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Tata Capital > Blog > Loan for Business > How to Create a Favorable Financial Forecast before Applying for a Business Loan

Loan for Business

How to Create a Favorable Financial Forecast before Applying for a Business Loan

How to Create a Favorable Financial Forecast before Applying for a Business Loan

Developing a robust business plan is an important aspect of raising funds for your business. Potential lenders will have a positive impression when they see that you are ready with your business plan.

Financial projections are one of the most important things that lenders will look for in your business plan. You must focus on developing a realistic analysis of the potential revenues and expenses during the initial years of commencing your business.

Here are three elements that must be included in the financial forecast.

1) Capital

You will need some capital to start your venture and continue running the operations. While developing the business plan, you must distinguish the startup expenses and operating expenses. Some of the startup costs include registration charges, lawyer fees, rent, down payment for equipment and property, utility installation, and website designing. Operating expenses are monthly costs, such as utilities, office supplies, salaries, raw materials, as well as phone and Internet services.

2) Income Statement

The income statement depicts the monthly profit and loss during the first year of business operations. You may project this on a quarterly basis for the period after the first year. You may use a spreadsheet to input the information and use the formulae to calculate your financial projections. Several online resources are also available, which may be used to develop the financial forecast needed before you apply for a business loan.

3) Balance Sheet

The last step of the financial forecast is the preparation of the balance sheet. This provides a financial overview of your venture. Based on the stage of your business planning procedure, this statement may include your assets and liabilities. While preparing the balance sheet you need to include fixed assets and current assets, such as cash on hand, accounts receivable, and product inventories. In addition, liabilities like accounts payable and outstanding expenses must be included in the balance sheet.

One of the most important aspects of preparing the financial forecast is to understand the sales from your product or service offerings. At the start, this may seem complicated; however, it is fairly simple. Here are two tips that will help you project your income.

1. Understand Your Market

You must understand your target audience and conduct extensive research about the market.  Analyzing your competitors and the market share you may be able to capture to project the revenues is important.

2. Create a Contingency Plan

In most cases, things never go according to the plans. Predictable and unpredictable circumstances like natural disasters or market fluctuations may impact your financial forecast. Therefore, it is recommended you develop the best, worst, and base case scenarios in the business plan.

Starting a new venture or expanding an existing business requires funds. It is common that entrepreneurs may over project revenues and underestimate the expenses while calculating their capital requirements. As a result, they may apply for a business loan for an amount that is significantly lower than what is actually needed. Following the aforementioned tips may be beneficial in developing an accurate financial projection to be included within the overall business plan.