2.4 Finacial Planning

Question 1

The business plan-

Answer 1

-A business plan to make us a look into the future of the business
-It is not a look back and how things have been for the business
-It would not include a bank statement as this is a look back at transactions

Question 2

Why do businesses use plans

Answer 2

A business needs a financial plan to set targets for themselves and how they will finance this by what time. Planning is key to reducing risk. Furthermore they need to financially plan to tackle unexpected challenges.

Question 3

The Cash Flow Forecast-

Answer 3

The Cash Flow Forecast- predicts the amount of money that will flow into and out of the business.

Components of cash flow:
-Cash Inflow- The money coming into the business. (Also known as Receipts)
-Cash Outflow- This is the money going out of the business. (Also known as payments)

Question 4

Cash inflows e.g.

Answer 4

Cash inflows e.g.
-Money/ profit off products bought by customers
-Loans /funding
-Selling shares
-Investment
-SAles revenue

Question 5

Cash outflow e.g.

Answer 5

Cash outflow e,g,
-The cost of materials
-The cost of bills e.g. gas, electricity
-Cost of labour bills
-Advertisement
-Productions
-TAX

Question 6

Factors impacting Cash flow forecast:

Answer 6

Factors impacting Cash flow forecast:
Consumers trends- Increase or decrease in sales due to changing consumer trends
Economic variables- Growth or declines in the economy can impact sales and costs
Competitors actions- New products, innovations, reputation gain, etc

Question 7

How to fix cash flow problems:

Answer 7

How to fix cash flow problems:
1. Short term loan- as the financing needs are flexible and probably short term. If the capacity to borrow is only needed for a few months, this would be the cheapest form of finance by far.
2. Reduce an expense- such as staff wages (lay someone off, close a couple of days a week) or switch to a cheaper supplier
3. Delay paying bills- he could delay bill paying to buy some time to make more cash.

Question 8

What are the limitations of Cash flow forecasting:

Answer 8

What are the limitations of Cash flow forecasting:
-Bias- business may overinflate the inflows to look better
-Predictions- A CFF cannot take into account weather problems, a supplier closing, any other event that cannot be foreseen
-Updates- A forecast is a document that needs regular updating or the data becomes inaccurate and stale, business is dynamic, this is a static document.
-Mistakes- A CFF is a tricky document for an inexperienced entrepreneur to produce, so may be inaccurate
-Time- The longer time the cash flow is based over the more likely it is to be inaccurate