Unit 29-LO3 Develop and analyze a cash flow forecast, budget, and break-even analysis and interpret key financial statements

Course: Pearson BTEC Levels 4 and 5 Higher Nationals in Business

Cash Flow Forecast

A cash flow forecast is a prediction of an enterprise’s expected cash requirement over a set time horizon. A forecast can be specific to a single month, quarter, or year; the only limitation is the extent of data that exists on which to base one. The forecasting process breaks down into three basic steps:

1.Cash flowing from and to customers

2.Cash coming in and going out of business activities

3.Insufficient or excess cash at the end of the period.


A budget is a planning and analytical tool that allows you to keep track of available income and necessary expenses for the coming months. A well-structured budget can make it much easier to focus on spending versus accumulating debt, saving for the future, or gaining access to necessary resources. We’ll begin by breaking down our monthly income.

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Break-even analysis

A break-even analysis is a critical tool in determining your minimum level of sales needed to stay operational and to make an allowable profit. The break-even point is the point at which revenues and expenses are even – that is, they balance each other out. If you have enough sales revenue, the number of expenses may not matter as much because you’re able to set aside profits in order to work on reducing or minimizing expenses in the future.

Sources of finance for start-up and small businesses:

The main sources of finance for start-ups and small businesses.

Different businesses will have different needs for finance. Some start-ups and small businesses might require loans from banks or other financial institutions, while others might rely on their own personal and social networks for funding.

Others use equity financing, such as an Initial Public Offering which allows you to sell shares of ownership in return for cash. This is a way to raise money without making any type of initial payment upfront or paying back interest on the investment later. The downside is that there isn’t any guarantee that the investment will be profitable and those who buy your shares may lose all of their money if your company fails – however, many people are confident enough in their business ideas to take this risk because they can get quick access to funding if their business idea does prove successful.

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Many startups are funded by personal savings, family loans, credit cards, or money from friends and relatives.

In fact, the 2012 Global Entrepreneurship Monitor-United States report found that three-quarters of entrepreneurs in the United States use personal funds to start their businesses. Others use other types of financing such as grants and crowdfunding platforms.

Forecasting and budgeting:

Techniques for forecasting and budgeting: using time series data, calculating a moving average, finding a trend, dealing with seasonality

Forecasting and budgeting are two ways of estimating what may happen in the future. Forecasting often works best when looking at trends or cycles of how something has happened in the past, and budgeting is usually done when there are limited resources to plan for a specific event that can’t be easily predicted.

The moving average strategy is used to forecast the future demand of a variable. A moving average represents a situation where just a single fixed point in time at which quantity was observed is taken as the index volume and quantities are then recomputed using successive values for replacement until they go off-scale.

Finding a trend is just one way of predicting what might happen to your progress in the future. There are many techniques for forecasting, including trend line analysis, time series charts, extrapolation by interpolation/extrapolation, and linear regression. Remember that it’s not always possible to have definite forecast projections for any business.

Forecasting and budgeting techniques for dealing with seasonality all depend on two factors: 1) the time of year, and 2) your industry.

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Forecasting techniques would be used differently for forecasting retail sales than they would be to forecast public theft crimes.

Developing budgets, including ‘What-if’ sensitivity analysis.

One way to do a what-if analysis is by developing a set of calculated ranges for variables in the budget, and then using those values to calculate new budgets.

A What-If Analysis is typically done as follows:

1) Calculate your budget without any economic change

2) your budget with the most extreme change in the market environment and assign probabilities to each probability Evaluate the sensitivity of key assumptions or make derivatives (what if you spend more than 50% of the time on this project?) and include those assumptions in the next step

3) Perform Stress Test scenarios – run Worst-Case Scenarios First; After running through the worst-case scenario, see what happened? Run forecast forward under each Worst-Case Scenario and compare the results to find out which one has made the most impact. Run Best-Case scenarios – run forecast forward under each favorable case scenario and compare the results to find out which one has made the most impact.

4) Determine a Sensitivity Analysis of your assumptions

5) What if you were to adjust an assumption in your model?

6) It may be useful to include what-if tables for all significant assumptions.

Using budgets for performance monitoring and control.

Budgets are important tools for measuring a company’s performance, and they should be used for at least a few related purposes.

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The first is to form part of an entity’s “balanced scorecard”, which typically has four perspectives that any company could consider: financial, customer, internal business processes (internal controls), and learning and growth. The purpose of budgets here is to provide information about the company’s financial state, as well as potential opportunities or issues with its customers.

Secondly, budgets can highlight problems with performance on key indicators of success (key performance indicators) that need correction or adjustment. Last but not least, budgets can serve management by enabling them to compare actual results against planned projections in order to measure the effectiveness of their strategies.

Variance analysis

Variance analysis is a financial management technique that analyzes the difference between budgeted and actual results.

This concept is used to identify variances in costs, revenues, or both. It can also be used for differentiating whether the variance is favorable or unfavorable.

Favorable variances are caused when an organization achieves more of its budgeted goals than it expected.

Unfavorable variances are caused when an organization falls short of its goals by a greater amount than anticipated.

Break-even analysis.

Break-even analysis is a management tool that helps you figure out the point at which your business will be profitable.

financial statements for a small business:

The key financial statements that are required for a small business and how to interpret them

The key financial statements that are required for a small business are Income statements, Balance Sheets, and Profit and Loss.

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The profit and loss statement is the other major financial report with both preferred income (profits) and normal income (cash coming into the company). Profits refer to money earned from any number of sources; these could be from merchandise sales, lending money, or property to another person in return for interest payments or dividends on stocks. This report can also include costs associated with production such as raw materials or labor expenses, as well as advertising outlays.

balance sheet acts as an inventory sheet including assets usually divided into current assets like cash or short-term investments and long-term investments such as landholdings. Liabilities are typically for amounts owed to creditors for such things as loans or unpaid bills, and equity is the amount of money that belongs to stockholders. The net worth of a company is calculated by adding the value of all assets minus all debts.

The difference between profit and cash and the vital importance of cash flow for a small business/social enterprise.

The difference between profit and cash is that profit is the earnings left over after all expenses are deducted from gross revenue.

Cash exists in two forms, liquid which can be converted into currency, and illiquid which cannot.

A company’s profit on their Income Statement can change dramatically based on when they paid their bills during the accounting cycle. For example, if a company pays some of its expenses at year-end as opposed to earlier in the year with a focus on minimizing taxes and maximizing profits; then income appears lower than what it would have been if all of the payments were made earlier in the year when revenue was greater than all inventory purchases (costs).

Cash flow is very important for a small business or social enterprise.

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In the case of a small business, cash flow can sometimes illustrate problems before they manifest in other parts of the company. Any shortfalls are often visible in daily transactions recorded through checks written to vendors and customers as well as recorded with accounts receivable/accounts payable items on balance sheets.

The need for social enterprises to pay employees also needs to be handled responsibly so that cash flow isn’t exhausted by expenditures while income stagnates. For example, remuneration may need to be staggered or adjustments made across board members who contribute in different ways (ex: volunteers versus paid staff).

The elements of working capital and how to manage cash flow effectively.

Manage working capital by focusing on reducing inventory levels and managing cash flow with improved receivables collections.

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Working capital is money that a company has available to use after it’s paid its bills and expenses. It tells you, more than anything, how much cash the company can access to invest in things like inventory or equipment – thus helping them turn their inventory into sales.

The six elements of working capital are; Cash & Equivalents, Accounts Receivable, Inventories, Payables as a percentage of Revenue (AR/Revenue), Inventory Turnover Rate, and Current Ratio.

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