Planning — Edexcel A-Level Business
Test yourself on Planning with PEARSON EDEXCEL A-Level practice questions.
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Planning explained
A written statement of the idea, the market research, the marketing and operations plan, the people running it and the numbers, and its main job when money is being raised is to close the information gap between the entrepreneur and a stranger being asked to fund them.
Read the full explanation
A bank reads it for evidence that cash will be there to service the loan, so the cash-flow forecast, the break-even output and the security offered carry most weight. An equity investor reads it for the size of the market and the route to an exit. The Start Up Loans scheme will not release money without one. The limit is that every figure in it is a forecast made by the person who wants the money, so lenders discount optimism and often weight track record, credit history and collateral more heavily than the document itself.
b) Interpretation of a simple cash-flow forecast and calculations based on changes in the cash-flow variables
The table lists receipts, then payments, then the balances, and the arithmetic never changes: net cash flow is total receipts minus total payments in the month, the closing balance is the opening balance plus that net cash flow, and this month closing becomes next month opening. Exam changes bite through that chain. If a customer takes sixty days rather than thirty, the receipt moves one column right and every later balance moves with it. If sales volume rises a tenth, raise the receipts and the materials outflow, not just the receipts. A firm can be profitable and still show a closing balance of minus twelve thousand pounds in March, which is when the overdraft has to be agreed. Always work left to right and rebuild the balances after any change.
c) Use and limitations of a cash-flow forecast
Used well it is an early warning system: it shows the month the balance turns negative, so an overdraft facility can be negotiated in advance at a normal rate rather than in a panic at a penalty rate, and it lets a firm time a vehicle purchase, a recruitment round or a supplier payment run into a month that can bear it. Compared month by month against the actual figures it becomes a control tool, with variances prompting questions. The limits are real. Every inflow rests on a sales forecast, and a forecast of a new product has no history behind it. Customers pay late, a competitor cuts price, energy costs jump. It says nothing about profitability, it cannot itself generate cash, and a plan written once for a bank and never revisited controls nothing.
Your focus
- a) Relevance of a business plan in obtaining finance
- b) Interpretation of a simple cash-flow forecast and calculations based on changes in the cash-flow variables
- c) Use and limitations of a cash-flow forecast
Planning exam tips
Marking Points
- Say what the plan does rather than what it contains: it reduces the lender uncertainty and lets risk be priced, which is why a startup with no trading record needs one most.
- Name the sections a financier actually reads, the cash-flow forecast, break-even, the sales forecast and the management team, and link each to the decision it informs.
- Apply it to the named business, for example a first time franchisee needing a loan against an established firm with three years of audited accounts that barely needs a plan at all.
- Evaluate by noting that the plan is necessary but not sufficient, since security, credit history and the entrepreneur experience often decide the lending decision.
- Show net cash flow as receipts minus payments for the month, then the closing balance as opening plus net cash flow, with the working visible so method marks survive an arithmetic slip.
- Carry every closing balance forward into the next month opening rather than starting each column from the original opening figure.
- When a variable changes, change every line it touches, so a volume rise lifts both revenue received and the variable cost paid out, and a credit period change moves the timing not the amount.
- Interpret rather than only compute: name the month the balance turns negative, say how large the deficit is and state what the firm must arrange before then.
- Give a use that changes a decision, such as arranging finance before the shortfall rather than after it, or timing capital spending into a cash rich month.
- Name the control use: comparing forecast against actual figures each month and investigating the variance, which is how a forecast keeps earning its place.
- Limit it properly by attacking the assumptions, so late payment by debtors, an optimistic sales forecast or a supplier price rise each break a specific line of the table.
- Evaluate with a condition, for example that the forecast is more useful for a seasonal or a rapidly growing firm and less useful the further ahead it runs.
Examiner Tips
- 💡It is usually a short explain question worth four to six marks, or one strand of a larger assess on how a startup should raise money, so keep the answer tight and applied.
- 💡Use the phrase reduces risk for the lender, then show it with something specific from the extract such as a signed contract, a pre order book or a secured premises lease.
- 💡If asked to evaluate, argue both that the plan disciplines the entrepreneur internally and that its forecasts are unverifiable, then judge which matters more for that business.
- 💡The calculate question is usually two to four marks and asks for one missing cell or the revised closing balance, so label every figure and keep the pounds sign consistent.
- 💡A follow on explain or analyse question almost always asks what the recalculated forecast means for the business, so finish the sums and then say what the owner should do about them.
- 💡Errors carried forward are normally credited, so never leave a later column blank because you doubt an earlier answer.
- 💡This is prime evaluate territory, so plan a two sided answer and reach a judgement about how much weight the directors should put on the forecast.
- 💡Link it to the other tools in Theme Two, since a forecast paired with break-even and a budget is far stronger evidence to a lender than any of them alone.
- 💡Use the case context to decide the verdict, because a stable business to business firm with long contracts can forecast far more reliably than a fashion retailer.
Common Mistakes
- Describing the contents of a business plan as a list and never saying why a bank or an investor would change its mind because of any of it.
- Claiming a good plan guarantees finance, when lenders routinely refuse well written plans that offer no security or rest on an unrealistic sales forecast.
- Confusing the plan with the cash-flow forecast inside it, so the answer only discusses cash and ignores the market research and the management team.
- Treating the forecast as a profit statement, so non cash items such as depreciation are entered as outflows and a capital repayment of a loan is left out because it is not an expense.
- Recording a sale in the month it is made when the extract says customers pay on thirty day credit terms, which puts the whole cash position one month early.
- Forgetting to update the later months after a change, so the answer corrects January and leaves February and March on the old opening balances.
- Confusing a forecast with a cash flow statement in the published accounts, which is a historical record rather than a plan.
- Saying that a cash-flow forecast will solve the liquidity problem, when it only reveals it and the firm still has to chase debtors, cut costs or borrow.
- Writing that the forecast is wrong because it is only a prediction, with no named variable and no reason that variable would move for this business.