Planning (Edexcel A Level Business)

Revision Note

Using a Business Plan to Obtain Finance

  • A business plan is a document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow

  • The main aim of producing a business plan is to reduce the risk associated with starting a new business

  • Producing a business plan forces the owner to think about every aspect of the business before they start which should reduce the risk of failure

    • It shows potential lenders or investors that the business has done their research 

  • Producing a business plan allows lenders (e.g. banks) and other investors to analyse the plan and make an informed decision about providing a loan

    • Business Angels will analyse whether there is an opportunity to increase the value of their investment and make a worthwhile profit

  • Having carried out research to support the plan, the business will be well-informed about the potential problems and chance of success and can select the most appropriate source of finance based on this information 

  • Most high street banks can provide a detailed template for business owners to complete when applying for finance

Interpreting Cash-flow Forecasts

  • A cash flow forecast is a prediction of the anticipated cash inflows and  cash outflows, typically for a six to twelve month period

  • A detailed business plan should include a cash flow forecast that allows the business owners to identify its financial needs

Key terminology and an example

  • The net cash flow is calculated by subtracting total outflows from total inflows

  • The opening balance is the previous month’s closing balance carried forward

  • The closing balance is calculated by adding the net cash flow to the opening balance

An Example of a Start-up Six-month Cash Flow Forecast (£s)

 

Jan

Feb

Mar

Apr

May

Jun

Inflows

Cash received from sales

2,600

2,800

3,100

4,600

4,800

5,200

Capital introduced

6,000

0

0

0

0

0

Total inflows

8,600

2,800

3,100

4,600

4,800

5,200

Outflows

Inventory

1,500

850

950

1,300

1,350

1,400

Wages

2,200

2,200

2,200

2,200

2,200

2,200

Utilities

840

840

840

882

882

882

Loan repayments

0

284

284

284

284

284

Miscellaneous

230

240

250

410

260

260

Total outflows

4,770

4,414

4,524

5,076

4,976

5,026

Net cash flow

3,830

(1,614)

(1,424)

(476)

(176)

174

Opening balance

500

4,330

2,716

1,292

816

640

Closing balance

4,330

2,716

1,292

816

640

814

Analysis of the cash flow forecast example

Executive Summary

  • Overall, this cash flow forecast supports an application for the business to borrow £6,000 in January to cover the initial low inflows, significant outflows and negative net cash flow

  • As sales increase from June, inflows are greater than outflows, and the business has positive cash flow

  • Should a loan be approved, the business will require any short-term sources of finance, such as overdraft facilities

January

  • The cash flow forecast assumes that the bank approves a £6,000 loan in January (capital introduced)

  • The opening balance of £500 has been introduced by the owner

  • The business is expected to achieve sales of £2,600

  • Total inflows are therefore expected to be £8,600 (£2,600 + £6,000)

  • Total outflows are expected to be £4,770

  • The Net Cash Flow is expected to be £3,830 (£8,600 - £4,770)

  • January’s closing balance is expected to be £4,330 (£3,830 + £500)

February

  • The closing balance from January becomes the opening balance for February

  • Sales of £2,800 as expected to be the business total inflows 

  • Total outflows are expected to be £4,414 

  • The Net Cash Flow is expected to be -£1,614 (£2,800 - £4,414) 

  • The closing balance is expected to be £2,716 (-£1,614 + £4,430) 

March

  • The closing balance from February becomes the opening balance for March

  • The business expects to achieve sales of £3,100 as its total inflows 

  • Total outflows are expected to be £4,524

  • The Net Cash Flow is expected to be -£1,424 (£3,100 - £4,524) 

  • The closing balance is expected to be £1,292 (-£1,424 + £2,716) 

 April

  • The closing balance from March becomes the opening balance for April

  • Sales of £4,600 are expected as the businesses total inflows 

  • Total outflows are expected to be £5,076

  • The Net Cash Flow is expected to be -£476 (£4,600 - £5,076) 

  • The closing balance is expected to be £816 (-£476 + £1,292) 

May

  • The closing balance from April becomes the opening balance for May

  • The business expects to achieve sales of £4,800 as its total inflows 

  • Total outflows are expected to be £4,976

  • The Net Cash Flow is expected to be -£176 (£4,800- £4,976) 

  • The closing balance is expected to be £640 (-£176 + £816) 

June

  • The closing balance from May becomes the opening balance for June

  • Sales of £5,200 are the business total inflows 

  • Total outflows are expected to be £5,026

  • The Net Cash Flow is expected to be £174 (£5,200-£5,026) 

  • The closing balance is expected to be £814 (£174 + £640) 

Worked Example

Here is a simple three-month cash flow forecast for a small seaside café

 

March

April 

May

Inflows

Sales

46,000

54,000

61,000

Outflows

Inventory

13,000

13,000

13,000

Wages

28,000

28,000

28,000

Miscellaneous

3,500

4,000

4,000

Total Outflows

44,500

45,000

45,000

Net cash flow

1,500

9,000

16,000

Opening balance

4,000

5,500

14,500

Closing balance

5,500

14,500

30,500

The café owner thinks that good weather will increase the volume of customers and decides to appoint another full-time assistant in March. As a result, wages increase to an expected £31,000 per month

Calculate the closing balances in the cash flow forecast resulting from the changes above (4)

 

March

April

May

Inflows

Sales

46,000

54,000

61,000

Outflows

Inventory

13,000

13,000

13,000

Wages

31,000

31,000

31,000

Miscellaneous

3,500

4,000

4,000

Total Outflows

47,500

48.000

48,000

Net cash flow

(1,500)

6,000

13,000

Opening balance

4,000

2,500

8,500

Closing balance

2,500

8,500

21,500

Step 1: Insert the value of the new wages into the relevant space for each month

Step 2: Calculate the new total outflows for each month and insert them into the relevant space for each month

  • March: £13,000 + £31,000 + £3,500 = 47,500

  • April: £13,000 + £31,000 + £4,000 = 48,000      (1 mark)

  • May: £13,000 + £31,000 + £4,000 = 48,000 

Step 3: Calculate the new net cash flow for each month and insert it into the relevant space for each month

  • March: £46,000 - £47,500 = -£1,500

  • April: £54,000 - £48,000 = £6,000                        (1 mark)

  • May: £61,000 - £48,000 = £13,000

Step 4: Calculate and insert the new closing balance for March and carry it forward as the opening balance for April

  • £4,000 + - £1,500 = £2,500                                  (1 mark)

Step 5: Calculate and insert the new closing balance for April and carry it forward as the opening balance for May

  • £2,500 + £6,000 = £8,500                                    (1 mark) 

Step 6: Calculate and insert the new closing balance for May

  • £8,500 + £13,000 = £21,500                                 (4 marks for the correct answer)

Note that this one change in the anticipated cost of wages impacts four other variables 1.Total outflows 2. Net cash flow 3. Opening balance (except March) 4. Closing balance

Examiner Tip

When calculating opening and closing balances, work through each month in turn. 

Always double-check your calculations in cash flow forecasts, as one mistake will have a knock-on effect elsewhere and, in some cases, lead you to make inaccurate judgements.

Evaluating Cash-flow Forecasts

The Uses & Limitations of Cash Flow Forecasts

Advantages

Disadvantages

  • Cash flow forecasts can support an application for a loan and are an integral part of the business plan

  • They can help identify where the business may experience cash shortfalls or cash surpluses so that plans can be made to manage these periods (e.g. arranging an overdraft)

  • Cash flow forecasts aid planning and help a business avoid costly mistakes

  • Forecasts are usually based on estimates and in reality, inflows and outflows may differ significantly from the estimates

  • Cash flow forecasts require appropriate skills, insight, research and time to prepare and update adequately

  • External factors that can impact inflows and outflows may not be reflected in the cash flow forecast

Examiner Tip

Look for clues in the case study about the reliability of the forecast and draw some judgements on the reliability of the forecast presented.

New entrepreneurs find it especially difficult to create accurate forecasts as they have little experience to draw on. They do often make use of free advice and guidance (e.g. from banks) or conduct significant research to support their forecasts. In these cases, the cash flow forecast is likely to be an excellent tool for planning. Where the cash flow forecast is constructed without such care, it can hinder business progress and undermine the business plan as a whole.

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Lisa Eades

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