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One shows future cash flow, the other shows past. One is used to plan cash flow, the other confirms your predictions (or not!)

Bills, Staff wages, utilities, cost of stock, Rent / mortgage payments, Loan repayments, Dividends to shareholders, Stock (inventories)

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Dividends, retained profits, cash , Selling an asset e.g. old equipment

Debtors, Selling shares, Loan from the bank, Consumables (sales of products)

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1000

-1000

2 of 9

Solving cash flow problems

Cut costs e.g. Arjuns own wages

Get a larger loan

Spend more on promotions to get more sales

Special offers during the quieter months (spring / summer)

Find a cheaper supplier for the boilers

Move to a cheaper location

Sell off unused assets or stock for a discount

Ask the supplier for credit (pay later, rather than straight away)

3 of 9

Break-Even = Fixed Costs

Selling price – variable cost per unit

Break-Even = 20000

35 – 25

= 2000

4 of 9

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5 of 9

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6 of 9

1000

1000

Up

  • You can see how many products you must sell before making a profit.

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  • It makes you work out your costs (fixed and variable costs can be calculated).

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  • You can see whether you should start up your business and that the break even number of customers are realistic to achieve.

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  • You can set your price correct to make sure you can cover your costs.

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  • You can work out your margin of safety.

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  • You can make changes to see what would happen if e.g. costs rise or prices fall.

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  • It can help when applying for loans / investment to show the bank / investor your finances.

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7 of 9

1000

1000

Up

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  • Costs may have been predicted wrong or are not known.

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  • Costs may unexpectedly change, making the break even calculations incorrect.

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  • The selling price may be too high or low to attract customers.

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  • Break even doesn't predict the number of customers you will have, it just shows how many customers are needed to cover your costs.

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  • If the business sells more than one product using the same fixed costs it will be difficult to calculate each individuals products break even point.

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  • The break even graph assumes all products are sold, which may not be true.

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8 of 9

Government grant

Owners funds

Loans

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Credit cards

Retained profit

Venture capitalist

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Trade credit

Peer-to-peer lending

Hire purchase and leasing

9 of 9

£5,000 Adverse

£1,000 Adverse

Lower sales than planned and higher costs than planned meant that Mo made a loss. There is greater risk of not breaking even. He may have to cut costs in the future. He may even have to shut his business down if these variances continue.