A healthy profit is encouraging, but it doesn’t necessarily mean your business has enough cash available to pay wages and suppliers or fund its next stage of growth.
A standard profit and loss statement shows only part of that picture.
For businesses managing project work, fluctuating costs and uneven payment cycles, this gap can make planning more of a challenge.
Three-way forecasting closes this information gap by showing how your plans and different scenarios could affect profit, cash flow and your overall financial position.
In practical terms, a three-way forecast helps answer three connected questions: Will the business be profitable? Will it have enough cash when payments fall due? And what will its assets, debts and equity look like as its plans unfold?
Why profit doesn’t always mean cash in the bank
Imagine a civil contracting business takes on a new project.
The work is expected to be profitable, but the business needs to pay wages and suppliers before receiving payment from its client. There might also be equipment costs or existing loan repayments to cover.
The expected profit is only one part of the picture. The timing of those costs and payments matter too, along with changes to what the business owns and owes.
A three-way forecast can help you explore that picture before committing. You can test different payment arrangements, project start dates or purchasing options and see how they affect your expected position.
What is three-way forecasting?
A three-way forecast is a financial planning process that links three financial reports into one integrated model:
Profit and Loss (P&L): projects your expected income, expenses and profit over a period.
Balance sheet: tracks your expected financial position, including assets, liabilities and equity.
Cash flow projections: when money is expected to come in and go out, and the cash balance that leaves you with.
The important part is the connection between the three reports.
A change in one report flows through to the others: income and expenses effect profit, payment timing affects cash flow, and purchases or borrowing change the balance sheet as well as future cash projections.
The model also incorporates assumptions about sales, customer payment timing, purchases and borrowing.
Changing those assumptions shows how different decisions or events could affect profit, cash flow and the balance sheet, giving you a more rounded basis for planning and decision-making.
What goes into a useful forecast?
A forecast needs more than just a spreadsheet full of figures. It also needs assumptions that reflect how your business operates.
That means starting with reliable financial records and discussing things such as upcoming work, expected margins, customer payment patterns, staffing, equipment purchases and existing commitments.
Your knowledge of the business is an important part of the process. Historical figures provide a starting point, but they cannot capture every planned change or emerging risk. The forecast should therefore be reviewed regularly and updated with current financial results and revised assumptions.
When is three-way forecasting useful?
A regularly updated three-way forecast can become a useful part of your monthly reporting, supporting:
1. Planning for growth
Taking on more work can mean higher costs before additional income arrives. A forecast helps you assess the resources and funding needed, whether you are hiring, buying equipment or expanding into a new market.
2. Preparing for finance discussions
When applying for finance, a lender may request forecasts to assess your business’s financial position, funding requirement and capacity to manage repayments.
A three-way forecast can support your overall application by helping explain your plans, the assumptions behind them and your expected ability to manage repayments in a clear report.
Requirements can also vary according to the lender, so forecasts are tailored to your application and situation.
3. Having information ready when needed
Keeping your forecast current means you can respond more quickly when a new project, investment opportunity or funding need arises. Instead of rebuilding reports from scratch, you can update existing assumptions and use the model to explain your plans, cash requirements and repayment capacity.
4. Supporting investor confidence
If you’re looking for investment, a three-way forecast helps potential investors understand how you expect the business to grow, how funding would be used and what that could mean for profitability and cash flow.
Clear assumptions and realistic scenarios help demonstrate that you have considered both the opportunities and the risks.
5. Comparing different scenarios
Scenario testing can show how sensitive your plans are to changes in timing, costs and customer payments.
For example, you can compare the effect of a delayed project start, higher material costs or slower customer payments, then identify the actions or funding options available under each scenario.
6. Managing uneven trading periods
If work or customer payments fluctuate, forecasting can help identify periods when cash might be stretched. That gives you time to consider your options and plan upcoming commitments.
Helping a client navigate delayed payments
One of our clients was experiencing cash flow difficulties because customers were taking longer to pay.
Our team prepared the financial reports and supporting documentation required for an additional finance application, helping the business maintain its operations while it managed the delayed payments.
It’s a practical example of why payment timing matters. Forecasting expected customer receipts alongside wages, supplier payments, loan repayments and other commitments can reveal a potential funding gap early enough to explore suitable options.
How does this fit with management accounting?
Management accounting works alongside your tax accounting, using regular reporting and forecasts to help you understand performance and strategically plan ahead.
Three-way forecasting goes deeper, connecting projected profit and loss, cash flow and the balance sheet so you can assess the financial implications of your next steps.
At Constructiv Accounting, we help growing Western Australian businesses build and maintain three-way forecasts. We’ll work with you to interpret your numbers, test the assumptions behind your plans, and identify what they could mean for your next steps.
If you are planning a major change, considering a significant purchase, or looking for a clearer picture of the months ahead, get in touch with us to discuss whether a three-way forecast could help.
Frequently asked questions
Is a three-way forecast the same as a cash flow forecast?
No. A cash flow forecast focuses on expected cash receipts and payments. A three-way forecast links that information with forecast profit and loss and a forecast balance sheet.
Do I need to be applying for finance to use one?
No. It can also support internal planning, scenario comparisons and decisions about growth or significant spending.
How far ahead should a forecast look?
The timeframe should suit the decision you are making. A forecast for an upcoming project may need a different period and level of detail from one supporting longer-term business planning.
Does a forecast guarantee what will happen?
No. It shows what could happen based on the assumptions used. Its value comes from making those assumptions clear, testing alternatives and updating the forecast as circumstances change.
