2.1.4 Planning

Question 1

A business plan will be used

Answer 1

both internally by the entrepreneur and externally by banks, external investors or those willing to provide grants

Question 2

A business plan involves

Answer 2

•The executive summary - a synopsis of the entire plan looking at the most important points
•The business and products or services
•The market e.g. size, share, competitors
•The marketing strategy
-financial forecasts

Question 3

What is the purpose of business plans

Answer 3

•To secure external funding
•banks, potential partners, venture capitalists, business angels
•To ensure that the firm develops a healthy financial structure
•To help identify problem
areas that the business might face
-sets targets to focus on
-provide realistic expectations

Question 4

What’s the relevance of a business plan in obtaining finance

Answer 4

When raising finance a business plan acts as a sales document or brochure for the business telling potential investors how and why the business will succeed, which is also how and why it will be able to repay loans or reward equity investors e.g. pay dividends

Question 5

The business plan shows

Answer 5

●Show that the entrepreneur is well organised and has logically worked through all the issues related to the start-up
●Give clear objectives that the entrepreneur will work towards
●Evidence the research to support sales and financial forecasts
●Provide detailed financial forecasts including:
●Cash - flow forecasts
●Budgets
●Forecast financial documents

Question 6

Cash flow in includes

Answer 6

Cash sales 
Payment from debtors 
Owners capital 
Sale of assets 
Bank loans

Question 7

Cash outflow includes

Answer 7

Stock purchase 
Paying wages 
Paying debtors 
Creditors 
Purchasing assets

Question 8

What’s the nature of cash flow

Answer 8

• Cash flow is important to a business as it needs to ensure a positive cash balance in order to be able to meet day to day expenses
• A cash flow forecast is a forward looking statement that tries to predict cash inflows and outflows in the future

Question 9

What’s the difference between the cash flow forecast and cash flow statements

Answer 9

Cash flow forecast- prediction

Cash flow Statement - actual

Question 10

What’s involved in Forecast cash inflows

Answer 10

• Owner’s investment or other source of finance
• Cash sales estimated from sales forecast
• Debtor payments estimated from sales forecast

Question 11

What’s involved in forecast cash outflows

Answer 11

Payment of fixed cost
Payment of variable costs
Unforeseen expense.
Payment terms

Question 12

Cash inflow shows

Answer 12

Cash in from sales

Cash fro other sources - eg bank

Question 13

Cash outflow shows

Answer 13

Cash out for purchases and payments

Question 14

What is net cash flow

Answer 14

The net result of cash inflows and cash outflows each month

Question 15

How do you calculate net cash flow

Answer 15

Cash inflow - cash outflow

Question 16

What is the opening balance

Answer 16

How much the business has at the start of each month

Closing balance becomes the opening balance for next month

Question 17

What is the closing balance

Answer 17

How much the business has at the end of the month

Opening balance + net cash flow

Question 18

Negative cash balance is showed by

Answer 18

Brackets

Question 19

What factors affect cash flow

Answer 19

Transaction types ( cash/ credit , Payment terms )

Timing of cash flow ( seasonal , timings of payments in and out )

Nature of business ( start up capital costs )

Question 20

Timing of cash inflow , and how it affects the business

Answer 20

• If cash inflows are slow this may cause cash flow problems
• A firm may try to speed up cash inflows
• This may include offering a discount for early payment or penalties for late payments
• Businesses may need to chase customers for payment i.e. credit control

Question 21

Timings of cash outflow and how it affects the business

Answer 21

• If cash outflows are too quick this may cause cash flow problems
• A firm may try to slow down cash outflows
• This may include negotiating longer payment terms from suppliers

Question 22

What are receivables

Answer 22

When a business is owed money from customers

Question 23

What are payables

Answer 23

When a business owes money to suppliers

Question 24

What are he cash flow problems

Answer 24

•Businesses need to have sufficient cash to meet day to day finances
Buying stock
Paying wages
Utility bills
•Insufficient liquid cash funds may mean an inability to meet short term debts
Bank overdraft
Payables (trade creditors)
•Limited cash may result in missed opportunities
•A key consideration should be whether the cash flow problem is short term or long term
•A firm may be able to survive short term cash flow problems

Question 25

What are the causes of cash flow problems

Answer 25

``` •Credit sales Long payment terms Poor credit control •Overtrading Additional overhead and day to day expenses Increased capital expenditure •Internal management Stock control Relationship with suppliers Poor or inaccurate planning •Seasonality •Unexpected events ```

Question 26

How to improve cash flow

Answer 26

•Increasing the volume of the inflow of cash •Speeding up the timing of the inflow of cash •Inflows increase Capital invested Loans Cash sales •Reducing the volume of the outflow of cash •Slowing down the timing of the outflow of cash Outflows Loan repayments Day to day running expenses Interest payments

Question 27

What are the uses of cash flow forecasts

Answer 27

* To identify the timing and significance of any potential shortfalls * To identify possible corrective action * To help secure finance from potential investors or the bank * To give confidence about short term survival * To provide a guide against which to measure actual cash flow

Question 28

Limitations of cash flow forecast

Answer 28

* Based on predicted future inflows and outflows therefore may be inaccurate * Informed by market research but this may be small scale, biased or flawed * Affected by the external environment which is outside of the entrepreneur’s control e.g. interest rates change, a supplier goes out of business, a new competitor opens * Demand may be over (or under) estimated