Why does your lender want your three-way forecast?
Why does your lender want your three-way forecast?
It’s that time of year - finalising your FY2024 financial accounts and tax returns can be a drag. However, updating your three-way forecast and having your accountant complete your financial accounts can be a positive move for your business.
Why?
If your business has debt facilities over $1.5m, your lender is probably now updating their internal risk rating of your business, using your financial data from FY2024. Lenders typically do this annually and will normally complete it when your statutory accounts are available, usually between October and March.
If your lender doesn’t get your accountant-prepared financial accounts on time, and your rating is completed using management accounts only, your risk rating could be downgraded. This impacts your ability to borrow more money and will certainly affect your interest rate.
Checklist: What your business needs when dealing with a lender
There are a number of fairly predictable things that you'll need to provide the lender. These include:
- Historical financial statements from at least the last two or three years
- Copies of Australian Tax Office portal printouts. These help to confirm that compliance payments are up to date, with no outstanding tax, superannuation guarantee or GST arrangements in place
- Aged creditor's ledgers
- Corporate diagram to show the structure of the company or group
- The background and experience of the directors, guarantors or executives, including statements of position, job history and industry experience
- Bank statements from at least the last six months (especially if you're applying for refinance). These show that behavioural conduct with existing financiers is in order, including making payments on time, no history of overdrawing accounts etc.
- Details of all loans, overdraft arrangements and equipment finance
- Details of any properties the business owns that could be used for security, as well as any leased premises.
Why create a three-way forecast?
On top of the more commonplace information outlined above; lenders value a three-way forecast. This aims to take the cash flow forecast to another level by incorporating several factors to create a much more complete picture of what the cash and balance sheet position will be like in the future.
A three-way forecast isn't something you should just be doing for your lender. Creating and using the three-way forecast is the best tool for planning as it allows you to create a comprehensive idea of the likely future outcomes for the coming years. You can apply your actual results against the forecast, assess what's going well and what's not, and change your strategy accordingly. While three-way forecasts have been used for a long time, lenders expect them as standard for complex or operating business borrowings. When the time comes to seek finance, a three-way forecast will significantly increase the likelihood of securing it.
What’s involved in a three-way forecast?
A three-way forecast is a combination of cash flow, profit and loss, and balance sheet all integrated into one spreadsheet. Lenders continue to favourably consider businesses that have a three-way forecast when providing finance. A well-prepared three-way forecast will give confidence that you’re in control financially and in your future outlook. These factors all contribute to an improved risk rating.
BDO has years of experience creating comprehensive three-way forecasts for a huge range of businesses. To find out more, contact a member of our debt advisory team today.