Planning Flashcards
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
To identify early on any problem areas that the business might face
To monitor their effectiveness - if they knew what they were aiming for at the end of the year they could see if they have achieved it
What is a business plan?
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 (angel, VC) to ask for finance to help the business grow and expand
What is 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
What goes into a business plan other than a cash flow forecast?
Name of the business
Product or service and the market it is aimed at
4 Ps of marketing: product, price, place, and promotion
Human resources; who will be working there, managers, owners etc.
Production costs and potential suppliers of materials
Premises and how it will be financed; rent, mortgage, bought outright, leased from council
Financial information; projections on revenue, costs and profits
List the different purposes 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
Explain helping set up a new business as a purpose of a business plan.
A business plan will help an entrepreneur to decide what resources they need to start their business:
Human resources; For example the staff needed for a clothes shop
Equipment
Raw Materials
Technology
Explain helping raise finance as a purpose of a business plan.
A business plan may help 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
A business plan should include a cash flow forecast and sales forecasts
A business plan may help to obtain finance from; from venture capitalists, banks, angel investors, or even family members
The lenders are going to want to see numbers that say the business will grow and that they can make a profit
The better the financial information, the more confident they will be in investing – this will reduce the risk for the investors
A business plan may help the business to negotiate a lower rate of interest on a bank loan
Alternatively the business plan may help the owner to negotiate a lower percentage of equity to the venture capitalists or angel investors.
Explain helping to set objectives as a purpose of a business plan.
A business plan can show how a business aims to achieve its goals
It should also show any potential investors what amount of sales and profit the business aims to achieve
A business plan should set targets (SMART) and objectives that can be followed for the business
The business owner can then monitor if they are meeting their objectives
The business plan may also set out how the company aims to grow and develop in the future
Explain outlining how functions of the business will be organised as a purpose of a business plan.
The business plan may show how many staff and location of the following departments; Production Marketing Purchasing Human Resources Accounting and Finance
This may not be relevant in a smaller business
What is cash flow and a cash-flow forecast?
Cash flow is day-to-day running of a business budget
Shows where the business will have a shortfall of cash (not enough to pay bills)
Allows the business to organise short-term cash borrowing to cover the shortfall
A cash flow forecast is NOT about profit
What is cash inflow?
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)
What is cash outflow?
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.
What are the uses/advantages 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 shortages 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
What are the 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 or understated both income and expenditure.
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 balance sheet and the profit and loss income statement
Can be very risky for an investor to make decisions about the business on just the cash flow forecast alone
