214 Planning AS Edexcel New Specification 2015 Business By Mrs Hilton for

Lesson Objectives To be able to discuss the relevance of a business plan in obtaining finance To be able to interpret a simple cash flow forecast To be able to calculate a simple cash flow forecast To be able to discuss the use of cash flow forecasts To be able to discuss the limitations of a cash flow forecast To be able to answer sample exam questions based on the topic area

From the specification a) Relevance of a business plan in obtaining finance b) Interpretation of a simple cash-flow forecast and calculations based on changes in the cash-flow variables c) Use and limitations of a forecast

Guidance from Edexcel

What do I need to know and do for this unit? You do NOT need to know the format of a business plan You do NOT need to produce one in an exam You do NOT need to produce an entire cash flow forecast in an exam You MAY have to fill in some gaps on a cash flow forecast (see sample questions) Useful to know for revision!

Business plans

Business plan A Business Plan is a look into the future of the business It is not a look back at how things have been for the business It would NOT include a bank statement as this is a look back at transactions

Why does a business write a business plan? To persuade lenders that the business will make enough profit to be able to pay back interest and loan capital on any finance taken out Attract potential investors to the business To give the owners some direction – once a plan is written down it is more likely to be followed To set targets (smart) and objectives that can be followed To identify early on any problem areas that the business might face To monitor their effectiveness - if they knew what they were aiming for at the end of the year they could see if they have achieved it

What’s included on a business plan Cash flow forecast – to show the expected income and expenditure of a business over the coming year Start-up cash flow management is critical – many businesses fail because of a lack of cash to pay suppliers and day-to-day bills Cash flow forecast will help to show a bank that the interest rates can be afforded on any finance that they borrow Cash flow shows the liquidity of the business (how quickly it can raise cash) and its ability to pay its bills A business plan will NOT improve cash flow that will be down to how well the business trades

What else goes into a business plan? Name of the business (“Cut above” or “curl up and dye” for hairdressers) Product or service and the market it is aimed at 4 Ps of marketing Human resources; who will be working there, managers, owners etc Production costs and potential suppliers of materials Premises and how it will be financed; rent, mortgage, bought outright, leased from council Financial information; projections on revenue / costs / profits

See the Princes Trust Guide here to create a business plan

Bank website examples Banks often have guide pages so that anyone who wants to go into business can apply for start-up loans. It makes it easier for them if customers use their templates – that way they know everything they need to make an informed decision about whether to lend is in the plan. Barclays Business Plan Lloyds Bank Business Plan Royal Bank of Scotland Business Plan

Cash flow

Money in, money out In out Months (£'s) September October November December January February Cash inflow From Cash Sales 12000 16000 20000 80000 6000 5000 From Credit sales 10000 14000 50000 2000 Total Inflow 17000 22000 30000 94000 56000 7000 Cash Outflow Security costs 3000 4000 Buying jewellery stocks 25000 55000 rent 9000 Wages 8000 Other expenses 1000 Total Outflow 31000 37000 67000 27000 Monthly balance -14000 -15000 -37000 44000 -7000 Opening balance -6000 -21000 -58000 53000 Closing balance 46000 In out The list of items in the out section will always be longer than the in, many bills to pay

Cash flow forecast example Forecasts months when finance, such as an overdraft, will be needed (indicated by orange arrows)

Bottom half of the CFF Top half of the CFF See this template here

Fill in the gaps on the cash flow Cash Flow Forecast – Bob’s Wooden Toy Shop   October £ November December January February March Total Receipts (cash inflow) 14,000 50,000 1,000 Total Payments (Cash outflow) 10,000 Balance at start of month Balance at end of month Fill in the gaps on the cash flow

Cash Flow Forecast – Bob’s Wooden Toy Shop   October £ November December January February March Total Receipts (cash inflow) 14,000 50,000 1,000 Total Payments (Cash outflow) 10,000 Balance at start of month 3,000 39,000 -48,000 Balance at end of month Interpretation: Bob has a very slack month in Jan which is to be expected given what he produces, very few parents buy toys in Jan having just spent in December for Christmas. His work appears seasonal, and his cash outflow is really high, he is nearly £50k in trouble by March. However he will make all his money in three months of the year. He needs to get his outflows down and organise a loan for the slack months. He is unlikely to get and overdraft of £50,000 from a bank, the amount is too high. They may suggest a loan that he pays back when he has a good month and then takes out again or another flexible finance arrangement. This does not show us his retained profit so he may have savings that will cover it. If he did need to arrange finance this document would support his application for a loan.

How Bob’s toy business could deal with his forecast cash flow problems A Short term loan, as the financing needs are flexible and probably short-term. If the capacity to borrow is only needed for a few months, this would be the cheapest form of finance by far Reduce an expense – such as staff wages (lay someone off, close a couple of days a week) or switch to a cheaper supplier Delay paying bills – he could delay bill paying to buy some time to make more cash

Uses of cash flow

Uses of cash flow forecasts A business will prepare a CFF to help control and monitor cash in and out of a business At years end the business can make comparisons between the predicted inflows and outflows and what actually happened An important part of the financial planning process which may support an application for funding Shows the business owner where likely cash surplus and shortages are so they can arrange suitable finance

Limitations of cash flow

Limitations of cash flow forecasts Bias; a business may overinflate the inflows to make the business look better on paper to attract finance or impress a supplier Predictions; A CFF cannot take into account weather problems, a supplier closing, any other event that cannot be foreseen Updates; A forecast is a document that needs regular updating or the data becomes inaccurate and stale, business is dynamic, this is a static document Mistakes; A CFF is a tricky document for an inexperienced entrepreneur to produce, so may be inaccurate Time; the longer time the cash flow is based over the more likely it is to be innacurate

Problems with cash flow forecasts This is only a 12 month snapshot which is very short term to make any concrete decisions about the business. It may need longer term finance This is only a forecast – an estimate actual sales or expenses might be higher The owner may have overstated expenditure or understated income This is not about profit it is only about the cash in the business to meet the short-term debts. To get a full picture we would need to see the balance sheet and the profit and loss. Dangerous to make decisions about the business on just the cash flow forecast alone

Sample questions

Sample question 1 2 marks Calculation 2a paper question

Answer question 1

Sample question 2 4 mark question Case study for context on next slide

Answer question 2

Sample question 3 8 mark question Case study for context on next slide

This is taken from a 2010 2A Edexcel exam and in 2010 cheques were an accepted form of payment

Sample question 4 4 mark question Case study for context on next slide

Answer question 4

Sample question 5 4 marks Case on next slide

Answer question 5

Revision Video

Glossary Cash flow forecast; a form of budget which enables a business to look at its potential revenue flow and its expenses. An estimate of the money a business will spend and receive within a year Business plan; A document that describes a businesses aims and objectives and how they can be achieved