2.1.4 Planning

Question 1

Main aim of producing a Business plan

Answer 1

Reduces the risk associated with starting a new business

Question 2

What is a Business plan?

Answer 2

A document which details how the business is going to develop over a period of time

Question 3

Benefits of a Business plan

Answer 3

• Forces the owner to think about every aspect of the business before they start which should reduce the risk of failure
• It shows potential lenders or investors that the business has done their research
• Allows lenders (e.g. banks) and other investors to analyse the plan and make an informed decision about providing a loan
• Business Angels will analyse whether there is an opportunity to increase the value of their investment and make a worthwhile profit
  -Having carried out research to support the plan, the business will be well-informed about the potential problems and chance of success and can select the most appropriate source of finance based on this information

Question 4

What is a Cash flow forecast?

Answer 4

A financial tool which can be used to estimate expected cash inflows/outflows over a period of time

Question 5

Formulas for calculations based on changes in the cash-flow variables

Answer 5

• The net cash flow is calculated by subtracting total outflows from total inflows
• The opening balance is the previous month’s closing balance carried forward
• The closing balance is calculated by adding the net cash flow to the opening balance


Question 6

Uses & Limitations of Cash Flow Forecasts


Answer 6

Advantages
- Cash flow forecasts can support an application for a loan and are an integral part of the business plan
- They can help identify where the business may experience cash shortfalls or cash surpluses so that plans can be made to manage these periods (e.g. arranging an overdraft)
- Aid planning and help a business avoid costly mistakes
Disadvantages
- Forecasts are usually based on estimates and in reality inflows and outflows may differ significantly from the estimates
- Require appropriate skills, insight, research and time to prepare and update adequately
- External factors that can impact inflows and outflows may not be reflected in the cash flow forecasts

Question 7

What should the main sections of a Business plan include?

Answer 7

• Executive summary
• The product/service
• The market
• Marketing plan
• Operational plan
• Financial plan
• Conclusion
  At the heart of the financial plan should be the cash flow forecast

Question 8

Ways to improve Cash flow

Answer 8

• Minimising spending on equipment e.g. using leasing or renting as methods of finance or even postponing investments
• Keeping stocks to a minimum as stock represents cash spent
• Chasing customers to pay quickly
• Producing and distributing products as quick as possible reducing time between paying for materials and receiving cash for finished goods