For many small and medium-sized enterprises (SMEs) in Nepal, obtaining a bank loan is an important step toward expanding a business, purchasing assets, increasing working capital, opening a new branch, or starting a new project.

However, submitting a loan application is not simply about requesting a certain amount from a bank. Banks generally want to understand how the business will use the loan, how the business will generate sufficient cash flow, and how the proposed borrowing can be repaid.

This is where financial projections become particularly important.

A well-prepared projection can help a bank understand the business’s expected sales, expenses, profitability, cash flow, debt servicing capacity, working-capital requirements, and overall financial position.

For SMEs in Nepal, preparing realistic projections requires more than simply increasing sales by 20% every year. The assumptions need to be connected with the actual business, Nepal’s market conditions, existing financial records, proposed investment, and the repayment obligations of the business.

What Are SME Loan Projections?

SME loan projections are estimates of the business’s future financial performance prepared for a specific period, often covering several years.

Depending on the nature of the loan and the bank’s requirements, projections may include:

• Projected Sales and Revenue
• Projected Cost of Goods Sold
• Projected Profit & Loss Statement
• Projected Cash Flow Statement
• Projected Balance Sheet
• Working Capital Calculation
• Debt Repayment Schedule
• Interest Expense
• Fixed Asset Investment
• Depreciation
• Tax estimates
• DSCR and other financial indicators
• Sources and uses of funds

The purpose is not to predict the future perfectly. The purpose is to demonstrate that the business model and proposed borrowing are financially reasonable and sustainable.

1. Start With Actual Historical Data

One of the most important principles when preparing projections for an existing SME is:

Do not build the projection in isolation from the actual business.

If the business has already been operating for several years, its historical financial information provides an important starting point.

Consider:

• Previous year’s sales
• Monthly sales trends
• Gross profit margin
• Operating expenses
• Existing loans
• Interest expenses
• Receivables
• Payables
• Inventory
• Fixed assets
• Existing cash flows
• Tax and statutory obligations

For example, if a business has historically generated NPR 1 crore in annual sales, projecting NPR 3 crore in the next year requires a reasonable explanation.

Possible explanations could include:

• Opening a new branch
• Adding production capacity
• Obtaining a major contract
• Expanding distribution
• Adding new products
• Increasing hotel rooms
• Purchasing additional machinery
• Increasing marketing and sales capacity

The projection becomes more credible when the growth assumption is supported by a specific business event.

2. Avoid Unrealistic Sales Growth

Sales revenue is often the most important assumption in a projection.

A common mistake is to assume aggressive sales growth simply to make the projected profit look attractive.

For example:

Existing sales: NPR 50 million
Projected sales: NPR 100 million
Growth: 100%

The question is not whether 100% growth is mathematically possible.

The question is:

What will cause the business to double its sales?

A better projection connects sales growth with measurable factors.

For example:

Sales = Number of customers × Average transaction value × Purchase frequency

For a hotel:

Revenue = Available rooms × Occupancy × Average Daily Rate

For a restaurant:

Revenue = Customers per day × Average bill value × Operating days

For a manufacturing business:

Revenue = Production capacity × Capacity utilization × Selling price

Such calculations make the assumptions easier to understand and defend.

3. Consider Seasonality in Nepal

Many Nepalese businesses do not generate the same revenue throughout the year.

Tourism, hospitality, education, retail, agriculture, construction and several other industries can experience significant seasonal fluctuations.

Therefore, simply dividing projected annual sales equally across 12 months may not represent the actual business.

For example, a tourism-related business may have:

• Strong tourist-season revenue
• Lower off-season revenue
• Weather-related fluctuations
• Festival-season effects
• Changes in international arrivals

Similarly, a retailer may experience higher sales around:

• Dashain
• Tihar
• New Year
• Wedding seasons
• Major promotional periods

A monthly projection can therefore be more useful than simply presenting an annual figure.

4. Understand the Purpose of the Loan

The projection should be directly connected to the proposed loan.

A bank will want to understand:

Why does the business need this money?

For example:

Term Loan

Could be used for:

• Machinery
• Vehicles
• Building improvements
• Equipment
• Business expansion
• New production facilities

Working Capital Loan

Could support:

• Inventory
• Receivables
• Operating cycle
• Supplier payments
• Short-term business requirements

Business Expansion

May involve:

• New branch
• Additional employees
• Additional equipment
• Larger premises
• Increased inventory
• Marketing expenditure

The financial projection should reflect the impact of the proposed investment.

5. Match the Projection With the Proposed Investment

If a business is requesting NPR 1 crore for machinery, the projection should show the financial effect of that machinery.

For example:

• Additional production capacity
• Additional sales
• Additional raw-material requirement
• Additional electricity consumption
• Additional labour
• Depreciation
• Maintenance
• Additional working capital

Simply adding the machinery to the asset side of the balance sheet without reflecting its operational impact can make the projection inconsistent.

6. Be Careful With Gross Profit Margins

Gross margin is another area where unrealistic assumptions can affect the credibility of a projection.

If a business has historically maintained a 20% gross margin, suddenly projecting a 35% margin requires justification.

Possible reasons could include:

• Higher-margin products
• Direct sourcing
• Better supplier pricing
• Economies of scale
• Changes in product mix
• Improved production efficiency

Otherwise, maintaining a margin close to the historical level may provide a more defensible starting point.

7. Include All Major Operating Expenses

A projection should not focus only on revenue.

Businesses incur many expenses, including:

• Salaries and wages
• Rent
• Electricity
• Internet and communication
• Transportation
• Marketing
• Repairs and maintenance
• Insurance
• Administrative expenses
• Professional fees
• Software and technology
• Bank charges
• Interest
• Taxes
• Other operating expenses

Underestimating expenses can significantly overstate projected profitability.

For example, if a business plans to open a new branch, the projection should consider additional:

• Rent
• Staff
• Utilities
• Marketing
• Furniture
• Equipment
• Maintenance

8. Consider Salary and Operating Cost Inflation

Costs do not necessarily remain constant.

A business may experience increases in:

• Employee salaries
• Rent
• Electricity
• Transportation
• Raw materials
• Imported goods
• Technology costs
• Maintenance

Therefore, assuming that expenses remain unchanged for several years may produce unrealistic projections.

The assumption should be reasonable for the particular industry rather than applying an arbitrary percentage to every expense.

9. Do Not Forget Existing Loans

This is particularly important for businesses that already have bank financing.

The projection should consider:

• Existing loan principal
• Existing interest
• Proposed new loan
• New interest expense
• Principal repayment
• Repayment schedule
• Other financial obligations

A business may appear profitable before debt servicing but have insufficient cash flow after existing and proposed loan repayments.

Therefore, profitability and debt repayment capacity are not the same thing.

10. Pay Attention to DSCR

Debt Service Coverage Ratio (DSCR) is commonly used to evaluate whether the business generates sufficient cash flow to service its debt.

In simplified terms:

DSCR = Cash available for debt servicing ÷ Debt servicing obligation

A projection should therefore demonstrate how the business expects to generate enough cash to meet its repayment obligations.

However, the exact calculation and acceptable level can vary depending on the bank, loan product, industry and other circumstances.

The objective should not be to manipulate the projection to achieve a particular DSCR.

Instead, the projection should realistically demonstrate the business’s repayment capacity.

11. Prepare a Realistic Cash Flow Projection

A profitable business can still experience cash-flow problems.

For example, a business may make a sale today but receive payment after 60 or 90 days.

Meanwhile, it may need to pay:

• Employees
• Suppliers
• Rent
• Utilities
• Taxes
• Loan instalments

Therefore, cash flow should be separately analyzed.

Important assumptions include:

• Credit sales
• Collection period
• Supplier credit period
• Inventory holding period
• Loan repayments
• Capital expenditure
• Working-capital requirements

For businesses with significant receivables or inventory, cash-flow projections can be particularly important.

12. Keep Working Capital in Mind

Working capital is often underestimated when preparing expansion projections.

Suppose a company increases its sales substantially.

Higher sales may also require:

• More inventory
• More raw materials
• More receivables
• More cash tied up in the operating cycle

Therefore:

Higher sales do not always mean higher immediately available cash.

A projection should consider the entire operating cycle.

13. Account for Depreciation

If the business purchases machinery, equipment, vehicles or other depreciable assets, depreciation should be reflected appropriately in the financial projections.

Depreciation affects:

• Profit
• Asset values
• Tax calculations
• Financial statements

The treatment should be consistent with the applicable accounting and tax framework.

14. Consider Tax Properly

Projected profit should not automatically be treated as cash available to the business.

The projection should consider applicable tax obligations and other statutory payments.

Depending on the business structure and nature of income, relevant considerations may include:

• Income tax
• VAT
• TDS
• Other applicable taxes and statutory obligations

Tax assumptions should be consistent with the applicable laws and the business’s actual tax position.

15. Make the Balance Sheet Balance

A projected balance sheet should actually balance.

That means:

Assets = Liabilities + Equity

Common mistakes include:

• Loan appearing in liabilities but not reflected in cash or assets
• Fixed assets added without corresponding funding
• Retained earnings not linked to projected profit
• Working capital assumptions inconsistent with receivables, inventory and payables
• Loan repayments not reducing outstanding liabilities

The Profit & Loss, Balance Sheet and Cash Flow Statement should therefore be interconnected.

16. Make the Three Financial Statements Consistent

A good financial model should connect:

Profit & Loss → Cash Flow → Balance Sheet

For example:

If projected sales increase:

• Revenue increases in P&L
• Receivables may increase in the balance sheet
• Cash collection affects cash flow

If machinery is purchased:

• Fixed assets increase
• Cash decreases or loan increases
• Depreciation affects profit
• Loan repayment affects cash flow and liabilities

This interconnected approach makes the projection more useful for both the business owner and the financing institution.

17. Use Nepal-Specific Business Assumptions

A projection prepared for Nepal should consider the realities of the Nepalese market.

Depending on the business, assumptions may need to consider:

• Import dependence
• Exchange-rate movements
• Tourism cycles
• Transportation costs
• Electricity availability and cost
• Labour costs
• Local purchasing power
• Competition
• Interest rates
• Regulatory requirements
• Supply-chain constraints
• Seasonal demand
• Inflation
• Changes in government policy

Not every factor needs to be included in every projection. The relevant factors depend on the industry.

18. Explain Major Assumptions

Numbers alone do not tell the complete story.

A projection becomes easier to understand when major assumptions are documented.

For example:

“Sales are projected to increase by 25% following the addition of 20 rooms and an expected increase in occupancy.”

Or:

“Revenue growth is based on increasing production capacity from 60% to 80% following the purchase of additional machinery.”

This is considerably more informative than simply entering a 25% growth rate into a spreadsheet.

19. Prepare Different Scenarios

Businesses operate in uncertain environments.

Instead of relying on only one projection, management can consider:

Base Case

Expected business performance under reasonable assumptions.

Conservative Case

Lower sales, higher costs or slower growth.

Expansion Case

Expected performance after the proposed investment is fully implemented.

Scenario analysis can help identify whether the business can continue servicing its obligations if actual performance differs from expectations.

20. Do Not Inflate Numbers Just to Obtain a Larger Loan

One of the biggest mistakes in loan projections is preparing numbers backward.

For example:

“I want a NPR 2 crore loan, so let’s make the projection large enough to justify NPR 2 crore.”

The better approach is:

Determine the business requirement first, then determine the appropriate financing requirement.

For example:

Total project cost
→ Less owner’s contribution
→ Less other funding sources
→ Financing requirement

The proposed loan should have a clear economic purpose.

21. Maintain Consistency With Other Documents

The information in the projection should be consistent with other documents submitted to the bank.

For example:

• Business plan
• Loan application
• Tax returns
• Audited financial statements
• Management accounts
• Fixed asset details
• Quotations
• Project cost
• Bank statements
• Existing loan details

If the business reports one level of sales in its historical financial statements but uses a significantly different figure as the starting point for the projection, the difference should be explainable.

22. A Projection Is Not a Guarantee

A financial projection is an estimate based on assumptions.

Actual results can differ because of:

• Market conditions
• Competition
• Changes in costs
• Changes in customer demand
• Regulatory changes
• Economic conditions
• Operational problems
• Unexpected events

The objective is therefore not to produce a perfect prediction.

The objective is to produce a reasonable, internally consistent and evidence-based financial model.

What Should an SME Loan Projection in Nepal Ideally Cover?

A comprehensive projection may include:

The exact requirements can differ between banks, loan products and businesses.

Common Mistakes in SME Loan Projections

Some of the most common problems include:

• Overestimating sales
• Underestimating expenses
• Ignoring seasonality
• Ignoring working-capital requirements
• Forgetting existing loans
• Using unrealistic profit margins
• Not including depreciation
• Incorrect tax assumptions
• Not linking financial statements
• Showing unexplained growth
• Ignoring owner’s contribution
• Preparing projections without reviewing historical accounts
• Creating numbers only to support the desired loan amount

These issues can make a projection less useful as a financial planning tool and may lead to questions from the financing institution.

Final Thoughts

For an SME seeking financing in Nepal, a financial projection should not be treated as merely a document required for a bank loan.

It should answer three fundamental questions:

1. How will the business generate revenue?

2. What will it cost to operate and expand the business?

3. Will the business generate sufficient cash flow to meet its financial obligations?

A strong projection connects historical performance, the proposed investment, market assumptions, operating costs, working capital and debt obligations into one consistent financial model.

For business owners, the value of a good projection goes beyond loan processing. It can also help management understand how much funding is actually required, identify potential cash-flow gaps, evaluate expansion plans and prepare for different business scenarios.

If you are preparing an SME loan application in Nepal, the numbers should be based on the actual business model, historical performance and realistic future assumptions—not simply the loan amount you want to obtain.