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
What’s included on 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
What else goes into a business plan?
A. Name of the business
B. Product or service and the market it is aimed at
C. 4 Ps of marketing; product, price, place and promotion
D. Human resources; who will be working there, managers, owners etc.
E. Production costs and potential suppliers of materials
F. Premises and how it will be financed; rent, mortgage, bought outright, leased from council
G. Financial information; projections on revenue, costs and profits
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
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 short- term bills)
• Allows the business to organise short- term cash borrowing to cover the shortfall e.g. an overdraft
• A cash flow forecast is not about profit
Cash inflow (income)
• 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)
Cash outflow (expenditure)
• 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
Opening and closing balances
• Notice on a cash flow that the balance closing at the end of one month is the opening at the start of the following month
• This is because on the last day of the month magic pixies do not steal the money from out of the cash tin, so on the first day of the next month it needs to start with that amount…
Uses of cash flow forecasts
• 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
Limitations of cash flow forecasts
• 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
Limitations of cash flow forecasts continued
• The cash flow forecast is not about profit it is only about the cash in the business to meet the short- term 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
Advantages and disadvantages of a business plan
Advantages of a business plan:
- Provides a roadmap: A business plan serves as a guide for entrepreneurs, outlining the company’s goals, strategies, and tactics
- Helps secure funding: Investors and lenders often require a business plan as part of the due diligence process before they invest or lend money to a company.
- Facilitates decision-making: A business plan helps entrepreneurs identify potential problems and opportunities, enabling them to make informed decisions about the business’s future.
Disadvantages
- Time-consuming: Creating a comprehensive business plan can be a time-consuming process, requiring entrepreneurs to conduct extensive research, analyze data, and write a detailed report.
-Uncertainty: Despite the time and effort invested in creating a business plan, there is no guarantee that the plan will be successful.
-Lack of flexibility: A business plan can be too rigid, leaving little room for flexibility and adaptability in response to changing market conditions or customer needs
