You've heard of cash flow forecasts, but what about a three-way forecast? A ‘three-way’ is a combination of cash flow, profit and loss, and balance sheet forecasts all integrated into one spreadsheet. Banks and all other providers of finance are increasingly requiring these from businesses before granting them finance.
How do you create a three-way forecast, and what else should businesses prepare before they deal with a bank?
On top of these more commonplace things required by banks when assessing a business loan application, banks are now asking for a 3-way forecast. This aims to take the cash flow forecast to another level by incorporating several factors in order to create a much more complete picture of what a business's finances will look like in the future.
They are typically done in an Excel spreadsheet platform, but many smaller enterprises don't have the capacity to create these themselves. In this case, the creation of a 3 way forecast can easily be outsourced to an accounting firm.
Why you need to create a three-way forecast
The absolute minimum amount of time a three-way forecast should cover is 12 months, but the best ones are completed at least once a year and will cover the next three to five years. You need to be able to identify your key business drivers and clearly articulate and justify the assumptions you've made in the forecast.
The model will allow you to test and challenge your assumptions by verifying outcomes under different scenarios. After all, this is what the banks will do to ensure you can repay the money they lend under a range of different scenarios, such as:
- Higher interest rates
- Lower sales in an economic slowdown
- Higher wage costs, etc.
It is important to note a three-way forecast isn't just something you should be doing for the banks. This is an integral component for your forward planning as it'll allow you to create a comprehensive idea of what could happen to your business in coming years. You can then apply your actual results against what you've forecasted, assess what's going well and what's not, and change your strategy accordingly.
Even very small businesses should look at creating a three-way forecast to help manage their growth and the changes that might be thrust upon them by the market.
While three-way forecasts have been around for a long time, banks have only in the last couple of years begun to expect them as standard. This means when the time does come to seek finance, a well-researched and structured three-way forecast will significantly increase the likelihood of securing it. Not having one could significantly harm your chances of a good deal or may even result in your loan being declined.
Contact us to help you prepare a three-way forecast
BDO has years of experience creating comprehensive three- way forecasts for a huge range of businesses and we understand what the banks are looking for. We use specialist accounting software that's been created with the specific purpose of producing three-way forecasts. To find out more, contact a member of our debt advisory team today.