Theme 2 - Planning

Question 1

What is a business plan ?

Answer 1

• A business plan is 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 to ask for finance to help the business grow and expand

Question 2

Why does a business write a business plan ?

Answer 2

• 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

Question 3

What’s a cash flow forecast ?

Answer 3

How much cash inflows per month
How much cash outflows
What’s the net cash flow

It’s an expectation of how much money the company gains each month and where the money is coming from - money usually comes from sales or even loans etc . Also how much money outflows from the company and from where ( eg wages, rent etc )

Question 4

Why must every business write a business plan ?

Answer 4

Every business needs to write a business plan, this will help to identify early on any problem areas that the business might face

Question 5

How can a business plan help to monitor the businesses effectiveness?

Answer 5

A business plan will also help 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. They could see if their methods were effective

Question 6

What does a cash flow forecast do ?

Answer 6

• 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

Question 7

What will a business plan not do ?

Answer 7

A business plan will NOT improve cash flow that will be down to how well the business trades

Question 8

What’s on a business plan ?

Answer 8

A. Name of the business
B. Product or service and the market it is aimed at
C. 4 Ps of marketing; product, price, place and promotion
D. Human resources; who will be working there, managers, owners etc.
E. Production costs and potential suppliers of materials
F. Premises and how it will be financed; rent, mortgage, bought outright, leased from council
G. Financial information; projections on revenue, costs and profits

You also need a cash flow forecast

Question 9

What’s the purpose of a business plan ? ( 4 main reasons )

Answer 9

• To help set up a new business
• To help the business raise finance
• To help the business to set objectives
• To outline how the functions of the business will be organised

Question 10

How might a business plan help to set up a new business ?

Answer 10

• A business plan will help an entrepreneur to decide what resources they need to start a business
  E.g :
• Human resources; For example the staff needed for a clothes shop
• Equipment; For example scissors and a sewing machine
• Raw materials; for example cloth or lace
• Technology: for example the till or business computer
• Vehicles; for example the company van

Question 11

How might a business plan help a business raise finance ?

Answer 11

• 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 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

Question 12

How might a business plan help a business raise finance by negotiating ?

Answer 12

• 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

Question 13

How might a business plan help a business to set objectives ?

Answer 13

• A business plan can show how a business aims to achieve its goals
• For example it may show any planned activities of the business e.g. a launch night for a new restaurant
• it should also show any potential investors what amount of sales and profit the business aims to achieve
• 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

Question 14

What does SMART stand for ? (Objectives)

Answer 14

Specific
Measurable
Agreed
Realistic
Timed

Question 15

How might a business plan help to outline how functions of the business will be organised ?

Answer 15

The business plan may show how many staff and location of the following departments;
• Production
• Marketing
- Purchasing
• Human Resources
• Accounting and Finance

In a small business this may not be relevant as it may just be the business owner carrying out all the functions

Question 16

Name a SMART business objective

Answer 16

Reduce costs by 10k by the end of 2023

It’s specific because you have a number and you have a certain an goal
It is measurable because it has numbers so at the end of 2023 you can check if you reduced the 10k
Is it achievable - well yes because it’s nothing crazy but it also depends on how good a company is on doing things
Is it realistic - yes
Is it time bound - yes because it has a time when the objective must be reached

Question 17

What is a cash flow forecast ?

Answer 17

• A cash flow forecast is the day to day running of a business budget
• A cash flow forecast will show where the business will have a shortfall of cash ( not enough to pay their short-term bills )
• Allows the business to organise short-term cash borrowing to cover the shortfall e.g. an overdraft
• A cash flow forecast is not about profit

It shows your balance, total cash inflow / outflow

Question 18

What do brackets mean in cash flow forecast and in finance ?

Answer 18

Brackets indicate that its a negative number

Question 19

Whats another way of saying income and expenditure ?

Answer 19

Cash inflows and outflows

Question 20

Whats another way of saying balance ?

Answer 20

Net cash flow

Question 21

Whats cash inflow ?

Answer 21

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 )

Question 22

Whats cash outflow ?

Answer 22

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.

Imagine a shop paying the window cleaner cash from the till

Question 23

What happens if at the end of a month of a cash flow forecast, the balance is negative to positive ?

Answer 23

IF the balance is positive then he is in a surplus
IF the balance is negative then he is in a deficit

Question 24

What are the uses of cash flow forecasts ?

Answer 24

• A Business will prepare a cash flow forecast to help control and monitor cash in and out of a business

At the end of the year the business can make comparisons between the predicted inflows and outflows and what actually happened

Shows the business owner where likely cash surplus and shortfalls 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 finance

Question 25

What are the limitations of a cash flow forecast ?

Answer 25

A cash flow forecast is only a 12month 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 expenditure or understated income

Question 26

What are the limitations of cash flow forecast continued ?

Answer 26

The cash flow forecast its not about profits, it is only about the cash in the business to meet the short-term debts It could be very risky for an investor to make decisions about the business on just the cash flow forecast