What a three-way forecast is, and why your broker keeps asking for one
A three-way forecast links profit, financial position and cash. It shows whether a promising plan can actually fund itself and repay debt.
The three reports answer different questions
The forecast profit and loss asks whether the business is expected to earn a profit over the period. The forecast balance sheet shows the assets, liabilities and equity expected at each reporting date. The forecast cash flow shows when money is expected to arrive and leave.
A three-way model links them. A sale affects revenue and profit, but it may first create a debtor rather than cash. Buying equipment reduces cash or creates debt, adds an asset and later produces depreciation and repayments. The model carries each event through all three reports.
Why a profit budget is not enough
A business can be profitable and still run out of cash. Customers may pay after wages, GST and suppliers are due. Stock and work in progress can absorb cash before the related sale appears. Principal loan repayments use cash but do not reduce accounting profit.
A lender needs to see those timing differences because repayments are made with cash, not accounting profit. The balance sheet also exposes whether the forecast relies on growing debtors, unpaid tax, stretched suppliers or new borrowing to stay solvent.
What the lender is testing
The model helps a credit team test whether the loan has a clear purpose, whether the business can service existing and proposed debt, and how much room remains if trading falls short. It also shows the owners' contribution and whether the requested term fits the life of the asset or project being funded.
- Does the opening balance sheet reconcile to the latest accounts?
- Are revenue assumptions supported by history, contracts or a credible pipeline?
- Do margins, wages and overheads move logically with activity?
- Are GST, income tax, capital expenditure and loan repayments included?
- Does cash remain positive in a reasonable downside case?
The assumptions matter more than the spreadsheet
A forecast should have a short assumptions schedule that a business owner can explain. Record price, volume, payment timing, wage growth, recruitment dates, capital spending, tax timing, interest and owner drawings. Use monthly periods where seasonality or working capital matters.
Build a base case and at least one downside case. The downside should change the drivers that could really move, such as slower sales, lower gross margin or longer debtor days. Reducing every line by the same percentage is easy but rarely describes how the business would behave.
Keep it useful after approval
The forecast should become a management tool, not a file made only for the bank. Compare actual results with forecast each month, explain the largest variances and roll the model forward. That process gives the owner early warning and gives a lender more confidence when the next request arrives.
A broker asks for a three-way forecast because it answers the questions a loan application creates. A good model does not guarantee approval, but it makes the funding need, repayment path and business risks visible in one connected story.
Primary sources
Rules and lender requirements change. These sources were checked when this article was published.
This article is general information current at the date of publication. It doesn't take your circumstances into account and isn't tax, legal or financial advice. Speak to a registered tax agent about your situation.
