utilities
  • Management wages
  • Insurance
  • Professional fees
  • Marketing costs 
  • …and many others.

Unlike COGS, these expenses are not directly tied to producing your goods or services. So, for example, if you sell more ice cream in August than in December, your COGS will go down in December, but your operating expenses won’t. After all, you still need to pay rent and keep the freezers running! 

Many operating expenses are straightforward to estimate because they are fixed each month. Others may only be incurred sometimes, such as accounting expenses at year end or one-off repair costs when the freezer is on the fritz. 

Now, look at your cash situation

Once you’ve entered your revenues, COGS, and expenses, have a look at the actual cash flow. Are you cash flow positive most months? Are there any times when your net ending cash is negative? If so, how will you fill that hole? Debt? Cutting expenses? This is where the real magic of the cash flow projection comes in. It will help you look down the road and understand when you might see a cash crunch. This gives you time to come up with a plan.

Closing advice

  • Don’t be too optimistic: We want your business to be successful, but if your projections are too optimistic, it may make your lender question whether your assumptions are realistic. 
  • Consider scenarios: Your lender might want to see different scenarios for your cash flow projection. Whenever possible, build your projections in a way that lets you play around with different variables to see how that changes your results. Not good with excel? Sorry to say there is no quick fix for this, but know that the more time you can invest into understanding excel, the faster you will be with setting up and revising your projections. 
  • Use benchmarking tools: Industry Canada has a small business benchmarking tool that provides information about business financial performance. You can look up your industry to get an idea of the revenues, COGS and expenses from businesses like yours. Just remember, there is a lot of variation between businesses, so you should only use this as a tool to help verify your own (well thought out) estimates.
  • Consider timing: Another note is to remember timing—if you are a cash business, like a coffee shop or salon, you will get your cash when the service or good is delivered. However, if you invoice for your services, you will receive the cash a little bit later. Same goes for expenses. Maybe you have 60-day terms with your suppliers. That will keep cash in your accounts for longer. Make sure you account for this in your projections.

So there you have it, your quick guide to putting together a cash flow projection to apply for a loan. We hope you will find these tips to be useful. Be sure to check out our WeBC Cash Flow Projection Template. And if you’re feeling overwhelmed with all this finance talk, check out our Financial Workbook for Small Business.

About Kelly Masson

Kelly Masson is a WeBC Business Advisor (BA) based out of Nanaimo. She understands the impact small businesses can make on individuals, families, and communities and is thrilled to work with entrepreneurs as they pursue their unique missions. As a BA for WeBC, Kelly’s favourite question to ask clients is, “is the juice worth the squeeze?” In other words: do you know if your efforts are getting results? If you don’t know, she will help you find out!

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