Q6 — Cash-flow forecasting (analysis)

Analyse the importance of producing a cash-flow forecast for a new start-up business. (6 marks)

Mark scheme (6 marks — AO1 + AO2 + AO3):

• Level 1 (1-2): States a benefit (e.g. 'helps plan').
• Level 2 (3-4): Explains one developed reason — e.g. 'identifies months with negative closing balance so the entrepreneur can arrange overdraft facilities in advance, avoiding emergency borrowing at higher rates'.
• Level 3 (5-6): Two logical chains, applied to a start-up context. Indicative content:
  • Highlights timing mismatches between inflows (often delayed in early months) and outflows (rent, stock, wages payable immediately).
  • Acts as evidence required by lenders and investors when applying for finance.
  • Allows comparison of forecast vs actual to spot variances early.
  • Reduces risk of insolvency — the leading cause of start-up failure in Year 1.
• Top-level response should weigh that forecasts rely on assumptions which may prove inaccurate, but conclude that they remain essential as a planning and monitoring tool.