the range of skills in deficit, and not the numbers of individ- uals needed to perform each role. Assessment of the personnel and staffing needs of the business reflects not just the range of skills needed to operate the business, but also the numbers of individuals required to work within the business. There may be a need for one person with supervisory management skills, but several with identical basic production skills to do the same job as each other, under the watchful eye of that supervisor.
The numbers of each type of worker, and the associated costs of employing these must be identified in order to be fed into the budgetary plan.
3.6 Insurance requirements
The precise insurance policy requirements of the business will depend on the type of business which is proposed. As a very minimum, the owners will need to consider public liability insurance; as well as cover for theft or damage to equipment, fixtures and fittings, and possibly stock or goods in transit. If any staff are employed, albeit just a part-time cleaner, it is a legal requirement to take out employer’s liability cover against accident or injury to employees. These and other insurance options are examined in more detail in Chapter 13.
these are the two key documents on which much of the assess- ment of the viability of a potential new business are based. As such, it is important to get them right.
The budgetary plan attempts to forecast all items of income and expenditure, and details them according to when the sale is invoiced, or when the stock, goods or services are received and a financial commitment is incurred. As such it can be used to assist in the forecasting of potential sales turnover and profits, and the forecast figures can be used as a basis against which actual financial performance (income and expenditure, profit margins, etc.) can be compared.
The cash flow forecast is basically similar in structure to the budgetary plan, but is modified to take into account delays in receiving money from customers and paying money to suppliers, owing to the giving and receipt of credit. So, although the budgetary plan may show a piece of equipment as being purchased in January, payment of that invoice may not be made until a month later. Similarly, goods sold to a customer and invoiced in January may not be paid for until February or March, and in the meantime, the money due for those goods is inaccessible. A company can be making a healthy profit in budgetary terms, but can have an appalling cash flow problem due to late payment for its goods or services, which might interfere with its ability to continue trading.
4.2 Explanation of the basis for planned budgets
This section acts as a narrative explanation to the figures that appear in the budgetary plan, for example, how sales income has been forecast or why the business has used hire purchase rather than leasing to finance its vehicles. It may also outline the basis for loan interest or repayment terms, or reasons for fluctuations in levels of trading activity.
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Similarly, the narrative will explain the basis for credit terms given to customers and received from its suppliers, and the impact this has on cash flow and working capital. The cash flow forecast may also indicate any overdraft requirements, or longer-term borrowing needs.
4.3 Breakeven analysis and profit forecast
It is a fundamental requirement of any business to be able to identify its breakeven level, i.e. the point at which its sales are generating sufficient contribution (surplus income) to cover both the cost of sales and the cost of overheads of the busi- ness. It is equally important that the business should be aware of its profit margins (and mark-up) so that it is able to fore- cast its expected profits from its anticipated sales turnover. Like the budgetary plans, this information will be an item of key interest to any bank manager or prospective financier as, without an identified profit from its trading activities, the busi- ness will be unable to repay any money which it has borrowed from them. This is a critical aspect of the assessment of the viability of any new small business as far as the banks are concerned – it just seems a shame that they did not apply the same degree of discretion when providing multimillion pound loans to certain Third World and South American countries in the 1980s, only to have them written off as bad debt a few years later. Unfortunately, the laws of bankruptcy that apply to small firms, are not so easily applied to international govern- ments. Overseas losses on investments by the banks have resulted in cash shortages at home, restricting the money avail- able to the owners of small firms and making it harder to raise finance. The end result is that it is imperative for the small business owner to be able to demonstrate a potential profit to its investors or financiers.
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4.4 Value of available capital and resources
The capital which the owners of a business put into their enter- prise does not just have to be in the form of hard cash. It can also consist of premises, vehicles, equipment, materials, saleable stock, or even goodwill in the form of an established customer base. In some cases, the capital may comprise a second mort- gage, a charge on property as security or a personal guarantee offered against a loan. The important factor is that whatever form the capital takes, it should be measurable, and have a tangible value to demonstrate what the investor is putting into the business. Not surprisingly, bank managers are reluctant to lend money to anyone who is not prepared to back the venture themselves.
4.5 Further finance required and potential sources of funds It is rare for a new small business to have all the available finance required to start it up and survive the first few months, let alone to expand itself once established. It is usually neces- sary at some stage to look for some form of external finance, even if that is just a short-term overdraft. Lenders will normally expect any business borrower to be investing a similar sum to that which they are asking to borrow, in order to verify their own commitment to the venture, except of course when the loan is secured against an asset such as a house or other prop- erty. Even then, although larger sums may be available, in practice the bankers’ rule of thumb is that the value of the security should be roughly double that of the sum borrowed.
The various options for raising finance are considered in Chapters 6 and 8, and the appropriate options and sources of finance should be identified and described within the financial requirements section of the business plan.
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4.6 Chosen sources of finance and reasons for choice
Having examined the various potential sources of finance, the business plan should identify the chosen sources, i.e. those that are most appropriate to both the owner-managers, and the type of business itself. Some firms may choose longer-term secured loans at lower rates of interest, to ease cash flow in the earlier years. Others may only need short-term initial financing, in which case the higher interest overdraft facility may be more suitable, where interest is only paid when the overdraft facility is in use.
Whatever the choice, it is necessary to describe the chosen option and the reasons for its selection over and above the alternatives. For the NVQ candidate who is preparing a busi- ness plan, the justified rejection of certain options is as much a demonstration of competence as making the choice and explaining the chosen option itself.