Planning

• closing balance?


  calculated by adding the net cash flow to the opening balance
• opening balance?


  previous month's closing balance carried forward
• net cash flow?


  calculated by subtracting total out-flows from total inflows
• producing business plan allows lenders and other investors to analyse the plan and make informed decision about providing a loan
• owner is forced to think about every aspect of the business before they start - reduced risk of failure
• producing business plan shows potential leaders/investors that business has done their research
• business plan?


  document produced by owner at start up - provides forecasts of items (sales, cost, cash-flow)
• main main of producing a business plan is to reduce the risk associated with starting a new business
• advantages of cash flow:

  • supports an application for a loan and are integral part of the business plan
  • can help identify where the business may experience cash shortfalls or cash surpluses - plans can be made to manage these periods
  • aid planning + avoids costly mistakes
• disadvantages of cash flow:

  • based on estimates i
  • inflows/outflows may differ significantly from estimates
  • requires appropriate skills, insight, research and time to prepare + update
  • external factors affecting inflow/outflow may not be reflected in cash flow forecast
• cash flow tells a business whether it has enough cash to pay its bills (wages and suppliers)
• cash flow is dynamic and unpredictable and are the main reason business fails
• why produce a cash flow forecast?


  • advanced warning of cash shortages
  • to make sure business can afford to pay suppliers/employees
  • spot problems
  • financial control
  • provides reassurances to investors and lenders - business is managed properly
• a good cash flow forecast:

  • is updated regularly
  • makes sensible assumptions
  • allows for unexpected changes
• problems with cash flow forecasts:

  • sales prove lower than expected
  • customers do not pay up on time
  • costs prove higher than expected
  • imprudent cost assumptions
• raising finance?


  borrow money to be repaid later or sell share in company