AS Economics and BusinessBusiness plans

Unit 1

By Mrs Hilton for revisionstation

Lesson objectives

• To be able to discuss business plans

• To be able to answer a past paper question on business plans

Starter

• Where do you want to be in 3 years time – do you have a plan?

Business plan• Is a look into the

future of the business

• It is not a look back at how things have been for the business

• It would NOT include a bank statement as this is a look back at transactions

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• To identify early on any problem areas that the business

might face• 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

• Cash flow forecast – to show the expected income and expenditure of a business over the coming year

• Start-up cash flow management is critical – many businesses fail because of a lack of cash to pay suppliers and day-to-day bills

• Cash flow forecast will help to show a bank that the interest rates can be afforded on any finance that they borrow

• Cash flow shows 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

Cash flow forecast exampleShows months when finance will be

needed

Months (£'s) September October November December January February

From Cash Sales 12000 16000 20000 80000 6000 5000From Credit sales 5000 6000 10000 14000 50000 2000Total Inflow 17000 22000 30000 94000 56000 7000

Scafoold hire costs 3000 3000 3000 4000 3000 3000Purchase of parts 10000 25000 55000 5000 0 2000Rent 9000 0 0 9000 0 0Wages 8000 8000 8000 8000 8000 8000Other expenses 1000 1000 1000 1000 1000 1000Total Outflow 31000 37000 67000 27000 12000 14000Monthly balance Inflow minus outflow -14000 -15000 -37000 67000 44000 -7000

Cash inflow

Cash Outflow

What else goes into a business plan?

• Marketing• HR

Sample question 1

Answer question 1

• Answer option c – supports application for start up capital

• Business plans are drawn up by owners of a business to give a business direction and help secure finance (1 mark)

• - This is because they can indicate cash-flow which indicates liquidity (1 mark)

• - And therefore the ability of the borrower to pay back any start-up capital borrowed (1 mark)

• - D is incorrect because improved cash-flow is not guaranteed by a business plan (though it may be assisted)because improved cash-flow depends on actual receipts

Sample question 2

• In January 2009, in order to support people who prepared a start-up business plan, LloydsTSB gave their customers Sage business planning software.

• Which one of the following is not usually found in a start-up business plan?

• A A cash-flow forecast • B A projected profit and loss account • C A marketing plan • D A bank statement

Answer question 2

• Answer – option D Bank statement

• - definition/description of a business plan (1)

• - as it is usually prepared to raise finance it contains financial projections (1)

• - which is precisely what cash-flow forecast and projected P & L accounts are (1)

• - bank statements are merely a record of financial transactions (1mark), which a start up business will not have given that it has not started to operate as yet (1)

Sample question 3

• Clear Vision is a small window cleaning business operating in Derby. In order to seek finance for the business to start-up, Mark Wilkinson, the proprietor, had to prepare a business plan.

• Which of the following would Mark include in his business plan?

• A Bank loan application• B Cash-flow forecast• C Bank statement• D Trade-off

Answer question 3

• Answer B a cash – flow forecast

• Because this is a start-up business cash-flow management is crucial (1 mark application) to secure finance from a bank to show potential liquidity (1 mark knowledge) but bank statements are simply a record of transactions which do not indicate liquidity only a record on receipts and payments (1 mark analysis).

• Cash-flow forecasts are projections of receipts and payments for the window cleaner (1 mark application) which are required to convince a financier that the business will not suffer liquidity problems (1 mark knowledge) whereas a bank loans application will have already been made separate to the plan (1 mark analysis).

Sample question 4

• Mike Watson, the Community Manager at Morris Brown CLC, prepared the business plan.

• Briefly give two reasons to explain why Mike might have prepared a business plan. [6]

Answer question 4

Knowledge 2, Application 2, Analysis 2Knowledge: up to 2 marks are available for showing knowledge, e.g.by candidates defining a business plan as a document designed toprovide information about a business proposal relating to such activitiesas marketing and HR, also in order to gain finance, monitoreffectiveness, give direction, etc.Application: up to 2 marks are available for relating the above toLeisure Library, e.g. describing the marketing plans for the LL such asadvertising the service on A Sporting Chance’s website.Analysis: up to 2 marks are available for the consideration of causesfor Mike to develop the business plan, e.g. to show potential lenders orfinanciers, in this case MBCLC Community Club (accept local council)why the business might succeed, OR in this case for example to checkthat the aims of the LL (e.g. to provide a broad-based activityportfolio) are being met.