43 e business plan and

cash flow projections

43.4
Forecasts and budgets
It is important to distinguish between a forecast and a budget:

(i) Budget - a planned result that a business aims to achieve. h t will happen as a
(ii) Forecast - a prediction (rather like the weather forecast!) of w a
1tl Specific objectives
After you have studied this chapter you should be able to: 43.5
result of a given set of circumstances.

• define a budget and understand its purpose Fixed, flexible and functional budgets
distinguish between a budget and a forecast (i) •
appreciate the difference between fixed, flexible and functional budgets Fixed budget -where the budget is based upon the assumption of a certain level of
understand why budget preparation is important in all businesses .. activity, for example, producing 5,000 units of a product. ..
name the main types of budgets used in business planning (u) Flexible budget -where it is difficult to estimate the future level of activity th en
understand ·cash inflows· (receipts) and ·cash outflows' (payments) a flexible budget is often prepared for a range of possible levels of output/sales,
• prepare a cash flow projection such as for businesses affected by weather conditions (for example ice cream sales)
prepare a production budget or businesses affected by the relationship between the economic climate and
• appreciate the contents of a business plan. ... consumption of luxury goods. .
111
( ) Functional budgets - a budget for a particular aspect of business operations. For
example, in a manufacturing company, these would include:
43.1 Definition of a budget • production budget for the number of units to produce
Abudget is a cost plan, expressed mainly in financial terms, which covers all the production budget for materials and labour
activities of a business enterprise. It is usually for a specific period of time, that is: sales budget for forecast sales.

monthly budget
yearly budget
three- or five-year budget
The budget is usually prepared and approved of prior to the budget year and shows the
43.6 Preparation of the budget
policy to be taken to achieve the business objectives.
43.2 Budgetary control
Budgetary control assigns responsibility for various sections of the overall budget to
individual managers. Periodically, the actual results are compared with the budgeted
figures to ensure that targets are being achieved.
43.3 Purposes of budgeting
Budgets have several different purposes, as shown below:
Planning- enables the owner(s) of a business to look ahead, set targets, anticipate
problems and provide objectives.
Communicate - ideas and plans to both management and employees.
Co-ordinate - the activities of different parts of the organisation so that all sections
43.7 Types of budgets
work towards the same goal.
Responsibility- for managers to manage their own budgets and obtain authorisation
for expenditure.
There are many other budgeting approaches that are in use today but these are outside
the scope of this book.
The preparation of a budget usually consists of five stages:
1 Initial forecast -to ascertain preliminary forecasts relative to the external
environment, economic climate, changes in the market and technology.
2 Development of policy - considering the above and making decisions on what
products or services to offer.
3 Operations planning- ascertaining operational requirements for quantities of raw
materials, the labour force and plant and equipment required.
4 Formalisation of budgets - ensuring there is a co-ordinated plan for smooth
operation and which reflects the aims and policies of the management.
S Approval- usually authorised by senior management/directors, after which they
become formal documents. Specific responsibility is then given to the individual
managers.
An organisation may be involved in the preparation of various types of budgets
depending upon their specific requirements, for example:
(i) cash budget (cash flow projection)
(ii) production budget
(iii) sales budget
(iv) marketing budget
(v) income and expenditure budget.

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PART 6 AC COUNTING FOR THE ENTREPRENEUR

(aS h fl OW P J
roiections ts to prepare is a cash flow projection (also st
43 .8 one ('.) art with the opening bank balance (in the example below this figure is SS,OOO)
. rtant documen h/b k . (. called
of the most ,mpa . . the expected cas an receipts inflows) and ('. '. )
Enter the total cash inflow (receipts) for the first month, January S2,000
1 <111 )
Add these two figures together, $7,000
a cash flow forecast) which detah, sb,v month basis, for the next three, six or twelv
on a mont - J- h b . ( . e
payments (outfl ows) . (ov) Enter the cash outflows (payments) for the first month , for January S2,GOO
• •
h cash is commg rnto t e usmess cash inflows)
months. It shows the t,mes ;t~: business (cash outflows). This will then show the (v) Deduct the cash outflow figure, S2,600, from the balance and receipts figure
and when cash 1s gorng out h d of each month throughout the period of S7,000 to ascertain the closing bank balance figure at the end of the mont h
estimated bank balance at th fie en proiection to decide what action to take ~hen th . (S7,000-$2,600 = $4,400) ·
rs use the cas ow , k ere rs (vi) The figure remaining is the bank balance at the end of the month ($4,400); th's
Th e manage . ble or as is more likely, when a ban overdraft may be n
either a surplus of cash a~a• 1athe,refore shows when money enters and leaves a bu eeded. figure is then carried forward to the beginning of the next month (February)
The cash flo':"' phroJd~on,nce betwe~n income and expenditure. s1ness Step 6: Repeat the above procedure for each of the remaining five mon th s.
whereas profit ,st e ,,.ere
Draw up a cash flow projection for the six-month period from 1 January to 30 June 2019
for Joseph Maxon from the following information:
43.9 Preparing a cash flow projection (i) Opening bank balance 1 January 2019 was $5,000
A cash flow forecast has three sections: (ii) Sales all cash and banked in the month of sale:
Cash inflows _ money received by the business from sales, investments and other Jan Feb Mar May June
Apr
sources $ $ $ $ $
$
Cash outflows_ money paid out by the business on wages, raw materials and other 2,000
2 2,600 2,800 3,200 3,500 3,800
items
3 Balances - the opening and closing balance on a monthly basis (iii) Raw materials paid for in the month of delivery:
Jan Feb June
Step-by-step guide to preparing a cash flow projection $ $
Mar Ap r May
$
$ $ $
using a worked example: 900 1,000 1,100 1,200 1,000 800
Step 1: Ascertain the opening bank balance and note this for inclusion on the cash fl
projection form at paint (5). ow (iv) Labour costs are: $1 ,000 per month
Step 2: Enter all the cash inflows in the appropriate month when the receipt is Variable expenses: $500 per month
expected, for example these may be one or more of the following : Fixed costs: $200 per month
Joseph is to buy a new machine in March for $4,000
Cash sales In June, a loan of $6,000 was obtained from the bank
Receipts from customers
Tax refunds The worked cash flow projection is now shown in Exhibit 43 .1:
Loans DETAILS JAN FEB MAR APR MAY JUNE
Injections of capital into the business's for example, new investor, new partner RECEIPTS $ $ $ $ $ $
Any other sources of income, for example, mterest Sales 2,000 2,600 2,800 3,200 3,500 3,800
Sale of assets Loan from bank - 6,000
Step 3: Enter all the cash outflows and list them in detail, including when they are 2,000 2,600 2,800 3,200 3,500 9,800
expected to be paid; these may include the following: PAYMENTS
Raw materials 900 1,000 1.100 1,200 1,000 800
Expenses
Paying suppliers for goods or services
Labour costs 1,000 1,000 1,000 1,000 1,000 1,000
Purchase of assets Variable expenses 500 500 500 500 500 500
Payment of taxes Fixed costs 200 200 200 200 200 200
Repayment of loans Machinery 4,000
--
Investing surplus cash 2,600 2,700 6,800 2,900 2,700 2,500
Balance 5,000 4,400 4,300 1,400
Step 4: Add up each monthly column of both the cash inflows and cash outflows. Add Receipts 2.000 2,600 2,800 3 ,200 3,500 9 ,800
Step 5: At the foot of the cash flow projection (refer to Exhibit 43 .1) comple te the 7,000 7,000 7,100 3,500 4,100 11 ,200
balancing summary.
Less Payments 2,600 2,700 6,800 2,900 2,700 2,500
4,400 4,300 300 600 1,400 8 ,700

;1' "
' ..
• Exhibit 43 .1 Cash flow projection
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PART 6 ACCOUNTINGFOR THE ENTREPRENEUR
From this cash flow proJection, it can be_seen that in March and A r"
;,oo" ,,,;og sJOO "" $600 """'""'' tl,erefore, Joseph d P " the b
ruOO> aod appli• wthe baOk fo, a1,ao. lM f> """"' ;, i"" "''" he .,, ba1
~'"" w $8,100 " tl< eod ofJ""' ' """""' ~•ea, fo 'e 43.11 The business plan
ca• fiow pro;erooos· e b'"' ... A b~siness plan is a docu
services you sell or su tent .
which states the details of your business, the products or
Enable advance planning plan to achieve th PP Y, who you are targeting as customers, your goals and how you
Anticipate cash surpluses or shortages osegoals.
Loans/overdrafts can be applied for in advance
43.12
Loans may be short- or long-term
Loans can be provided by banks, debentures or shareholders Reasons for preparing a business plan
Abusiness plan is prepared for a number of reasons:
to assess the viability of starting a business . . . titutions
43.10 Production budget 1
to obtain a loan from the bank, local credit union, other fmancia 1ms
Manufacturing organisations prepare production bud~ets to calculate th I to apply for grant funding if applicable . tors
of units that the factory can produce ma spec1f1c period to meet ex e number 1
to encourage others to join you in the business as part_ners, or inves
An example of a production budget is shown below: pected sales. • if already running a business to make plans for expansion
What will be the production per month if the following informal"ion is
. known~ • for decision-making processes.

Mar Apr
UNITS
Jan Feb May
June 43.13 The content of a business plan
80 120 220 340 200
Opening inventory

-
? ? 0 120 The sections below are those typically included in a business plan:
?
Production required?
?
- ?
-
? 1 Executive summary
?

-
? 1 Overview of the business
300 220 380
Less Sales 200
220
-
340
-200 140
100 • Marketing plan
Closing inventory 120 1 Marketing analysis
- =
120
-
! Exhibit 432 Production budget
-
= 40
•
•
Operational plan
Management plan
• Financial plan
Answer:
Workings, by arithmetical means: Executive summary- summarises the contents of a business plan which form part
of a longer report or document. It is produced for business purposes to enable the
Jan: 120 +200 =320 - 80 = 240 units of production required reader to have an overview of the report/document prior to reading the whole
Feb: 220 + 300 = 520 -120 = 400 units of production required document. The summary appears first in the business plan yet it is prepared last after
the body of the report has been written.
Mar: 340 +220 =560 - 220 = 340 units of production required Overview of the business - this section gives details of the business and would include
Apr: 200 +380 =580- 340 = 240 units of production required the following:

May: 120 +140 =260- 200 = 60 units of production required Aims/objectives -of the business
Description - of the products/services
Jun: 40 +100 =140-120 = 20 units of production required Features - special features which are attractive to the customer
The table can now be completed: Market - potential market for the products/services
Location - of the business
UNITS Jan Feb Mar Apr Marketing plan - it is essential to assess the market in order to sell the goods or
Opening inventory May June
80 120 220 services provided by the business. Consideration should be given to:
340 200 120
Production required 240 400 340
320 520
-560 240
-580 60
-260 20 Target market -for potential customers
Market need- is there a niche market for the products/services?
Less Sales

,
140
200 Market research - carrying out market research to identify competitors, market
-340
300 220 380
Closing inventory 120 220 -200 140
-120 -
100
changes etc
= 40
Competitive strategy - to attract customers to the business's products/services and
away from those of the competitors, various strategies can be used, for example
cheaper prices, better products and services.

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PART 6 ACCOUNTING FOR THE ENTREPRENEUR
Exo.,,,iriotio11 Tip:
L;rtfiv, main rectionr of
• b1,r•••H plan. Wh;ch
fecti"" do ycv tkil"lk lf tht
mort imporfo~t? Give o
reaton for yovr ari)Witr.
. ns _ effective methods to inform cust
' L- - - - - -- - - - - -.2
."""'J' ''&"-:'\~ ~,i
~i______::___ _ _ _ __
. an d prorno ·ces
Marketing t10 for example, using
. sa 1es and market·orne rs ab0 ,, 0
, ducts1serv1 , . 1ng r t tL
businesss pro _. nd radio), social media such as, Facebook epresen ••e
advertising (telev1s1on a ' e-mail fl tali,
business cards and_ newspapers. , Yers, es,
Marketing analysis -
Chapter 43 Exercises
e target rnarket the business aims to trad 1
and research th . e w·th· 43.1 What is the purpose of an Executive Summary in a
D efi,ne h e is a continuing process of collecting informaf 1n _ s
Ensure that t er . ion of de ee ab business plan? W'rry is it done after the business plan You are asked to copy the cash flow forecast he has
businesses products/services. . I I . . °"e.
rnand fOrt,. has been written? prepared so far, add in columns and complete the
. _ the process of operat1ona p annmg 1s ascerta·1 . -~ cash flow forecast for March and April using the
P1an . to be achievning 43.2 Which of the following is not a cash inflow: following information:
operat1ona
. d1obi·ectives .
of the business an d how t h'1s 1s d .in adva- salaries, capital, bank loan and sales revenue> Give a
the . are e 1n a spec·t· • Sales are expected to increase to $19,000 in
_ aims an,... nagement would nee d to cons,'der t he fo11owing ••Ce
1 reason for your answer.
t,rnesca1e. ,-,a . as When 1 1c March and April.
to operate the business. , . Pannin 43 .3 Paul makes a healthy income by selling ready-to-- • The cost of materials increases to S5,000 in
- the office factory and/or warehouses location should b . gho,,, March but returns to $4,000 in April.
Prern1ses - , . e 1n a eat fresh fruits in pre-packed bags to passers-by on a
• He purchases a new piece of equipment in
accessible situation with room for ~xpans1on.. safe and busy main street in a major Caribbean city. By 10.00
Machinery and equipment-details of machinery and equipment . am on mornings, however, his fruits start showing March costing $6,000 .
Materials_ types of materials required and their sources. required and its signs of deterioration and he makes fewer sales as All other items remain the same as in February.
Labour - the number of employees required, both full- and part-time nd casi. the day goes by. Give three methods he can use to 43 .5x lal Draw up a cash flow projection for laura Kerr
skill levels. ' a their increase his sales and reduce inventory losses.
showing the balance at the end of each month, from
Working hours-operational business hours to be decided and knownt 0 43 .4X Alex White, a sole trader, has decided he would the following information for the six months ended
and customers. . . employee like to prepare a 'cash flow forecast' for the period 31 December.
Manufacturing process - details of the manufacturing processes h s January to April. He has started the cash flow lb\ State the closing bani<. balance, if you would
comprehensive to ensure high standards of the goods to be produc:d ould be forecast but due to work pressure has been unable need to arrange an overdraft and, if so, the
Management plan - a management team needs to be established :th to complete the projection. amount.
responsibilities and areas of work defined. Each member of the tea w, manager's Incomplete cash flow forecast lei What other alternatives would be available to
highly motivated, competent and be experienced. m needs to be Cash inflows (Receipts)
Jan Feb laura to provide additional fund s?
$ $
Financial plan - the financial plan is an overview of.the business' f _ New capital Iii Sales Purchases
requirements and consists of three main documents, namely: s mancial accounting 10.000 $
Sales $
4,000 18,000
Total cash inflow July 18,000 15,000
cash flow statements 14.000 18,000
trading and profit and loss account (income statement) Cash outflows (Payments) == August 30,000
20,000
18,000
10,000
statement of financial position. Rent September
500 500
Wages October 18,000 12,000
There a'.e other financial documents that could also be included 2.000 2,000 13,000
Production forecast etc. such as a Sales fo recast, Advertising November 20,000
1,500 1,500
Utilities (electricity. telephone) December 29,000 16,000
500 500
Equipment Iii\ Bani<. balance 1 July was $25,000.
1\J Summary Materials
8,500
4,000 4.000
0 liiil Wages are $10,000 per month.
livl Tax $6,000 is payable in September.
Abudget is a cost plan, mainly expressed in financ ial term s and has many useful Total cash outflow 17,000
-8,500
- lvl New equipment is to be bought in
purposes. . . Balance nil -3,000 October $9,000.
Abudget is a planned result, compared to a fore cast, which 1s a pred iction. Add Cash inflows (Receipts) lvil Fixed costs are $600 per month.
14,000 18,000
• Fixed, flexible and functional budgets are expla ined. --
14.000 15,000
lviil Rent payable is $400 per month.
• The preparation of a budget comprises of five stages, th at is, initial forecast, lviiil Laura takes drawings of $800 out of the
development of policy, operations plann ing , form ali sation of budgets and approval. less Cash outflows (Payments! 17,000 8,500 business each month.
An organisation may use various budgets in thei r plann ing such as cash flow Balance c/forward -3,000 6,500
projection, production, sales, marketing and incom e and ex pend iture budgets.
• Acash flow projection is shown together with a step -by-step gu ide .
• Aproduction budget is shown with full working s.
• The contents of a business plan comprise of the execut ive summary, overview
of the business, marketing plan, marketing analysis, operati onal plan,
management plan and financial plan.