Edexcel AS Business

2.1.4 Planning
 Theme 2 Retrieval Challenge Matrix
1 point 2 points 3 points
What is ‘trade credit’? Describe the role of a Explain why the sale of
business angel assets might indicate that
a business is in financial
trouble
What is ‘crowdfunding’? What is the link between Explain the term ‘limited
retained profit and liability’ using examples
opportunity cost?
Give another name for Compare a loan with an Give 2 finance methods
personal savings overdraft appropriate for a sole
trader
Calculators will be needed for this topic
You will need worksheet 2.1.4 for this lesson
From Edexcel
a) Relevance of a business plan in obtaining finance

b) Interpretation of a simple cash-flow forecast and calculations based

on changes in the cash-flow variables

c) Use and limitations of a cash-flow forecast

Starter
Where do you want to be in 3 years time?
In 13 years?
In 30 years?

How far does your plan go?

Should businesses have a plan?
What do I need to know for this unit?
• Top revision tips for this subject:

• You do NOT need to know the format of a business plan

• You do NOT need to produce a business plan in an exam
• You do NOT need to produce an entire cash flow forecast in an exam
• You MAY need to know some uses and limitations of business plans
and cash flow forecasts
• You MAY have to fill in some gaps on a cash flow forecast (see sample
questions)
Relevance of a business plan in
obtaining finance
What is a business plan?
• 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
Why does a business write a business plan?
• 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 (smart) and objectives
that can be followed
Why does a business write a business plan -
continued
• Every business needs to write a
business plan, this will help to
identify early on any problem
areas that the business might
face
• 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
What’s included on a business plan?
• 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
• A business plan will NOT improve cash
flow that will be down to how well the
business trades
 What else goes into a business plan?
A. Name of the business (“Cutting Crew” or “curl up and
dye” for hairdressers)
B. Product or service and the market it is aimed at
C. 4 Ps of marketing
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
Purpose of a business plan introduction
There are lots of uses of business plans, these are the four that your
exam board would like you to be able to discuss. Get ready to make
some notes on these from the following slides:

1. To help set up a new business

2. To help the business raise finance
3. To help the business to set objectives
4. To outline how functions of the business will be organised
#1 To help set up a new business
• A business plan will help an
entrepreneur to decide what
resources they need to start their
business:
A. Human resources; For example the
staff needed for a clothes shop
B. Equipment; For example scissors and a
sewing machine
C. Raw Materials; for example cloth or
lace
D. Technology: for example the till or
business computer
E. Vehicles; for example the company van
#2 To help the business raise finance
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 should include a
cash flow forecast and sales
forecasts
#2 To help the business raise finance
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
#2 To help the business raise finance by
negotiating
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
Watch the video – did the investor
negotiate a higher equity
percentage?
#3 To help the business to set objectives
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
#3 To help the business to set objectives
• A business plan should set
targets (SMART) and objectives
that can be followed for the
business
• 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
#4 To outline how functions of the business
will be organised
• The business plan may show
how many staff and location of
the following departments;
A. Production
B. Marketing
C. Human Resources
D. Accounting and Finance
• Why might this not be relevant
to a small sole trader business?
Interpretation of a simple cash-flow forecast and
calculations based on changes in the cash-flow
variables
What is a cash flow forecast?
• A cash flow forecast is the day-to-day Example cash flow forecast

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
Question: In which two months does this
business have a cash shortfall?
Answer
• If you look at the cash flow
forecast you will see the balance
carried forward at the foot of
the forecast
• In June and July the business has
negative cash flow
• Notice that losses or negative
numbers are shown in brackets,
without the minus sign
Cash inflow (income)
• 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)
Cash outflow (expenditure)
• 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.
• What does a window cleaner
have to do with cash outflow
for a small retail business?
This is a cash flow forecast showing business
income: highlight this on your diagram

Income is
cash into the
business
This is a cash flow forecast showing business
expenditure - highlight this on your diagram

Expenditure is
cash out of the
business
Cash flow showing opening and closing balances: highlight these
areas on your diagram

Opening balance
(brought forward from
last month)

Closing balance
(carried forward to
next month)
Calculate A and B
Answer

10,000

10,000
Opening and closing balances
• Notice on a cash flow that the Cash flow forecast for PeakyBs Ltd

balance closing at the end of  

 
Jan
£
Feb
£
Mar
£
April
£

one month is the opening at

Balance brought forward 25,000 60,000 15,000 (10,000)
the start of the following INCOME

month Sale of goods 100,000 80,000 60,000 70,000

Rental income 10,000 10,000 10,000 10,000
• This is because on the last day TOTAL INCOME 110,000 90,000 70,000 80,000

of the month magic pixies do EXPENDITURE

materials 50,000 80,000 60,000 40,000
not steal the money from out energy costs 5,000 20,000 5,000 5,000

of the cash tin, so on the first wages

transport
10,000
10,000
20,000
15,000
20,000
10,000
10,000
5,000
day of the next month it needs TOTAL EXPENDITURE 75,000 135,000 95,000 60,000
to start with that amount…
Balance carried forward 60,000 15,000 (10,000) 10,000
Example question – Bob’s wooden toys
• This is Bob
• Bob makes wooden toys in his
workshop and then sells them at
craft fayres and over the Internet
• He wants to expand his business
so has decided to write a
business plan and a cash flow
forecast so that he can approach
his bank to ask for a loan
 Cash Flow Forecast – Bob’s Wooden Toy Shop
  October November December January February March
£ £ £ £ £ £

Total Receipts 14,000 14,000 50,000 1,000 1,000 1,000

(cash inflow)

Total Payments 20,000 20,000 20,000 20,000 20,000 20,000

(Cash outflow)

Balance at start 1,000          

of month

Balance at end of            
month
 Cash Flow Forecast – Bob’s Wooden Toy Shop
  October November December January February March
£ £ £ £ £ £

Total Receipts 14,000 14,000 50,000 1,000 1,000 1,000

(cash inflow)

Total Payments 20,000 20,000 20,000 20,000 20,000 20,000

(Cash outflow)

Balance at start 1,000  (5,000)  (11,000)  19,000 0  (19,000)

of month

Notice that shortfalls are shown in brackets without the minus sign

Balance at end  (5,000)  (11,000)  19,000  0  (19,000)  (38,000)

of month
Interpretation of Bob’s cash flow forecast
• Bob had a very slow month for
sales in January which is to be
expected given what he
produces, very few parents buy
toys in January having just spent
in December for Christmas.
• His work appears seasonal, and
his cash outflow is really high, he
is £38,000 in trouble by March.
Why is not a problem for Bob?
More feedback for Bob
• Bob needs to get his outflows down and
organise a loan for the slow sales months.

• He is unlikely to get and overdraft of

£38,000 from a bank, the amount is too
high. They may suggest a loan that he
pays back when he has a good month and
then takes out again or another flexible
finance arrangement.
• This does not show us his retained profit
so he may have savings that will cover it.
• How would the cash-flow forecast help
Bob with his business finances?
Use and limitations of a cash-flow
forecast
Uses of cash flow forecasts
• A business will prepare a cash
flow forecast to help control and
monitor cash in and out of a
business;
• At years end the business can
make comparisons between the
predicted inflows and outflows and
what actually happened
• Shows the business owner where
likely cash surplus and shortages
are so they can arrange suitable
finance e.g. an overdraft with bank
Limitations of cash flow forecasts
• A cash flow forecast is only a 12
month 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
and actual sales (income) or
expenses (expenditure) might be
higher
• The owner may have overstated
expenditure or understated income
Limitations of cash flow forecasts continued
• The cash flow forecast is not about
profit it is only about the cash in
the business to meet the short-
term debts
• To get a full picture the business
would need to show a statement
of comprehensive income and a
statement of financial position
• Why should investors be cautions
when reading cash-flow
forecasts?
Plenary Quiz
• Name two uses of cash-flow forecasting
•1
•2
• Name two limitations of cash-flow forecasting
•1
•2
• Name the two main parts of a cash-flow forecast
•1
•2
 Sample AS questions
AS exam questions on Paper 1
Marketing and People have the
following tariffs:
2 marks
4 marks
8 marks
10 marks
20 marks
Case Study for sample question 1
Sample question 1

Knowledge 2 Application 2 Analysis 3 Evaluation 3

 Peer / self marking grid for 10 mark question
Mark
1-2 marks Limited knowledge and some recall of business theory, answer may not be in context
What went well: You used business terms correctly
Even better if: You had discussed the business context given in the case study
3-4 marks Comments are in context, and chains of reason are present but very basic. Unbalanced
argument, only discusses one side.
What went well: You were able to give chains of reason in context in your answer
Even better if: You had given both sides of the argument
5-6 marks Chains of reason are complete and argument shows both sides. Answer is in context, an
attempt at a assessment using numerical data given in the case study.
What went well: Your analysis was shown in your chains of reason
Even better if: You had reached a supported judgement
7-10 marks Accurate understanding and knowledge. Logical chains of reason, balanced argument, in
context leading to a supported judgement
What went well: You had logical chains of reason showing cause and effect which led to a
supported judgement
Even better if: You had used more numerical data from the case study to support your
arguments
Glossary
• Cash flow forecast; a form of forward looking budget which enables a
business to look at its potential revenue flow and its expenses. An
estimate of the money a business will spend and receive within a year.
Would typically appear on a business plan.

• Business plan; A document that describes a businesses aims and

objectives and how they can be achieved, and how the business
intends to develop over time.
Thank You