2.1.4 - Planning Flashcards
What is a business plan
- A business plan is a document which sets out the future plans for a business
- It is how an business owner will explain how they will turn their idea into a successful business
- The owner may then show the plan to a bank or another investor to ask for finance to help the business grow and expand
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
- Every business needs to write a business plan, this will help to identify early on any problem areas that the business might face
- A business plan will also help 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
Whats included in a business plan
- A cash flow forecast on the plan will show the expected income and expenditure of a business over the coming year
- Cash flow forecast will help to show a bank that the interest rates can be afforded on any finance that they borrow
- Cash flow forecast will show 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
- Name of the business
- Product or service and the market it is aimed at
- 4 Ps of marketing; product, price, place and promotion
- 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 and profits
What is the purpose of a business plan
- To help set up a new business
- To help the business raise finance
- To help the business to set objectives
- To outline how functions of the business will be organised
Why are business plans important when setting up a new business
- A business plan will help an entrepreneur to decide what resources they need to start their business:
✓Human resources; For example the staff needed for a clothes shop
✓Equipment; For example scissors and a sewing machine
✓Raw materials; for example cloth or lace
✓Technology: for example the till or business computer
✓Vehicles; for example the company van
Why are business plans important when raising finance
✓A business plan may help 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
✓A business plan should include a cash flow forecast and sales forecasts
✓A business plan may help to obtain finance from; from venture capitalists, banks, angel investors, or even family members
✓The lenders are going to want to see numbers that say the business will grow and that they can make a profit
✓The better the financial information, the more confident they will be in investing – this will reduce the risk for the investors
Why is a business plan important when negotiating to raise finance
✓A business plan may help the business to negotiate a lower rate of interest on a bank loan
✓Alternatively the business plan may help the owner to negotiate a lower percentage of equity to the venture capitalists or angel investors
Why is a business plan important when setting business objectives
✓A business plan can show how a business aims to achieve its goals
✓For example it may show any planned activities of the
business e.g. a launch night for a new restaurant
✓It should also show any potential investors what amount of sales and profit the business aims to achieve
* A business plan should set targets (SMART) and objectives that can be followed for the business
* The business owner can then monitor if they are meeting their objectives
* The business plan may also set out how the company aims to grow and develop in the future
Why is a business plan important when outlining how the function of the business is organized
- The business plan may show how many staff and location of the following departments;
❑Production
❑Marketing
❑Purchasing
❑Human Resources
❑Accounting and Finance
- In a small business this may not be relevant as it may just be the business owner carrying out all the functions
What is a cash flow forecast
- A cash flow forecast is the day-to-day running of a business budget
- A cash flow forecast will show where the business will have a shortfall of cash (not enough to pay their shortterm bills)
- Allows the business to organise shortterm cash borrowing to cover the shortfall e.g. an overdraft
- A cash flow forecast is not about profit
What is cash inflow
- Cash into the business appears at the top of the cash flow forecast
- This is called income
- The income of a business is most likely to be sales revenue – this is the money that has come in from customers (imagine a full cash tin or cash register)
What is cash outflow
- Cash outflow is the cash that is being spent in the business
- This is known as expenditure
- This will be on bills such as: wages, insurance, advertising etc.
- Imagine a shop paying the window cleaner cash from the till
What are the uses of a cash flow forecast
- A business will prepare a cash flow forecast 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
- Shows the business owner where likely cash surplus and shortfalls are so they can arrange suitable finance e.g. an overdraft with bank
- A good cash flow forecast may help the owner to secure a better deal on their finance e.g. lower rate loan
What are the limitations of a cash flow forecast
- A cash flow forecast is only a 12 month snapshot which is very short term to make any concrete decisions about the business, they 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
- The cash flow forecast is not about profit it is only about the cash in the business to meet the shortterm debts.
- To get a full picture the business would need to show a a statement of comprehensive income and a statement of financial position
- It could be very risky for an investor to make decisions about the business on just the cash flow forecast alone
