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2.1.4 Planning

Business plan – A document containing a business’s strategy, aims and objectives and how it plans to achieve them


A) Relevance of a business plan in obtaining finance

By having a business plan it helps to reduce the risk to investors of the business failing. This is due to the fact that by having a business plan it helps to organise the business, for example cash flow forecasts within the business help to ensure that the business has enough current assets to maintain day to day trade and to pay off any current liabilities. This will help to ensure the success of the business and help investors to decide whether or not the business is viable and therefore there decision about whether or not to invest. This is likely to help businesses when obtaining finance such as loans as well as lowering the interest rate on the loans. This is due to the fact that the business plan helps to persuade the bank that they will be able to pay back their loan with interest. In addition to this, it may also allow the business to raise finance through sources such as venture capital while reducing the percentage of the business that they have to sacrifice.


B) Interpretation of a simple cash flow forecast and calculations based on changes in cash-flow variables

Cash flow forecast – Shows the predicted cash inflows and cash outflows of a business.

Cash inflows 14,000 11,000 15,000 3,000 4,000 12,000
Cash outflows 10,000 10,000 12,000 8,000 8,000 10,000
Net cash flow 4,000 1,000 3,000 -5,000 -4,000 9,000
Opening balance 1,000 5,000 6,000 9,000 3,000 -1,000
Closing balance 5,000 6,000 9,000 3,000 -1,000 1,000

The business is making a profit each month up until January. The cash flow forecast suggests that demand falls in the months of January and February. As a result of this, the business could fix this by reducing their cash outflows in these months. For example, they may reduce the staff that they have working in months January and February. This would help to reduce cash outflows thus improving their net cash flow. Furthermore, the business could be taken out in the months of January and February in order to try and improve their cash flow. In addition to this, they may also use trade credit in February in order to delay their payment of supplies thus reducing their cash outflows preventing a negative closing balance in February.

Cash inflows – This is the total cash going into the business e.g. from sales or returns on investments.

Cash outflows – This is the total cash going out of the business e.g. Supply costs and marketing costs.

Net cash flow – This is the total cash inflows – the total cash outflows

Opening balance – This is the cash that the business has at the start of the month. The closing balance of the previous month is the opening balance for the month after.

Closing balance – This is the cash that the business have at the end of the month and is the net cash flow + the opening balance.


C) Use and limitations of a cash-flow forecast


  • Identify shortages in cash – A cash flow forecast allows the business to identify months in which they may have a shortage of cash. Therefore, it gives the business a chance to fix this.
  • Comparison to financial objectives – Businesses are able to compare the cash flow forecast to the financial objectives that they set out in their business plan.
  • Helps to get a loan – Most investors will want to see a cash flow forecast before they invest in the business. This is due to the fact that it helps them to know whether or not the business will be able to pay back the loan with interest



  • Bias – The business may overestimate their predicted cash inflows and underestimate their cash outflows in order to make the business seem better/more viable on paper then it actually is. This may be in an attempt to persuade potential investors to invest in the business.
  • Prediction – The cash-flow forecast is only a prediction of the cash inflows and outflows of a business. Therefore, there is likely to be some margin of error in the predictions. Furthermore, it cannot take into account unforeseen events such as extreme weather affecting the supplies.
  • Time consuming – The cash-flow forecasts can take a lot of time to make, especially if the size of the business is relatively large. Furthermore, it will need to be updated on a regular basis which can be very time consuming.
  • Mistakes – A cash-flow forecast is a relatively difficult document to make. This is especially if the owner is inexperienced. As a result of this, the document is prone to mistakes which may result in a reduction in the accuracy of the cash-flow forecast.
  • Accuracy – As the time period in which the cash-flow forecast is predicting, the accuracy of it is likely to decrease. This is due to the fact that the uncertainty of what may happen to the business increases as time goes on.
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