Analyse the benefits for a new business of producing a cash flow forecast.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2019). The mark or mark type is shown in brackets.

1. A Cash Flow Forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses.
2. Identify potential shortfalls in cash balances in advance – an 'early warning system'. For example, if the forecast shows a negative cash balance then the business needs to ensure it has a sufficient bank overdraft facility.
3. See whether the trading performance of the business (revenues, costs and profits) turns into cash. Helps prevent early business failure.
4. Makes sure that the business can afford to pay suppliers and employees. Suppliers who don't get paid will soon stop supplying the business; disputes will arise if employees are not paid on time.
5. Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts. However, this is not really a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale.
6. As an important part of financial planning – the cash flow forecast forces the owner to think about likely revenues and costs in advance.
7. External stakeholders such as banks may require a cash flow forecast. Certainly, if the business wants a bank loan, the bank will want to see the CFF as part of the business plan.
8. Analyse whether the business is achieving the financial objectives set out in the business plan.
9. Used as a tool to answer 'what if' questions about changes in income and expenses. Will therefore allow the new business to think about the appropriateness of pricing, marketing and suppliers.
10. Gross profit margin and profit margin calculated from income statement using revenue, cost of sales and expenses.
11. Gross Profit Margin: looks at cost of goods sold as a percentage of sales. Gross Profit × 100 / Sales Revenue. Ratio shows how well a company controls the cost of its inventory and the manufacturing of its products and subsequently pass on the costs to its customers. The larger the gross profit margin, the better for the company.
12. Operating Profit Margin: Operating profit is profit before interest and tax. The operating profit margin looks at profit as a percentage of sales. The operating profit margin ratio is a measure of overall operating efficiency, incorporating all the expenses of ordinary, daily business activity. Operating Profit × 100 / Sales Revenue.
13. Net Profit Margin: shows how much of each sales dollar/cent shows up as net income after all expenses are paid. E.g., if net profit margin = 5%, then 5 dollars/cents of every dollar/cent are profit. The net profit margin measures profitability after consideration of all expenses including interest and depreciation. Net Profit × 100 / Sales Revenue.
14. Maximise earnings and minimise expenses.
15. Brand building, reduce PED, raise price
16. More effective sales process, staff training, updated procedures, sell more
17. Extension strategies for existing products
18. Improved communications with customers (CRM), more loyalty
19. Find cheaper resource suppliers, cut cost of sales
20. Adopt cheaper production process - capital intensive, economies of scale
21. Reduce wastage – training, JIT
22. Reduce overheads – internal staffing and admin costs, utility bills, storage, rent, outsourcing
23. However – Cost of marketing, training, updating, buying new plant.
24. Loss of time, quality, staff
25. Disruption caused by change.
26. Evaluation: Link to best way(s) for a large food retailer – perishable stock, need for good supply/stock levels, competition/customer loyalty, potential for market growth.