Planning (Edexcel A Level Business): Revision Note

Using a business plan to obtain finance

• A business plan sets out key aspects of a business and how the owners intend it to develop

• The main aim of producing a business plan is to reduce the risk associated with starting a new business and help the owners raise finance

  • 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 

  • Having carried out research to support the plan, the business will be well-informed about the potential problems and chance of success

  • They can use it to select the most appropriate source of finance based on this information 

• A well-written business plan can help a business obtain finance

  • Lenders (e.g. banks) and other investors will be able to explore the plan and make an informed decision about whether the business is credible and worth the financial risk

  • Investors (e.g. venture capitalists) will use the business plan to explore whether there is an opportunity to increase the value of their investment and make a worthwhile profit

Key elements of a business plan

• A business plan should be a regularly-updated working document

  • As the business grows plans are likely to change as it faces new threats and opportunities

Executive summary

• This section provides an overview of the business idea, its unique selling proposition, target market, and financial projections

  • It should be concise yet compelling enough to grab the reader's attention

Company description

• A description of the business mission, vision and values

• Information about the legal structure, location and any unique advantages or intellectual property the business may have

Market analysis

• A thorough analysis of the target market, including its size, growth potential and key trends

• Identification of target customers and their needs

• A competitor analysis to understand their strengths and weaknesses

Products or services

• A detailed explanation of the products/services the business will offer, highlighting their features, benefits and any competitive advantages they may have

Marketing and sales strategy

• A description of the intended marketing and sales approach, including marketing channels, pricing strategy and promotional tactics

• A description of how customers will be attracted and their loyalty captured

Organisation and management

• An overview of the organisational structure of the business and the key members of the team, including their qualifications, experience and responsibilities

Operations and implementation

• A description of how the business will operate on a day-to-day basis, including the production process, stock management and any key partnerships or suppliers

Financial projections

• A detailed financial forecast for the business, including cash flow forecasts

• An outline of funding requirements and any existing or potential sources of finance

Risk analysis

• A consideration of the potential risks and challenges the business may face and the intended strategies for mitigating them

Advantages and disadvantages of business plans

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 the business's financial needs

Key terminology

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

Example six-month cash flow forecast (£)

Analysis of the cash flow forecast example

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 not 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 are expected to be the business's 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 + £4,330) 

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 to be the business's 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 expected to be the business's 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) 

Evaluating cash-flow forecasts

Uses of cash-flow forecasts

• 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

Limitations of cash-flow forecasts

• 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