Unit 3: Business finance
Task 2: Understand how financial planning tools can be used to analyse financial data
and assess business risks
P3: Explain the purpose of financial planning tools in reviewing financial data in a
specific business context.
P4: Perform appropriate calculations using financial planning tools to identify financial
risks in a specific business context.
M2: Analyse the factors that impact on financial risks in a specific business context.
D2: Evaluate the impact of different factors that impact on financial risks in a given
business context.
Financial planning tools are the foundation of a successful business. Financial planning tools
are used to analyse the company’s financial data and assess business risks based on the data.
There are various tools to plan and analyse risks but this report will primarily focus on the
Cash flow statement Cash flow forecast.
Ahmed can use the Cash flow statement to calculate the net amount of cash that the company
receives and spends during a specific period of time. Cash flow statement is used to record
inflows of cash from things such as an increase in payables, sale of fixed assets and other
similar things which lead to cash coming into the business. Whereas, the outflows are the
opposite so things such a decrease in payables as this means the business has paid its
payables or a purchase of a fixed asset for cash as this means the business has paid for the
asset. This reporting period can be a month, a quarter or a whole year depending on Ahmed’s
preference. Important to note, this report does not include non-cash expenses such as
amortization or depreciation. Furthermore, Ahmed should ensure to maintain a positive cash
flow to remain in business and pay the loan and generate value for himself. Another incentive
to maintain a positive cash flow is to attract new investors as investors or even banks will
analyse these financial tools to decide whether to invest in Ahmed’s business. Therefore, it is
imperative that Ahmed records and analyse the cash flow statement to plan appropriately.
In addition, the Cash flow forecast is another tool used for planning for the next quarter. This
is similar to the Cash flow statement; however, it is much more detailed. For example, Cash
flow forecast break down an expense into different sections. Expenses will be only one entry
in the Cash flow statement; but, in the Cash flow forecast, the expenses will be further broken
down into entries such as office supplies, rent, insurance, electricity bills and so on. This type
of forecast is useful in analyzing and planning ahead as it will give Ahmed an idea about the
cash needs for the next quarter.
If there are cash flow difficulties, Ahmed can plan ahead by implementing certain strategies.
Strategies such as buying from suppliers on credit and when selling bikes doing the opposite,
which means selling only on cash basis. In addition, Ahmed can reduce the inventory of bikes
and order only using strategies such Just in Time (JIT) which is used to order right before
there is going to be a shortage. Ahmed could also increase the price of bikes to receive more
cash and in extreme cases take out a loan.
Task 2: Understand how financial planning tools can be used to analyse financial data
and assess business risks
P3: Explain the purpose of financial planning tools in reviewing financial data in a
specific business context.
P4: Perform appropriate calculations using financial planning tools to identify financial
risks in a specific business context.
M2: Analyse the factors that impact on financial risks in a specific business context.
D2: Evaluate the impact of different factors that impact on financial risks in a given
business context.
Financial planning tools are the foundation of a successful business. Financial planning tools
are used to analyse the company’s financial data and assess business risks based on the data.
There are various tools to plan and analyse risks but this report will primarily focus on the
Cash flow statement Cash flow forecast.
Ahmed can use the Cash flow statement to calculate the net amount of cash that the company
receives and spends during a specific period of time. Cash flow statement is used to record
inflows of cash from things such as an increase in payables, sale of fixed assets and other
similar things which lead to cash coming into the business. Whereas, the outflows are the
opposite so things such a decrease in payables as this means the business has paid its
payables or a purchase of a fixed asset for cash as this means the business has paid for the
asset. This reporting period can be a month, a quarter or a whole year depending on Ahmed’s
preference. Important to note, this report does not include non-cash expenses such as
amortization or depreciation. Furthermore, Ahmed should ensure to maintain a positive cash
flow to remain in business and pay the loan and generate value for himself. Another incentive
to maintain a positive cash flow is to attract new investors as investors or even banks will
analyse these financial tools to decide whether to invest in Ahmed’s business. Therefore, it is
imperative that Ahmed records and analyse the cash flow statement to plan appropriately.
In addition, the Cash flow forecast is another tool used for planning for the next quarter. This
is similar to the Cash flow statement; however, it is much more detailed. For example, Cash
flow forecast break down an expense into different sections. Expenses will be only one entry
in the Cash flow statement; but, in the Cash flow forecast, the expenses will be further broken
down into entries such as office supplies, rent, insurance, electricity bills and so on. This type
of forecast is useful in analyzing and planning ahead as it will give Ahmed an idea about the
cash needs for the next quarter.
If there are cash flow difficulties, Ahmed can plan ahead by implementing certain strategies.
Strategies such as buying from suppliers on credit and when selling bikes doing the opposite,
which means selling only on cash basis. In addition, Ahmed can reduce the inventory of bikes
and order only using strategies such Just in Time (JIT) which is used to order right before
there is going to be a shortage. Ahmed could also increase the price of bikes to receive more
cash and in extreme cases take out a loan.
