BTEC Level 2 First Business Assessment Resource Pack
Unit 3 Financial Forecasting for Business Unit overview
Credits: 5
Cert / Ex Cert / Dip
This unit introduces learners to business finance and the idea of costs, revenue and profit. Learners will understand the different types of costs which businesses face and the impact that poor management of these could have. They will know how to classify costs as well as how they are calculated. Revenue, gross and net profit are also covered and learners will learn how to distinguish between them. Again they will be given the opportunity to calculate these for different scenarios. Following their introduction to finance learners will understand how to calculate and analyse break even. At a higher level learners will be able to explain the changes and the impact this could have on a business. The final part of this unit gives learners the opportunity to investigate the cash flow of businesses. They will understand how figures in these can be manipulated and adjusted to ensure a business does not run out of cash. Assessment for this unit is a combination of written and numerical tasks, which give learners the basics required in business finance. Learners can get information for this unit through visiting speakers from banks, building societies and other financial institutions. This unit has links with Unit 16 Business Enterprise and Unit 17 Starting a Small Business.
Assignments for this unit The following ready-made assignments are available in this Pack. Assignment
Learning outcome
Assessment and grading criteria
Summary
A1
Costs, revenue and profit
LO1 Know about costs, revenue and profit in a business organisation
P1, P2, P3 and M1
Learners produce a booklet for ‘Fresh Business’ which covers the different types of costs a business incurs. They must also look at the different revenue streams for the business and outline the differences between gross and net profit. Evidence: a booklet about business finance
A2
Break even
LO2 Be able to prepare a break-even analysis
P4, P5 and M2
Learners use suitable software to calculate break even using the data provided. They also produce a supporting handout which annotates the graph showing a clear understanding of the key terms. Following this, they adapt the data in the graphs and explain the outcomes. Evidence: break even graphs for the original and revised figures
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Unit 3 Financial Forecasting for Business
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BTEC Level 2 First Business Assessment Resource Pack
A3
Cash flow forecast
LO3 Be able to create a cash flow forecast
P6 and M3
Learners will produce a full 12-month forecast using an acceptable layout. Following this they will analyse the impact of regular and irregular cash inflows and outflows. Evidence: a completed 12-month cash flow forecast; an analysis of the 12-month cash flow forecast; a revised 12-month cash flow forecast
A4
An evaluation of break even and cash flow forecasts
LO3 Be able to create a cash flow forecast
D1
The culmination of this unit incorporates knowledge gained from Assignments 2 and 3. Learners will create fact sheets that evaluate the break even and cash flow forecast, including judgements and diagrams to back up their work. Evidence: two fact sheets evaluating cash flow and break even
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Unit 3 Financial Forecasting for Business
BTEC Level 2 First Business Assessment Resource Pack
Assignment guidance for tutors A1 Costs, revenue and profit P1
P2 P3 M1
Learners should create a professional looking leaflet that describes the different costs, revenue and profit a business may encounter. For P1 they should include start up, running, fixed, variable and total costs. P2 looks at the different revenue streams and P3 covers the difference between gross and net profit. Learners should be encouraged to incorporate formulas used to calculate costs, revenue and profit. For M1 learners should explain in their leaflet what costs, revenue and profit are and explaining their importance in no more than a paragraph for each.
A2 Break even P4
P5
Learners will need to understand how to calculate break even. It would be advisable to begin this by ensuring learners are competent at calculating these and drawing the graphs by hand. This gives them the understanding required to then move onto creating them on spreadsheets. Some learners will require support with the formula required for this Task as well as producing the graphs. Centres may wish to create a supporting handout to assist learners with this Task. Once learners are proficient with using the spreadsheet they can then produce the graph required for P4. These should then be annotated using a word processor or desktop publishing software. These allow learners to add text boxes and arrows to annotate the graphs, demonstrating an understanding of what they are showing (P5). At the merit level (M2) learners should adapt the figures in their break even graphs and produce a supporting document which explains what they have done and what the results are showing.
A3 Cash flow forecast P6
M3
Similarly to Task 2 learners should first gain experience of calculating cash flow forecasts by hand prior to commencing this task. Once they are comfortable doing this they can move onto inputting the data into their own spreadsheet (P6). Although it is not a requirement of this task, it would be beneficial to the learners if they used formula to calculate the totals and net cash flow. This allows them to manipulate the figures and demonstrate the impact of regular and irregular cash inflows and outflows for M3.
A4 An evaluation of break even and cash flow forecasts D1 The distinction task looks at both the break even and cash flow forecast and requires a detailed evaluation of the importance of these for the business. Learners should go into detail about how these can be used by a business including diagrams and judgements about their effectiveness
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BTEC Level 2 First Business Assessment Pack
Unit 3 Financial Forecasting for Business
A1 Costs, revenue and profit BTEC Level 2 Business, Unit 1 Business Purposes
Learner name
Assessor name
Date issued
Deadline
Scenario You have been working as a consultant for a company called Fresh Business, which supports new small enterprises Steve, a business owner and local entrepreneur, has identified an opportunity in his local area to set up a fish and chip shop. He has previous experience of working in the catering industry and following extensive research believes there is a gap in the local market. The area he has chosen has a population of 2,400 people and the nearest fish and chip shop is over five miles away. He has little experience of running a business and has been looking for information on what he needs to start one up. You have been working as a consultant for the company Fresh Business, which supports new small enterprises like this one. Steve will be paying a small consultancy fee and in return you will provide him with the resources and materials he requires to understand the financial aspect of running a business.
In this assignment you will have the opportunity to provide evidence towards the following criteria: P1
identify the difference between start up costs and operating costs, variable costs and fixed costs
P2
identify the different types of revenue
P3
outline the differences between gross and net profit
M1
explain the importance of costs, revenue and profit for a business organisation
TASK 1 − Understanding Business Finance P1, P2, P3, M1 For this assignment you must create a ‘Fresh Business’ booklet, which outlines the important terms Steve will come across as he sets up and runs his business. You also need to include information on how you calculate certain figures. Your leaflet should be an A5 booklet entitled Business Finance…The Basics. It will need to have three distinct chapters. These are costs, revenue and profit. In your booklet you must cover the following areas, paying particular attention to any differences between the terms in each: ●
What are start up and running costs?
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Unit 3 Financial Forecasting for Business
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What are fixed, variable and total costs?
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What is revenue?
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What is gross and net profit?
BTEC Level 2 First Business Assessment Pack
Guidance For each section you should also explain why each factor is important for a business and what would happen if they didn’t have them. You can use websites such as www.smallbusiness.co.uk or www.businesslink.gov.uk to help with this task. Useful sources of information Student Book pages 68-71 may be useful for Task 1. Your tutor will have a list of sources of information that you can use for this assignment
Evidence checklist TASK 1
a booklet about business finance
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BTEC Level 2 First Business Assessment Pack
Unit 3 Financial Forecasting for Business
A2 Break even BTEC Level 2 Business, Unit 1 Business Purposes
Learner name
Assessor name
Date issued
Deadline
Scenario You have been working as a consultant for a company called Fresh Business, which supports new small enterprises. Steve, a local entrepreneur, has identified an opportunity in his area to set up a fish and chip shop. He has previous experience of working in the catering industry and following extensive research he believes there is a gap in the local market. The area he has chosen has a population of 2,400 people and the nearest fish and chip shop is over five miles away. Steve has followed your advice from the ‘Business Finance… The Basics’ booklet and has begun trading. However he isn’t sure if he is going to make a profit, loss or just break even. He has asked you to come up with a graph to show the figures he has given you and two suitable selling prices for his fish and chips. He can produce up to 5000 portions of fish and chips per month.
In this assignment you will have the opportunity to provide evidence towards the following criteria: P4
calculate the break even using given data to show the level at which income equals expenditure
P5
present the break even as an annotated graph showing break even
M2
demonstrate the impact of changing cost and revenue on the break-even point of a selected business
TASK 1 − Chart of government role P4 Using the information provided below, create a break-even graph. Costs
Selling price
Raw materials for fish and chips per portion – £2.50
Fish and Chips selling price 1 – £5.00
Utility bills per month – £700
Fish and Chips selling price 2 – £6.00
Insurance per month – £400 Salaries per month – £2,000 Lease on the premises per month – £1,500 Loan repayment per month – £1,200
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Unit 3 Financial Forecasting for Business
BTEC Level 2 First Business Assessment Pack
Advertising per month – £200 Paper for wrapping the fish and chips per portion – £0.30 Sauces per portion – £0.20
Once you have created your break-even graphs you must show this to Steve in the form of a fact sheet. This will outline what the graph is showing him. You need to annotate each part of the graph and give a brief description of it. After six months of trading Steve has come back to you with some revised figures. The price of his raw materials has increased by 50 per cent and he has had to double the amount he pays for his salaries. In addition to this his insurance company has increase his premiums by a further £200 per month. He predicts he will have to increase the selling price of his fish and chips to £6.50 and £8.00. Using this new data calculate the changes in the break-even point and create two new graphs for him. Include these two graphs (and the original ones) in a supporting document that explains what these changes are and the impact they may have on the business. Useful sources of information Student Book pages 41, 76 − 82 may be useful for Task 1. Your tutor will have a list of sources of information that you can use for this assignment.
Evidence checklist TASK 1
break even graphs for the original and revised figures a supporting document explaining the graphs and changes made
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BTEC Level 2 First Business Assessment Pack
Unit 3 Financial Forecasting for Business
A3 Cash flow forecast BTEC Level 2 Business, Unit 1 Business Purposes
Learner name
Assessor name
Date issued
Deadline
Scenario You have been working as a consultant for a company called Fresh Business, which supports new small enterprises. Steve, a local entrepreneur, has identified an opportunity in his area to set up a fish and chip shop. He has previous experience of working in the catering industry and following extensive research he believes there is a gap in the local market. The area he has chosen has a population of 2,400 people and the nearest fish and chip shop is over five miles away. You have previously created a booklet for Steve, called ‘Business Finance… The Basics’ and a graph with break-even charts using financial information that he had provided you with. As these figures are estimates, he now wants you to show him when he is likely to have good and bad months.
In this assignment you will have the opportunity to provide evidence towards the following criteria: P6
prepare an annual cash flow forecast using monthly data
M3
analyse the implications of regular and irregular cash inflows and outflows for a business organisation
TASK 1 − Creating a cash flow forecast D1 As you know, Steve is not very good with figures and has just listed them on a scrap of paper for you to work out. a) You need to use them to create a cash flow forecast for twelve months of trading.
Opening balance for the year – £10,000 Forecast sales January – £17,000
Forecast sales September – £11,000
Forecast sales February – £19,000
Forecast sales October – £18,000
Forecast sales March – £18,000
November – £21,0000
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BTEC Level 2 First Business Assessment Pack
Unit 3 Financial Forecasting for Business
Forecast sales April – £15,000
Forecast sales December – £22,000
Forecast sales May – £11,000
Loan from the bank in January 15,000
Forecast sale s June – £8,000
Gas, Electric and Water bills £700 per month
Forecast sales July – £6,000
Raw Materials £10,000 for January to April
Forecast sales August – £8,000
Raw Materials £12,500 for October, November and December Insurance £600 per month
Raw Materials £2,500 for the remaining months Salaries £4,000 per month
Lease for the premises £1,500 per month Advertising £200 per month
Loan repayments £1,200 per month from February onwards New cooking equipment £20,000 in November
Delivery van £8,000 in May
Fuel for the van £200 per month from May onwards b) In addition to providing the cash-flow forecast you also need to analyse the cash flow. Guidance Working through each section of the forecast, show the impact the income and expenditures could have on the business. By identifying the months when there are likely to be cash-flow issues you will be able give some examples of how they could be avoided. This can be also demonstrated through an alternative cash-flow forecast, which shows how the business could avoid some of the less favourable months. Make sure your analysis looks at both the regular and irregular inflows and outflows of the fish and chip shop. Explain to Steve the changes you have made to his cash flow and analyse the impact poor or negative cash flow could have on his business. Steve has made it clear that he doesn’t understand finance and you need to show him that his business could go bankrupt due to cash-flow problems, despite the fact it appears to be making a healthy profit.
Useful sources of information Student Book pages 83−87may be useful for Task 1. Your tutor will have a list of sources of information that you can use for this assignment.
Evidence checklist TASK 1
a completed 12-month cash flow forecast an analysis of the 12-month cash flow forecast a revised 12-month cash flow forecast
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BTEC Level 2 First Business Assessment Pack
Unit 3 Financial Forecasting for Business
A4 An evaluation of break even and cash flow forecasts BTEC Level 2 Business, Unit 1 Business Purposes
Learner name
Assessor name
Date issued
Deadline
Scenario You have been working as a consultant for a company called Fresh Business, which supports new small enterprises. Steve, a local entrepreneur, has identified an opportunity in his area to set up a fish and chip shop. He has previous experience of working in the catering industry and following extensive research he believes there is a gap in the local market. The area he has chosen has a population of 2,400 people and the nearest fish and chip shop is over five miles away. You have previously created a booklet for Steve, called Business Finance… The Basics, a graph with break-even charts using financial information that he had provided you with and also shown him when he was likely to have good and bad months. Steve is now ready to move his business forward without your support, but has asked that you provide him with more details about the effectiveness and limitations of break-even and cash-flow forecasts.
In this assignment you will have the opportunity to provide evidence towards the following criteria: D1
evaluate the importance of cash flow and break even for the effective management of business finance
TASK 1 − Understanding Business Finance D1 For this task you must create two fact sheets that evaluate break-even analysis and cashflow forecasts. This needs to cover both the positive and negative aspects of both. Use diagrams similar to those you have already created to demonstrate your evaluation. Make judgements on these examples to show Steve the difference between the uses and limitations of break-even and cash-flow forecasts. This should be created using your knowledge of both methods and should include diagrams to explain your evaluation. Guidance At the very least you should consider the following points: ●
Why is break even useful for businesses?
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How can businesses use break even to benefit them?
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What are the limitations when using break even?
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Unit 3 Financial Forecasting for Business
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Why should businesses take care when using break even graphs?
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Why is it useful for cash flow forecasts to be produced?
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Why should businesses be cautious when using cash flow forecasts?
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What are the limitations when using cash flow forecasts?
BTEC Level 2 First Business Assessment Pack
Remember to brand your fact sheets with your Fresh Business logo.
Useful sources of information Student Book pages 83 − 89 may be useful for Task 1. Your tutor will have a list of sources of information that you can use for this assignment
Evidence checklist TASK 1
two fact sheets evaluating cash flow and break even
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Unit 3 Financial Forecasting for Business
BTEC Level 2 First Business Assessment Resource Pack
Sample learner work and assessor comments Commentary for tutors Sample learner work and assessor comments follow for the assignment A1 Cost, revenue and profit (P1, P2, P3, M1). The learner work that follows is of a standard expected when a learner is achieving Merit criteria at Level 2. This standard is achieved because the evidence for P1, P2, P3 and M1 is thorough. However, this assignment only addresses some of the criteria for this unit (see the assignments listed on page xx). The other unit assignments would need to be completed before the learner’s work can be graded and an overall unit grade awarded. This unit of work will be many learners first foray into the business finance. They are introduced to the key financial terms, break even analysis and cash flow forecasting. The first sample of work is a purely written task which requires the learner to identify, outline and explain key terms relating to business finance. This particular sample covers: Costs – start up, running, fixed, variable and total Revenue – Sales, donations, sponsorship, loans and grants Profit – gross and net. The learner has identified and described these terms correctly and in sufficient detail. Where necessary they have included the formula required to calculate them. The learner has demonstrated how to calculate the break even formula using both a graph and the formula. The graphs have been calculated using a spreadsheet and demonstrate the learner’s understanding of the calculations. These are supported with a handout providing more detailed information, such as the margin of safety, break-even point, profit and loss. Centres can adapt this unit of work by adjusting the figures set out in the assignment brief. The result could be simpler or more complex figures for the learner to dissect and incorporate in their work.
Sample learner work for A1 Cost, revenue and profit
Fresh Business Business Finance … The Basics
An introductory guide for new businesses 2010 Edition
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Unit 3 Financial forecasting for business
BTEC Level 2 First Business Assessment Resource Pack
Sample learner work for A1 Cost, revenue and profit
Introduction Starting a business is a daunting task. We know how difficult it can be to understand the different terms so that is why we have created this booklet for you. Within this guide you will find out information about costs, revenue and profit. We will look at what each term means and why they are important. Please remember this is not a complete guide to finance, just an introduction to the basics you will need to get you through the early difficult stages.
Costs
Assessor’s comment: This is a good introduction which is written in the correct context. It includes a summary of the contents.
There are many different costs associated with running a business. These can include: • Start up costs • Running costs • Fixed costs • Variable costs This section will look at each one and tell you what they mean and give you some examples of each one. It will also include some examples of each one.
Start-up and Running Costs Start-up costs are costs that a business has to pay when they begin. They are not usually paid on an ongoing basis. 1
These can take a large chunk of your initial budget and you must watch that they are monitored and kept under control at all times. Whereas running costs are the dayto-day expenses that a business has to pay. These will usually be paid on a weekly or monthly basis depending on the agreement. As with start-up costs it is important that accurate records of these are kept so that you don’t overspend. If they are not kept then the business could find itself insolvent (out of money) and unable to exist. Start-up costs include the fixtures and fittings for the business. This can mean shelving, furniture for display cabinets. Also included in this is the deposit for a premises or store. Other costs can include the forming of the company or the setting up of a website and computer system. Running costs include the wages and salaries of staff, the purchasing of stock and the paying of utility bills such as gas, electricity and water.
Fixed, Variable and Total Costs Fixed Costs These are costs that have to be paid by the business and are not dependent on the output of the business. It is important that fixed costs are paid in the agreed time otherwise a business will have a bad credit rating which 2
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Unit 3 Financial Forecasting for Business
BTEC Level 2 First Business Assessment Resource Pack
Sample learner work for A1 Cost, revenue and profit
could affect future requests for borrowing money or purchasing goods. Also suppliers like their customers to pay for their goods and services on time and it will look good if you keep up regular payments. To calculate the fixed costs you must add them all up. Some fixed costs are also running costs. These include rent payable for a premises or store and utility bills. However they can also include payments for advertising and salaries. Salaries are not dependent on the number of hours worked and are agreed annually, but paid monthly. Variable Costs These are costs which change depending on what you produce. This could be the number of products you make and sell or the amount of stock you purchase. Variable costs change from week to week and month to month, while fixed costs will usually stay the same each month or year. If you have a large surplus of one item you stock then you don’t need to keep buying more of it. This means that the costs will change. Variable costs include items such as stock and bonuses. If you have a really good month then you may want to reward your staff with a party or a bonus. This wouldn’t happen every month so therefore becomes a variable cost. 3
With stock it can depend on sales in the previous week or month. For example if you have a seasonal product then you may need more during certain times of the year. To calculate variable costs you must add them up and then multiply the amount by the quantity made. It is important not to overstock your business as products which have a use-by date could be wasted and thrown away. The same with if you have a product that is fashionable, it may be in one week and not next one. If you overstock you are left with items you have to probably sell at a loss.
Assessor’s comment: P1, A good clear description of the costs of a business.
Total Costs Total costs are all the costs a business has to pay. This is the variable costs added to the fixed costs. This is important and is used when calculating break even.
Revenue Revenue is money that is coming into a business. This is usually made from sales, but can also be from donations, sponsorship, loans or grants. Sales This is money that comes in when an item is sold. Businesses aim to increase their sales so that their revenue increases. 4
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Unit 3 Financial Forecasting for Business
BTEC Level 2 First Business Assessment Resource Pack
Sample learner work for A1 Cost, revenue and profit
Donations This is when organisations or people hand money over to you. It normally the way in which charities make their ‘sales’. Sponsorship If you have a successful product then other companies may want to be associated with you. They will pay you money in order for you to promote their business. Loans This is when you borrow money from a bank, building society or other financial institution. This will have to be paid back over an agreed time with interest. Grants These are handed out to businesses and other organisations. They are not expected to be paid back. The Prince’s Trust give grants to new businesses started by young people. Total revenue is calculated by multiplying the selling price by the quantity sold. Revenue is important for businesses as without it they will not be able to pay their costs. For businesses to succeed in the long term they should have higher revenue than they do costs.
Assessor’s comment: P2, You have covered a good range of sources of revenue for a business.
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Profit There are two different types of profit gross and net.
Assessor’s comment: Both gross and net profit have been covered.
Assessor’s comment: P3, the difference between gross and net profit have been outlined.
Assessor’s comment: Well done Tom you have met the criteria for P1, P2 and P3. A very good piece of work which covers the costs, revenue and profit of a business.
Gross profit is the profit made by the business after the variable costs have been taken out. These are the costs of making the product or delivering the service and are not all of the costs to a business. To calculate this you take the total revenue and minus the total variable costs. Gross profit is different from net profit as it doesn’t include some of the costs. Net profit is the amount of profit made after all costs such as rent and salaries have been paid. It can be both before and after tax. To calculate the net profit you take the gross profit and minus the fixed costs. Profit is important for a business. It maybe so that they can share it with the investors of the business, this is known as a dividend. Another reason why it is important is that businesses can use it to expand and grow in new parts of the country or world. Without making profit you will not have a successful business. We hope you find this leaflet useful how if you need any more information then contact us on 0110 444 1234
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Unit 3 Financial Forecasting for Business
BTEC Level 2 First Business Assessment Resource Pack
Assessor’s comments Qualification
Edexcel BTEC Level 2 Certificate, Extended Certificate and Diploma in Business
Assessor name
Peter Brown
Unit number and title
Unit 3 Financial Forecasting for Business
Learner name
Tom Smith
Assignment
A1: Cost, revenue and profit
Criteria reference
To achieve the criteria the evidence must show that the learner is able to:
Achieved?
P1
Identify the difference between start up and operating costs, variable and fixed costs
Yes
P2
Identify the different types of revenue
Yes
P3
Outline the differences between gross and net profit
Yes
M1
Explain the importance of costs, revenue and profit for a business organisation
Yes
Learner feedback This unit of work has given me a good introduction into finance for a business. I now know how to calculate costs, revenue and profit for businesses. I can also create a break even graph both on paper and using the computer. The computer is easier to use if you want to make any changes to the graph as you don’t have to draw it out over and over again. The same goes for the cash flow. This is easier to do on the computer because if you make a mistake you can simply change it whereas if you make a mistake on paper you have to rub it out and start again. I have also learnt how to write a report for a business. My analysing and evaluating skills have also improved during this unit. I have enjoyed doing this unit as it included a lot of practical tasks. Assessor feedback Tom has created some good resources for Steve and Fresh Business. His leaflet is clearly laid out with the relevant sections required for P1, P2 and P3. He has also included M1 within his leaflet. His breakeven graphs are effective and he has clearly labelled them in the supporting document. The cashflow forecast covers all of the information laid out in the assignment brief and he has calculated this correctly. The report is a detailed analysis of the cash flow and the implications that arise from it. Action plan Continue to read generally around this subject and build on your excellent work. Remember to check your grammar after you’ve submitted. Assessor signature Learner signature
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Peter Brown
Tom Smith
Date Date
4.11.2010 11.11.2010
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