2.1.4 Planning

Business plan

🔗 A document explaining what a business intends to do

📌 Can include...

• Aims and Objectives
• Market research
• Production methods.
• Financial forecasts.
• Contingency plan.

Benefits And Drawbacks

• Helps business to understand their finances, 📝 e.g., create a cash flow forecast, allow them to manage their liquidity
• Increase chances of obtaining external finance
• Time-consuming to create, wasting time could mean the business misses out on opportunities or loses it's gap in the market
• Doesn't consider external shocks, 📝 e.g., sticking to plan during a demand spike could be detrimental, loss of customer satisfaction, loss of market share. Thus, needs to be flexible/adjustable
• If the entrepreneur does not have experience making a plan, danger that they may over-predict revenues or under-predict costs, resulting in liquidity issues. This could be a problem down the line, may need additional sources of finance they did not account for

Cash Flow Forecasts

🔗 Statement of expected cash inflows and outflows over a given time period.

• Helps a business to predict when extra finance may be needed (Inflows can also be called receipts and outflows can also be called payments/expenditure)

Inflows = Revenue coming into the business Outflows = Expenditure leaving the business Net cash flow = Inflows - Outflows Closing balance = Net cash flow + Opening balance

Interpreting A Cash Flow Forecast

• Positive cash flow indicates that a business can cover its day-to-day expenses, negative cash flow indicates that it can't. (Lack of working capital)
• If the closing balance is negative, the business should seek extra finance (overdraft or loan)

$$High inflows = Opportunity cost, could use cash to expand business$$

High Outflows =

• Liquidity issue, negotiate longer payment times with suppliers (may damage the relationship with the supplier) - How important this is depends on whether you can find another.
• Hold less stock, free up space, lower storage costs (may have less sales, less revenue).

Low Inflows =

• Persuade debtors to pay early.
• Increase selling price (may lower sales).

Benefits And Drawbacks

• Predicting an unexpected cash-flow problem will allow the business to plan ahead and reduce expenditure/increase revenue, reduces risk, increases resilience
• Can change figures to examine different scenarios (e.g., the impact of a rise in costs) plans can then be made to deal with the problem
• Based on estimates, doesn't consider unexpected payments or external influences e.g., demand spikes or an economic downturn, decreases accuracy Overall, highly beneficial in the short term, however, becomes less accurate when looking at long-term cash flow

Reasons for poor cash flow...

• Poor sales
• Overtrading (too much stock, not enough cash)

Why poor cash flow is an issue...

• Cannot pay workers, lack of motivation, lower productivity
• Indicates need for sources of finance (equity? Debt?)