1. 214 Planning AS Edexcel New Specification 2015 Business
By Mrs Hilton for

2. 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

3. 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

4. Guidance from Edexcel

5. 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!

6. Business plans

7. 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

8. 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

9. 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

10. 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

11. See the Princes Trust Guide here to create a business plan

12. 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

13. Cash flow

14. 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

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

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

18. 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

19. 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.

20. 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

21. Uses of cash flow

22. 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

23. Limitations of cash flow

24. 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

25. 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

26. Sample questions

27. Sample question 1
2 marks Calculation
2a paper question

29. Answer question 1

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

32. Answer question 2

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

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

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

38. Answer question 4

39. Sample question 5
4 marks
Case on next slide

41. Answer question 5

42. Revision Video

43. 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