What assumptions should I explain when sending a forecast to a lender?

Start with the actual funding request

State the amount, purpose, timing and proposed form of funding. A request to buy equipment differs from a request to finance stock or cover a seasonal collection gap. The forecast should explain the specific use of funds and the resulting business activity. A round loan amount entered solely to keep the spreadsheet positive does not show whether the request is appropriate.

Ask the lender what period, format and supporting information it requires. Requirements differ by institution, product and transaction. Do not claim that one standard forecast or business plan guarantees acceptance. Use the actual application instructions to shape the pack, while keeping the underlying assumptions consistent across the forecast, narrative and supporting schedules.

Explain where the opening numbers come from

Identify the forecast start date and reconcile opening bank, debtor, creditor, stock and loan balances to the latest available records. State whether the accounts are final, provisional or still being reconciled. A forecast starting with an unexplained cash amount can misstate the funding need before any future assumption is considered. Include material obligations that have already been committed but not yet paid.

If the business is new, state that it has no trading history and explain the source of opening funds and assets. Do not create historical revenue to make the application look established. Owner contributions, loans and assets introduced into the business should be described accurately and supported where available. The lender can then distinguish existing resources from the proposed funding.

Make the revenue model understandable

Show the main drivers of sales, such as units, jobs, billable hours or recurring customers, and the price assumptions attached to them. Explain any expected growth through capacity, signed orders, customer acquisition or other evidence. A growth percentage alone is difficult to assess because it does not reveal what the business must do to achieve it.

Separate confirmed orders from proposals and general opportunities. Explain cancellation conditions, delivery milestones and concentration in major customers where material. If the forecast depends on winning a tender, state whether an award exists and what conditions remain. A submitted bid or positive conversation should not be described as secured revenue. Show the effect if the uncertain work does not arrive.

Connect costs and capacity to the sales plan

Identify the direct costs associated with the forecast activity and the evidence for prices, quantities and margins. Supplier quotations, recent purchase records and contract terms can support the assumptions. Explain any improvement in margin rather than assuming costs remain flat while revenue grows. Volume discounts, productivity gains and a different product mix each need their own basis.

Include the resources needed to deliver the growth: people, equipment, premises, stock, transport and systems. If the plan doubles output without additional capacity, explain how the existing operation can achieve that. State where training, setup or installation will delay production. A lender needs a coherent operating story, not just a profitable final column.

Show when sales turn into cash

Keep VAT treatment consistent and explain whether amounts include it. Also show the timing of existing obligations. Funding a new project does not remove the business’s current supplier, payroll or tax commitments.

Illustrative example: a machine does not produce immediate repayments

A fictional manufacturer requests R300,000 for equipment. A supplier quote supports the purchase amount, but delivery is expected after six weeks and installation and training require additional time. The forecast should show when the supplier must be paid, when production can begin and when customers will pay for the resulting output. The invented amount and timing are examples, not a lending recommendation.

Suppose the model initially assumes additional collections in the same month as the equipment deposit. That may be inconsistent with the delivery sequence. Moving those receipts later can reveal a working capital need beyond the machine price. The owner should explain whether existing funds cover that gap or whether the funding request needs a different structure.

Repayment terms must also be based on the lender’s actual proposal or clearly labelled assumptions. Do not enter an interest rate, repayment holiday or approval date as confirmed when no offer exists. Test the cash effect of the terms under discussion and update the model when the lender provides a formal basis.

Separate financing from operating performance

Show new borrowing, owner funding, existing repayments and proposed repayments clearly. A loan receipt increases cash but is not sales revenue. Principal repayment uses cash but is different from an operating expense. Keep the profit view and cash view connected so the reader can understand both trading performance and the ability to meet payment obligations.

Disclose existing facilities, security commitments and other relevant funding obligations in the application as required. Do not count the same owner funds in two projects or assume an undrawn facility is available beyond its agreed conditions. Where funding depends on another approval, label that dependency and show what happens if it is delayed.

Use a downside case that tests the real risk

Choose assumptions that matter to this business: a delayed launch, slower collections, fewer orders, higher input costs or a major customer loss. Explain the changes and show their effect on the lowest cash balance and repayment capacity. A flat reduction across every line can produce a tidy scenario without testing the actual vulnerability.

Record the actions management could take and whether they are already authorised or merely proposed. Reducing an uncommitted purchase may be practical; removing contractual employment costs instantly may not be. Avoid making the downside case positive through unexplained emergency funding. If the model shows a gap, state its size and the evidence needed for a credible response.

Keep the pack consistent and traceable

Use one date and version across the business plan, forecast and assumptions schedule. Check that the funding amount, launch date, staffing and sales figures agree. Retain source quotations and relevant contracts in an organised supporting file. Give the lender enough context to follow the calculation without adding unrelated personal or commercially sensitive documents that were not requested.

Explain material limitations plainly, such as limited trading history, an unsigned customer contract or a supplier quote awaiting confirmation. A forecast is management’s reasoned expectation, not a guarantee. The official government business planning guidance links strategy, operations and finance; use that relationship to make the application internally coherent.

Show how requested funds are drawn and used

Match each proposed drawdown to a use of funds and a date. Some facilities pay suppliers directly, some reimburse approved spending and others release funds after conditions are met. Until the lender confirms the structure, describe the assumed arrangement and test any timing uncertainty. Do not treat the full requested amount as unrestricted cash on the first day.

Keep the sources and uses of funds in balance. If equipment, installation and working capital together exceed the requested facility, identify the remaining source and whether it is available. If the owner contributes an asset instead of cash, that may support operations but cannot pay an unrelated supplier invoice. Distinguish the contribution’s form so the forecast does not count a noncash resource as spendable money.

Prepare for questions rather than polishing away uncertainty

Ask someone to challenge the three assumptions with the largest effect on cash. Be ready to explain their evidence, the date last checked and the alternative outcome. Correct errors before submission and keep a record of what was sent. If a material assumption changes while the lender is assessing the request, follow the lender’s process for providing an update.

Vatco’s business budgeting and forecasting service can help organise the model and assumptions. For the wider funding narrative, use business plan support. Bring the lender’s instructions, actual financial records, proposed funding terms and evidence behind expected sales. Clear assumptions make the forecast assessable; the lender remains responsible for its own decision.