2-1-4-planning

Using a business plan to obtain finance

• A business plan is a document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow

• The main aim of producing a business plan is to reduce the risk associated with starting a new business

• 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

  • It shows potential lenders or investors that the business has done its research 

• Producing a business plan allows lenders (e.g. banks) and other investors to analyse the plan and make an informed decision about providing a loan

  • Business angels will analyse whether there is an opportunity to increase the value of their investment and make a worthwhile profit

• Having carried out research to support the plan, the business will be well-informed about the potential problems and the chance of success and can select the most appropriate source of finance based on this information 

• Most high street banks can provide a detailed template for business owners to complete when applying for finance

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 and an example

• 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 of a start-up’s 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 + £4,430) 

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)