Forecasting for lenders

If you need to borrow funds for either your existing business or for a leveraged buy-out (LBO), then the chances are that the lender will ask you to produce a financial forecast. Most lenders will require a forecast that contains a profit and loss account, balance sheet and cash flow statement for the next 24 months. This is part of their due diligence to check whether the business is robust and that there is sufficient headroom to repay the loan and interest.

Having recently done this for an LBO and having previously done it when applying for an invoice financing facility several years ago, I wanted to share my thoughts on the options available and whilst initially I thought it was a pain in the behind to do, as a business owner/operator why it was the most useful exercise I ever did.

From my experience, there are four options you can use when asked by a lender to do this:

-?????????Use an accounts package that has a forecasting facility. You will have to key in a few assumptions, but these packages do a lot of the heavy lifting for you and is probably the quickest way to get a forecast, especially if it is the same accounts package that you already use so it will already have a load of the information required.

-?????????Ask a colleague/in-house accounts person to do it. It saves you doing it and depending on the size of the business and whether you have an FD or in-house resources, then it is probably the most sensible way.

-?????????Ask an accountant to do it. Again, saves you the time and effort but accountants don’t work for free!

-?????????Do it yourself.

I have tried all options and the one that I would higher recommend is the DIY option. Why? Well whilst it took a lot of time and brainpower, it forces you to fully understand your business. You challenge your sales assumptions, the relationships between sales and expenses, the cash impact of the actions you take and cash flow cycles.

Having spent a couple of days building a big excel spreadsheet and working out why I couldn’t get my balance sheet to balance, and then analysing the results of the forecast, I could now fully see how the business’ operations translated into profit, and most importantly cash. I could see where we were doing things that were giving us cash flow issues, where we were spending too much, and most importantly, what we needed to do to be profitable and cash generative. I then used this model to develop a strategy with KPIs. We no longer went through a year trying to sell, sell, sell and hoping to make a profit at the end. Every month I know where we were an made informed investment decisions and ultimately, helped me turn the business around.

About the Author

Having previously worked as a Charted Accountant in Corporate Finance before running and then selling his family business, Daniel is now building a portfolio of businesses through acquisition. Typical target companies are in the manufacturing and wholesale sectors with turnovers of between ￡1 and ￡5m.

If you want to discuss selling your business, or know someone who does, you can contact Daniel via LinkedIn.