2.1.4 Planning

Question 1

what is a business plan and why is it used

Answer 1

• a document that outlines what a business wants to achieve and how they plan to achieve it
• may contain financial forecasts (cash flow forecasts, sales forecasts, break-even analysis etc.)
• used to monitor business performance and keep on track
• can be used to show and attract investors

Question 2

how can a business plan be used to obtain finance

Answer 2

• shows business owners have done their research, convincing investors that there is a low risk of the business failing
• helps convey passion and drive
• can show projected profit estimations, allowing investors to see the potential return on investment

Question 3

how can a business plan benefit a business

Answer 3

+ gives the business access to a wider range of sources of finance as more people will be willing to offer finance
+ may be able to get cheaper finance if the business can provide evidence that they are reliable when repaying loans on time through a cash flow forecast

Question 4

how would a new business use a cash flow forecast

Answer 4

• they have no past data so need to consider capacity, similar firms and consumer trends
• can be used to obtain finance
• can be used to plan how many employees are needed etc.

Question 5

how would an established firm use a cash flow forecast

Answer 5

• can use previous years’ data and market research to form the cash flow forecast
• allows them to plan their finances, seeing when they might be short of cash to arrange a loan or an overdraft
• also used to make sure the firm doesn’t have too much cash as that is inefficient and could be invested into the business

Question 6

why are cashflow forecasts not always accurate or useful

Answer 6

• they require lots of experience and research to be accurate
• businesses in dynamic markets where things are always changing makes cash flow difficult to predict

Question 7

what are the potential effects of an inaccurate cash flow forecast

Answer 7

• the business could run out of cash and be unable to pay its debts (insolvent) and have to close down

Question 8

NOTE you need to be able to interpret a cashflow forecast