The cash forecast a bank wants from a dealership
What a cash flow forecast for a dealership's loan or stock facility should cover, how far ahead, and which figures its own books can supply.
By Achekam · · 5 min read · For Automotive businesses in South Africa, Nigeria, Kenya
The dealer principal has a good relationship with the bank, a solid sales record and a plan: a larger stock facility, or a term loan to refurbish the workshop. The credit manager listens politely and then asks for the same thing every lender asks for: a cash flow forecast.
Many dealerships produce one in a hurry, from a template, the week before the meeting. The bank can usually tell. A forecast that was built properly, from the dealership's own figures, with assumptions the bank can test, does far more for the application than a polished spreadsheet with numbers nobody can explain. This article sets out what lenders expect and where the figures come from.
Why the bank wants a forecast, and for how long
A lender's question is not whether the dealership is profitable. It is whether the dealership will have the cash to pay the instalments and stay within the facility, month after month. Profit and cash part company in a dealership more than in most businesses, because vehicles sit in stock, finance houses settle after delivery, and parts are bought ahead of jobs.
ICAEW notes that lenders will require cash flow forecasts with loan applications and for ongoing monitoring, usually for the next 12 months. ICAEW's nine principles of cash flow forecasting are a useful checklist for anyone preparing one.
Monthly for a year, weekly when it is tight
ICAEW notes that rolling monthly forecasts for the next 12 months are usually necessary, that rolling weekly forecasts for 13 weeks ahead are often used in turnarounds, and that both are often required for loan applications.
For a dealership the monthly view shows the seasonal shape of the year: the months when new model stock arrives, the quieter periods, the annual insurance and licence payments. The weekly view matters when cash is tight or the facility is close to its limit, because a month-end figure can hide a mid-month low point when the finance house has not yet paid and the parts account has.
Building it on the direct method
ICAEW recommends using the direct method where possible: show cash coming in and cash going out, in language a non-accountant understands, with the assumptions clearly documented. ICAEW notes that the indirect method, starting from profit and adjusting, is less easily understood, although it is a useful control.
A dealership forecast on the direct method might have these lines:
Cash in
- Vehicle sales: deposits and finance house settlements, by month of receipt, not month of sale
- Workshop and parts: cash and card takings, and collections from account customers
- Warranty and insurer claims, when they are paid
- Any new loan drawdown
Cash out
- Vehicle purchases and stock facility repayments
- Parts suppliers
- Salaries and statutory payments
- Rent, utilities, insurance and licences
- VAT and income tax payments in the months they fall due
- Loan instalments and interest
- Capital spending, such as workshop equipment
Assumptions the bank can test
Every line rests on an assumption, and the assumptions are what the credit manager will probe. Write them down next to the forecast: how many units a month, at what average deal value, how long the finance house takes to settle, what share of workshop sales is on account, and so on.
ICAEW advises producing worst-case, most-likely and best-case scenarios, including a prediction of the earliest date additional funding may be required. For a dealer, the useful worst case is specific: sales slow for a quarter, used stock ages, and a large fleet customer pays late. If the forecast shows the facility is still adequate under that scenario, the application is stronger. If it shows a shortfall, it is better that you find it than the bank.
What the books can supply
The forecast is a view of the future, but it should be anchored in the past. Achekam's management accounts show an income statement for a chosen period beside the period before, and a balance sheet at period end, both built from the dealership's own journals and exportable as PDF or CSV. Those give you the starting cash balance, the receivables and payables you will collect and pay in the first months, and a track record of sales and costs to base assumptions on. The year-to-date preset starts on 1 January, not on the business's own year start, so select the dealership's financial year deliberately.
A business can also set a budget per account and period in Achekam and compare it with actual figures from its ledger. A budget is not a cash forecast, but it is where the revenue and cost assumptions should agree. If the forecast assumes workshop revenue that the budget does not, one of them is wrong.
The statement the books do not produce
One limit is worth knowing before the meeting: Achekam's books do not produce a cash flow statement. The bank may want a historical cash flow statement alongside the annual financial statements, and that will come from your accountant. For the forecast itself, build the direct-method schedule in a spreadsheet, using the exported management accounts as the opening position.
Reporting once the facility is granted
The forecast does not end when the loan is approved. ICAEW recommends controls over cash flow reporting: reconcile reports to bank and creditor statements, show when they were prepared, have them reviewed by someone other than the preparer, and reconcile them to the profit and loss and balance sheet movements. ICAEW also advises checking forecasts against actuals to improve the process.
In practice, that means a monthly pack to the bank: the forecast for the month, what actually happened, and a short explanation of each significant difference. A lender that sees honest explanations month after month has fewer reasons to doubt the next forecast.
For how long the dealership's cash is tied up between stock and sale, see how long a dealership's cash is tied up; for the weekly view in more detail, read a rolling 13-week cash forecast.
The best time to build the forecast is before the bank asks for it, so that the conversation is about the plan rather than the spreadsheet.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
