Question

1. Explain how the business planning process is one of revision. Explain two clear examples of your own (not those in the textbook) showing how your calculations in the financial section of the business plan, may force you to go back and change elements in previous sections of the plan.
2. “The accountant is the most important advisor to an entrepreneur.” Discuss the validity of this statement, explaining a variety of ways an accountant assists an entrepreneur.
3. Discuss why cash flow projections are so important to lenders and investors. What common mistakes are new entrepreneurs likely to make in their cash flow planning?

Answer 1

Business planning is an important precursor to action in new ventures.

Discuss why cash flow projections are so important to lenders and investors.

Cashflow is the ultimate measure of how a business is doing – and that makes cashflow a vital indicator for investors when analysing whether a company is making money, or losing money. When approaching private investors, funding organisations or finance providers, it’s important that your business can provide the right level of financial reporting.

Your cashflow statement (or statement of cash flows) is key report for investors to review and analyse. By running a statement for a given period (whether that’s the past month, quarter or year) you can get a clear breakdown of the key areas of cash movement in the business.

This cashflow statement breaks down into three main areas and a net summary:

1. Operating cashflow – this section of your cashflow statement shows the cash inflows and outflows that relate to the everyday running of the business. This is where investors can see what money you’re generating as income, and how much you’re spending on operating overheads, expenses and other related costs.

2. Investment cashflow – this is where investors will see cashflow from investments. This includes investments that are generating revenues from non-current assets (assets that won’t be turned to cash within the current accounting year), or securities that can’t be classed at cash equivalents.

3. Financing cashflow – this sections shows investors the flows of cash between the business and its owners and creditors. It’s where they’ll find numbers relating to borrowing funds, repaying debts, payments of dividends to your directors and capital that’s been brought into the business during the relevant period.

4. Net cashflow – the three preceding sections are brought together in the bottom line of your cashflow statement – giving a net cashflow number. The cash inflows and cash outflows are summed together so investors can quickly see whether the business is in a negative or positive cashflow position.

By analysing these cashflow numbers carefully, potential investors can see if the company is in a positive (or negative) cashflow position – and can use this metric as a key measure of whether you’re likely to be a good (or bad) investment.

What common mistakes are new entrepreneurs likely to make in their cash flow planning?

1. Overestimating future sales volumes.

2. Engaging in impulse spending during the startup phase.

3. Being passive about past-due receivables.

4. Not using a cash-flow budget.

and the most common mistake done is by

5. Not keeping a cushion of cash on hand.