Why this matters to lenders

Lenders use cash-flow projections to answer a simple question: will you generate enough cash when it’s needed to make loan payments and keep the business (or household) operating? A projection that is realistic, well-documented, and conservative reduces perceived risk and speeds underwriting.

In my 15 years as a financial advisor, I’ve seen underwriters reject otherwise-strong applications because the cash-flow model missed timing issues (seasonal slumps) or left out loan-servicing costs. A robust projection tells the lender not just how much you expect to earn, but when that cash hits the bank.

Authoritative guidance: the IRS and Consumer Financial Protection Bureau recommend keeping accurate records and using clear financial forecasts when applying for credit (IRS; CFPB).

What lenders look for (clear checklist)

  • Accuracy of historical inputs: lenders expect projections to tie back to recent bank statements, sales invoices, and tax returns. If projections wildly diverge from historical data, be ready to explain why.
  • Realistic revenue assumptions: underwriters prefer conservative topline growth and explicit contingencies for lower sales.
  • Expense completeness: include fixed costs, variable costs, loan payments, taxes, payroll, and one-time expenses.
  • Timing and seasonality: monthly granularity is often required to reveal short-term gaps.
  • Multiple scenarios: provide most-likely, conservative (downside), and upside cases.
  • Cash buffers and covenants: show an emergency cushion and confirm you meet any loan covenants (debt-service coverage, minimum cash balances).

Step-by-step: Build the projection lenders want

  1. Gather source documents
  • Last 12–24 months of bank statements, profit-and-loss (P&L) reports, A/R and A/P aging, and recent tax returns. Lenders often ask for 12 months; having 24 months strengthens trend analysis.
  1. Choose the projection period and cadence
  • Short-term loans / working capital: monthly for 12–18 months.
  • Term loans / expansion financing: monthly for 12 months and quarterly thereafter for up to 3 years.
    Companies with irregular or seasonal cash flows may need a 24-month rolling forecast.
  1. Forecast cash inflows
  • Start with strongly supported items: confirmed contracts, recurring sales, and historical averages.
  • For new revenue streams, document assumptions: conversion rates, sales cycle length, pricing, and marketing spend.
  • Separate cash receipts from accrual-based revenue — lenders care about cash that clears the bank.
  1. Forecast cash outflows
  • List payroll, rent, utilities, inventory purchases, loan payments, taxes, and capital expenditures.
  • Include timing for payments (due dates) and any supplier payment terms (Net 30, Net 60).
  • Account for payroll taxes and employer-side benefits; these are commonly missed.
  1. Calculate net cash flow and opening/closing balances
  • Monthly net cash flow = monthly cash inflows − monthly cash outflows.
  • Track opening and closing cash balances to show how shortages or surpluses evolve.
  1. Run scenario analysis
  • Most-likely: conservative but realistic assumptions tied to evidence.
  • Downside: 10–30% lower revenue or delayed receipts; stress-test expenses to the extent possible.
  • Upside: best-case sales mix or cost improvements.
    Lenders will often review the downside scenario to judge resilience.
  1. Reconcile to financial statements
  • Tie your projection to the latest financial statements and bank balances. Provide a short reconciliation table that explains major differences.

Example (concise monthly snapshot)

Month Cash Inflows Cash Outflows Net Cash Flow End Cash Balance
Jan $10,000 $8,000 $2,000 $7,000
Feb $12,000 $7,500 $4,500 $11,500
Mar $15,000 $9,000 $6,000 $17,500

This simple table demonstrates the mechanics lenders expect: monthly granularity, both inflows and outflows, net result, and rolling ending balance.

Documents to attach (what to give the lender)

  • Historical P&Ls and balance sheets (12–24 months).
  • Bank statements (last 6–12 months).
  • Accounts receivable aging and major customer contracts.
  • Accounts payable schedule and vendor terms.
  • Loan amortization schedule for existing debt.
  • A one-page summary explaining key assumptions.

Providing a one-page narrative that calls out the three largest upside and downside risks is highly effective and often requested.

Tools and templates

  • Spreadsheets: build a three-tab workbook — Inputs, Monthly Projection, Scenario Summary.
  • Accounting software: QuickBooks and Xero can export reports that speed model building.
  • For a lender-ready template see our cash-flow worksheet and forecast guides (internal resources below).

Useful internal links

Common mistakes I see in practice

  • Overlooking timing: projecting annual revenue growth without monthly detail masks seasonal shortfalls.
  • Ignoring taxes and employer payroll costs: these can materially change cash needs.
  • Using accrual revenue as cash: accounts receivable won’t pay the lender.
  • No contingency: failing to model a 10–20% revenue drop is a red flag.
  • Weak documentation: unsupported assumptions force lenders to discount the forecast.

In my experience, a clear reconciliation between your projection and your last tax return/P&L reduces back-and-forth with underwriters and shortens approval timelines.

How lenders test your assumptions

  • Sensitivity checks: lenders reduce revenue and extend days-sales-outstanding to see if loan covenants still hold.
  • Debt service coverage ratio (DSCR): many commercial lenders require a minimum DSCR (commonly between 1.1x–1.5x). Show calculations if relevant.
  • Liquidity runway: lenders will ask how many months you can operate if revenues fall to the downside case.

When to hire a professional

If your forecast affects multi-million-dollar financing, complex inventory cycles, or material seasonality, engage a CPA or financial advisor. They can produce audited schedules, stress-tested scenarios, and a lender-facing memo. In my practice, clients who bring a third-party-reviewed projection to the lender close faster and with fewer covenants.

Frequently asked questions

Q: How far ahead should I project?
A: Provide at least 12 months of monthly detail. For term loans, extend to 24–36 months with quarterly summaries after year one.

Q: Should I include owner draws or personal expenses?
A: Yes — if you’re a pass-through business or sole proprietor, include owner draws because they reduce cash available for loan servicing.

Q: Can I use software exports instead of building a spreadsheet?
A: Yes. Exported reports from QuickBooks, Xero, or your bank are acceptable if they clearly show receipts and disbursements and you add explanatory notes.

Final checklist before submission

  • Tie projections to historicals and bank balances.
  • Provide most-likely and downside scenarios.
  • Include a one-page assumptions memo and reconciliation.
  • Attach supporting documents (bank statements, P&L, A/R, A/P).
  • Keep the model transparent: label inputs, formulas, and assumptions.

Sources and further reading

Professional disclaimer

This article is educational and general in nature. It does not constitute individualized financial, tax, or legal advice. Consult a CPA, attorney, or qualified financial advisor for guidance tailored to your situation.