Financial Projections for Existing Businesses — What Banks Expect

Getting ready to apply for a commercial loan, but feel overwhelmed by the application process? This is part of a series of posts explaining the different documents requested during a commercial loan application. Next up: Financial Projections for Existing Businesses.

What Are Financial Projections?

Financial projections can cause a lot of fear and anxiety in business owners who may feel the need to consult their crystal ball and predict the future. In reality, projections are more manageable than most business owners realize and are a great tool to test how potential business decisions can affect your financials.

For existing companies, projections should start from your most recent historic financial statements (P&L, Balance Sheet, and Cash Flow Statement) and provide anticipated financial performance for the next 2 to 3 years.

Building Your Assumptions

Using your historic financial performance as a baseline, you begin adding assumptions about what will change in the projected year. Examples of assumptions could be:

• Do you plan to increase your prices in the projected year(s), and will that increase keep up with higher Cost of Goods Sold expense?
• Have you maintained sales with your largest customers, or do you need to find new customers to maintain your historic sales volume?
• Will your current workforce meet your staffing needs, or do you need to hire additional roles in your company? What will those wages earn and what benefits will you provide as an employer?
• Are you at capacity in your current location and need a bigger space to lease/own?
• Is your marketing budget keeping up with your growth strategy?
• Do you have enough inventory to meet your sales demand? If you decide to increase your inventory levels, will your vendors allow you to stretch your payables terms?
• Do you have equipment at the end of its useful life that needs to be replaced?

Applying Assumptions to Your Financials

With these assumptions converted to dollars, they can be applied as sales, expenses, assets, and liabilities in your business. This allows you to forecast how changes in your business will affect your profitability, debt service and cash flow in the short-term and help assess the viability of your current loan request. Taken a step further, you can create different "What-If" scenarios to plan for the best-case, worst-case, and most probable options for future financial performance.