AO1: Investigating why business enterprises plan their finances Write a list of 10 questions a bank manager is likely to ask an entrepreneur applying for a bank loan. Business planning

Business planning In this topic you will learn about planning an enterprise: start-up running costs profit planning to meet financial objectives: making a return for the owners of the enterprise setting profit targets ensuring sufficient cash resources long term financing Providing information to key stakeholders to enable them to make decisions about the viability of an enterprise or expansion: owners/shareholders potential funders suppliers

What do these people all have in common? Who are they?

Business planning A business plan is an important part of setting up a business A business plan will be used both internally by the entrepreneur and externally by banks, external investors or those willing to provide grants The contents of a business plan include: The executive summary - a synopsis of the entire plan looking at the most important points The business and goods or services The market e.g. size, share, competitors The marketing strategy The skills of the entrepreneur and other key employees Operations Financial forecasts In this unit you will be focusing on why business enterprises plan their finances.

Planning an enterprise Planning an enterprise will include the need to plan finances This will include: Start-up cost The costs involved in setting up the business e.g. market research, legal advice, premises, fixtures and fittings, opening stock Running costs The costs of operating the business on a day to day basis e.g. utilities, replenishing stock, wages Profit Profit is the surplus of revenue i.e. the money coming in from sales over the costs i.e. the money going out to fund the business activity If a business is to survive it must plan how it will achieve a profit in the medium to long term Why are the start-up costs for an online business likely to be lower than for a physical store e.g. a shop? http://www.bbc.co.uk/news/business-35371999 What tips does Jamal Edwards offer new entrepreneurs?

Planning to meet financial objectives Financial objectives are the targets a business will set out to achieve, in terms of finance, in a given period of time These will be included in the business plan The entrepreneur will need to regularly review progress against these targets Financial objectives include: Making a return for the owners of the enterprise The owners will have invested capital in the business and will want to be rewarded for this The reward will come from a share of the profits Return on an investment can be calculated as: Operating profit/return x 100 It is likely a minimum target return on investment will have been set

Planning to meet financial objectives Financial objectives include: Setting profit targets A minimum amount of profit to be achieved in a given time period An entrepreneur may have an objective of survival in the short term but once established the business will need to achieve a profit at some point in the future Ensuring sufficient cash resources Without sufficient cash to meet day to day expenses a business will not survive Why is cash so important?

Planning to meet financial objectives Financial objectives include: Long term financing Planning how to finance capital expenditure i.e. the purchase of assets that will stay in the business for more than a year such as machinery, premises and vehicles An objective may look at the percentage of long-term funding that comes from debt i.e. loans Long-term funding that is debt is compulsory interest bearing This means that regardless of profits interest and repayments have to be made to financial institutions This increases the degree of risk undertaken by the business especially if interest rates start to rise Interest represents a cost to the business What might the financial objectives be for Airbus? http://www.bbc.co.uk/news/business-33375915

Planning to meet financial objectives The proportion of long term funding that is debt This relationship is referred to as gearing A business can be described as highly geared if the % is thought to be high as this increases the element of risk Calculated as: Debt x 100 Total long term funding Example: Long term funding = £3.2m Debt = £1.2m £1.2m/£3.2m x 100 = 37.5% Gearing is a concept you will look at in more detail in AO4.

Providing information to stakeholders Stakeholders are anyone with an interest in the actions of a business These include: Owners/shareholders Potential investors Suppliers Customers Workers Community Government Stakeholders can be categorised as: internal or external primary or secondary Primary stakeholders have a direct relationship with the business whereas secondary stakeholders, although affected by the actions of a business, are not directly related to the business.

Providing information to stakeholders A business plan can provide valuable information to stakeholders e.g. profit forecasts, worth of the business, target market, how loans will be repaid and how investors will be rewarded This enables stakeholders to make decisions about the viability of an enterprise or expansion Owners/shareholders Forecast return on investment How to fund expansion Potential cash-flow problems Potential funders Weigh up different investment opportunities Degree of risk How profits will be achieved Suppliers Whether to offer credit and if so on what terms Potential future business Influence pricing decisions

Challenge In this first topic you have already been introduced to a lot of terminology In pairs take it in turns to explain the following terms to each other Business plan Start-up costs Running costs Profit Entrepreneur Financial objectives Long term financing Debt Stakeholders Suppliers Credit

Business planning In this topic you have learnt about planning an enterprise: start-up running costs profit planning to meet financial objectives: making a return for the owners of the enterprise setting profit targets ensuring sufficient cash resources long term financing Providing information to key stakeholders to enable them to make decisions about the viability of an enterprise or expansion: owners/shareholders potential funders suppliers