M3: Business Plans and Forecast

Question 1

What are the 14 main components of a business plan?

Answer 1

 Table of contents (Section 1.1.1)
 Executive summary (Section 1.1.2)
 Business details, including products/services (Section 1.1.3)
 Industry and market analysis (Section 1.1.4)
 Customers and value proposition (Section 1.1.5)
 Marketing strategy (Section 1.1.6)
 Operations plan (Section 1.1.7)
 Management, workforce and curriculum vitae (CV) (Section 1.1.8)
 Equipment and start-up costs (Section 1.1.9)
 Financing (Section 1.1.10)
 Forecasts, commentary and sensitivity analysis (Section 1.1.11)
 Risks and strategic options (Section 1.1.12)
 Key milestones (Section 1.1.13)
 Summary (similar to the executive summary but longer in length) (Section 1.1.14)

Question 2

What is included in the Business details section of a business plan?

Answer 2

 Business name
 Address
 Legal form, eg sole trader, partnership, limited company etc
 Ownership structure, eg parent company, shareholders etc
 Detailed description of the products/services offered
 Mission and vision statement
 Aims and objectives

,

Question 3

What is included in the Executive summary section of a business plan?

Answer 3

Short section that summarises the business plan and states the key conclusions and figures.

Question 4

What is included in the Industry and market analysis section of a business plan?

Answer 4

 An analysis of the industry and market.
 An analysis of internal and external market factors.
 Details of the specific market segments targeted.
 Details on the marketing mix (the combination of products, pricing, places and promotions it uses to differentiate itself from the competition) and on how the product will be promoted.
 The size, growth potential and structure of the industry as well as market trends, buyer behaviour and market share (for existing businesses).

Question 5

What is included in the Customers and value proposition section of a business plan?

Answer 5

• Who their target market segment is.
• Their USP (the value proposition (an innovation, service, or feature intended to make a company or product attractive to customers.)

Question 6

What is included in the Marketing strategy section of a business plan?

Answer 6

 Details about how the business will meet sales targets
 Launch strategy (if applicable)
 Marketing mix
 Distribution channels
 Sales tactics
 Brand development
 Competitive reaction
 Product and market development
 Growth potential

Question 7

What is included in the Operations plan section of a business plan?

Answer 7

 Manufacturing processes
 Business model
 Business controls
 IP (intellectual property) issues
 Scalability of the business

Question 8

What is included in the Management, Workforce and CV section of a business plan?

Answer 8

• All the information on day-to-day operations,
• The people charged with governance of the business,
• Employees of the business,
• Job roles.

Question 9

What is included in the Equipment and start-up costs section of a business plan?

Answer 9

• Details of the business’ resources (eg existing premises, equipment and other assets)
• List of start-up costs (if applicable) to get the business set up.

Question 10

What is included in the Financing section of a business plan?

Answer 10

Details on how the business has been financed.

e.g. bank loan, equity investors, government grants.

Question 11

What is included in the Forecasts, commentary and sensitivity analysis section of a business plan?

Answer 11

 Profit/loss projections
 Cash flow surplus/deficit projections
 Forecast balances (ie assets, liabilities and capital)
 Key ratios – especially around working capital (eg trade receivable days, trade payable days, inventory days, current ratio and acid test)
 Assumptions and commentary (supported by corroborating evidence)
 Alternative scenarios shown in the sensitivity analysis

Question 12

What is included in the Risks and strategic options section of a business plan?

Answer 12

• Details of risks that have been identified.
• Critical success factors.
• How risks are monitored and mitigated and strategic options available to the business.

Question 13

What is included in the Key milestones section of a business plan?

Answer 13

• When the business launched the first products, received funding or expanded the service offering etc.

Question 14

What is included in the Summary section of a business plan?

Answer 14

A concluding section that summarises the business plan and is longer than the executive summary.

Question 15

What are the prime objectives of cash management?

Answer 15

Objective/Explanation:

1) Liquidity - The business must be able to meet its liabilities as they fall due. The business must
know what the liabilities of the business are and when they require to be met.

2) Safety - Investments made by the shareholders should be safe and not exposed to
excessive risk.

3) Profitability - Once the objectives of liquidity and safety have been met, the finance manager
and/or board of directors should consider the level of return the business can make
on its investments.

4) Flexibility - An element of any investment should be flexible to allow the business to react to
and accommodate unexpected events.

Question 16

Why might profitable companies fail?

Answer 16

Bad cash management.

Not being able to pay liabilities as they become due.

Question 17

Why is the most important part of cash flow projections to record inflows and outflows in the correct month?

Answer 17

Because of timing differences and cash is recorded differently to the P&L statement, thus needs monitoring.

Question 18

What items/timing differences might you need to consider when preparing a cash budget and why?

Answer 18

The preparation of the cash budget should consider any timing differences due to payment terms offered to debtors and those received from suppliers.

Question 19

What is the purpose of cash flow projections or forecast/cash budget?

Answer 19

To allow the finance manager to monitor the expected cash position of the business accurately.

Question 20

Can you list the main potential cash inflows and outflows of a business?

Answer 20

Inflows:
 Payments received from debtors
 Increases in borrowings
 Interest receipts

Outflows:
 Payments made to creditors
 Capital expenditure
 Loan repayments
 Interest payments
 Tax payments
 Dividend payments

Question 21

What is the difference between profit and loss projections and cash flow forecasts?

Answer 21

Items are included in the profit and loss statement at the point the transaction occurs, but the cash flow forecast records when the physical cash is paid or received.

Question 22

Why are there differences when reconciling between the projected cash flow and the projected profit of a business?

Answer 22

Timing differences in payments. SoPL is based on accruals rather than cash into or out of bank.

e.g. the P&L projection will show revenue and expenses when they occur, whereas the cash flow forecast will record the actual amount of cash when it is paid or received.

Question 23

What are the most common reconciling items?

Answer 23

• Sales and purchases made on credit
• Capital expenditure
• Dividends

Question 24

Can you calculate the differences between the expected profit/(loss) (P&L) for a period and
the projected cash inflow/(outflow) for same period?

Answer 24

Think of cash being lower than P&L and what needs to be added into cash or out of cash to reconcile to the p&l.

E.g. cash needs interim dividend taking out, trade payables included etc.

Question 25

List the main pricing strategies, besides cost-plus and target pricing, and explain how they work in practice

Answer 25

- Market Skimming: Initially charging high prices for a new product, then lowering prices to attract price-sensitive customers. - Premium Pricing: Maintaining high prices to create the perception of superior quality. - Market Penetration: Offering products at low prices, even at a loss, to gain market share rapidly. - Limit Pricing: Setting low prices to deter competitors from entering the market. - Dynamic Pricing: Adjusting prices based on demand, supply, and various factors. - Freemium: Offering basic features for free and charging for premium features. - Loss Leader: Selling a product at a loss to attract customers who may purchase other profitable items. - Pay What You Want: Letting customers choose the price for a product or service.

Question 26

Can you calculate the selling price of a product using target pricing given sufficient information?

Answer 26

Calculate total investment Get profit as % of this investment Add on fixed costs, variable costs Revenue needed/units = Selling price to achieve return %

Question 27

With regards to psychology of pricing, what are price anchoring, the power of 9 and decoy pricing?

Answer 27

Price anchoring - Products are placed next to other more expensive ones. Power of 9 - Prices are often rounded down slightly from a round number, eg £20 reduced to £19.99 or £5,000 reduced to £4,999. Decoy pricing - decoys are either slightly cheaper products with much lower quality, or slightly higher quality products with a much higher price. Consumers compare the products and believe the product being boosted to be a much ‘better deal’ than the others.

Question 28

Why might a business need to change the price of a product to respond to competitors’ actions and what options does it have?

Answer 28

To respond to competitors’ actions where they are successfully gaining market share etc. Options: 1) Maintain current price: If the threat to market share is minor, maintaining the current price may be a viable strategy. This could potentially force the price-cutting competitor out of the market or compel them to raise prices if profit margins are thin. 2) Maintain price with alternative strategies: Businesses can explore alternatives like changing advertising methods, enhancing customer service, improving product quality, or a combination of these strategies to respond to competitive actions. 3) Reduce prices: While reducing prices might protect market share, it could impact profitability if not accompanied by cost reductions.

Question 29

What are factors of production (and list the four categories)?

Answer 29

To produce goods and services, firms utilise various inputs categorised as factors of production. 1) Land Natural resources like raw materials, land, and minerals. Paid for with rent. 2) Labour Human resources providing skills, knowledge, and physical and mental contributions. Paid with Wages. 3) Capital Man-made inputs, including machinery, buildings, and tools. Paid with Interest. 4) Enterprise - Organisation of the other three factors, provided by business owners. Rewarded with Profit.

Question 30

What are marginal cost and marginal revenue and how is profit maximised in terms of these?

Answer 30

MC is the cost of producing one additional unit, while MR is the increase in total revenue from selling one more unit. Profit is maximised when MC equals MR.

Question 31

What is normal profit and what is the difference to supernormal profit?

Answer 31

Normal profit, included in total costs, represents the minimum profit required to keep business owners engaged. When a normal profit is being earned: Total costs = Total revenue. When total revenue exceed total costs, a supernormal profit is earned, attracting competitors into the market.

Question 32

How might pricing strategies differ depending on different market structures that a company might operate in?

Answer 32

Depending on the market structure and competition determines what pricing strategies can be used. e.g. firms in a perfectly competitive market are ‘price-takers’ who must follow the market price or face losing their market share altogether, as other firms would provide the identical product at a cheaper price.