2.1.4 Planning

Question 1

Using a business plan to obtain finanace

Answer 1

• a business plan = a document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow
• aim = to reduce the risk associated with starting a new business
• allows lenders and other investors to analyse the plan and make an informed decision about providing a loan

Question 2

Cash flow forecasts

Answer 2

• a precision of the anticipated cash inflows and cash outflows, typically for a 6-12 month period

Net cash flow = calculated by subtracting total outflow from total inflows
Opening balance = previous month’s closing balance carried forward
Closing balance = calculated by adding the net cash flow to the opening balance

Question 3

Adv + disadv of cash flow forecasts

Answer 3

Advantages:
- can support an application for a loan and are an integral part of the business plan
- can help identify where the business may experience cash shortfalls or cash surpluses so that plans can be made to manage these periods
- aid planning and help a business avoid costly mistakes

Disadvantages:
- usually based on estimates and in reality, inflows and outflows may differ significantly from the estimates
- require appropriate skills, insights, research and time to prepare and update adequately
- external factors that can impact inflows and outflows may not be reflected in the cash flow forecast