In groups, go to page 114 of your Activities and Accounts Book to complete a business plan for a new or existing product or service of your choice.
Along with the business plan, financial providers need evidence of financial planning when deciding whether or not a loan should be given to a business. The business provides this information in a cash flow forecast.
CASH FLOW FORECAST All of the money that comes in and out of a business is called cash flow.
In chapter 4, we looked at how planned income and expenditure for an individual or household is recorded in a budget. A business must also plan what money will come in and go out, so that it can see how much it will be left with each month.
A cash flow forecast is a plan showing all the income the business expects to receive (receipts) and all the costs it expects to pay out (payments) over a future period.
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A cash flow forecast predicts a business’s receipts and payments over a period of time.
Receipts may include:
• Money from cash sales • Money owed to the business by debtors
• Grant money
• Tax refunds (e.g. a business can claim back VAT).
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We will learn more about liquidity in chapter 28
GO i 238 Payments may include:
• Costs of purchases • Money the business owes to creditors (e.g. suppliers)
• Staff wages • Expenses (e.g. rates).
Debtors are the people who owe a business money. Creditors are the people the business owes money to.
A cash flow forecast allows a business to assess if it will have enough money to function on a daily basis. This is called working capital.
The money available to a business for day-to-day use is called working capital.
A business needs to have more money coming in from receipts than going out as payments. If a business has not got enough money to meet its short-term debts then it is said to have a liquidity problem.
Liquidity is the ability of a business to meet its short-term debts.
