Cashflow & Breakeven
Special thanks to Geoff Leese
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Financial Aspects of Business
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This block of six lectures covers financial
aspects of business
The mission of all business is to make a profit
Clear monitoring and control is needed to
ensure that this can happen
This means that you need to set up a good
Information System from the start
These lectures cover the tools and skills
necessary to monitor and control the money
Software
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Businesses use software for their accounting
Excel spreadsheets are widely used for simple
accounts. You need to know something about
accounting to set up the sheets and use the functions
Specialist software also requires a knowledge of
accounting practices. GIGO!
Sage software is a widely sold specialist range of
accounting packages, for all sizes of business
Microsoft Money is inexpensive and popular for small
businesses
Accounts
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These are the profit and loss account and the
balance sheet of a company
An account is a statement of indebtedness
from one person or company to another
Companies are required by law to keep
accounts, which are audited annually by
persons who are members of an authorised
body
Accounts are kept in books (see Excel
terminology), hence bookkeeping
Topics in this lecture
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The Flow of Money
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The Death Valley curve
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Managing cash flow
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Break even analysis and
“contribution”
The flow of money
Obtain capital: own capital,
share capital, loans
Retained profit
Withdrawals
or dividends
Money leaving
the business
Buy assets:
fixed and
current
Taxation
Net profit
Loan interest
and other nonroutine costs
Day-to-day
operating
costs
Operating profit
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Sales
The six financial drivers of small firms
UPDATE INFORMATION
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SALES
Daily/weekly/monthly
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CASH
Daily/weekly/monthly
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PROFIT MARGINS
Monthly
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MARGIN OF SAFETY or BREAK-EVEN
Monthly
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DEBTORS or STOCK TURNOVER
Monthly
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PRODUCTIVITY
Monthly
(wages:sales)
Death Valley curve
CASH
£+
Establish
business
and find
customers
Business
launch
Sales
First
Sale
Cash flow
£0
TIME
Maximum borrowing
£-
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Death Valley
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The venture capital belonging to a firm is
used during start-up, and can run out before
its income reaches predicted levels
Leaching of capital makes it difficult for the
company to obtain any further investors who
can provide additional venture capital
Maximum slippage is the period between the
start of earned income and the date to which
the venture capital will support it, before
heading to death valley
Cash flow
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Cash flow is the life blood of a business; it
pays all the bills, including salaries and
wages. But many firms run low, particularly
small businesses
You can be making a profit and still run out of
cash which means that bills go unpaid
Start ups face the danger of Death Valley
Cash flow projection lists all expected
payments and receipts over a stated period
Managers use cash flow projections to plan
payments of creditors (and employees)
Managing cash flow
Your (company) working capital is the amount of cash needed to keep
the business going on a day to day basis. I.e. tied up in stocks +
debtors, + cash in bank, and - what is owed to creditors. To minimise
borrowing and ensure the maximum money is available for investment
(or paying yourself) the working capital needed to be as low as possible
Money owed
to you by
your debtors
Minimise
Stocks
Cash in bank
Current assets
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Minimise
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Money you
owe your
creditors
Current liabilities
Maximise
credit
terms
Managing cash flow
Debtors - minimise outstanding debt
Creditors - maximise credit terms
Stocks - minimise stock levels
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Debtor control / 1
Choose credit customers and set credit limits
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Choosing
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Trade references
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Bank references
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Published information
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Credit checks
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Sales visits
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Limits
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Amounts
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Time allowed
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Obtain stage payments
Debtor control / 2
Tips on speeding up payments cont.
If all else fails:
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Withhold supplies
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Try reclaiming goods
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Consider using debt collectors
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Take legal action
Stock control
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Ensure correct costings
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Ensure easy to use
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Ensure everyone uses it
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Aim at JIT
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Centralise system in small firm
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Have a reliable system that accurately
reflects practice
Police system and avoid shrinkage –
everything must be paid for in monetary
terms or paper accounts
Creditor control / 1
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Agree best possible credit terms
with suppliers and stick to them
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Do not pay early
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Establish key suppliers and make
certain they are paid on time
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Take repeat business to suppliers
where possible to develop
relationship
Creditor control / 2
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If there are problems:
Work with creditors (eg agree part
payments)
Keep bank informed
Remember that the Inland Revenue and
Customs and Excise are the most likely
organisations to put a firm into
liquidation, so keep them informed and
paid
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Insolvency
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Inability to pay debts when they are due
 Shows
need for good cash flow analysis
Individuals – may lead to bankruptcy
 Companies – may lead to liquidation
 Trustee in bankruptcy or liquidator –
specialist – appointed
 Gathers and disposes of all assets
available, to pay creditors
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Breakeven analysis
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Cost-volume-profit analysis CVP
Costs analysed into fixed costs and variable
costs
Compared with potential sales revenue to
determine the output level at which the
business makes neither a profit or a loss
(breakeven point)
Unit contribution is sale price less variable
cost; when total contributions exceed fixed
overheads, all further contribution is profit
Some Definitions
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Total costs = variable costs + fixed costs
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Variable costs are related to each item sold
(usually direct materials and labour)
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Fixed costs are all other costs
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Revenue = selling price * volume sold
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Breakeven point = the volume of sales at
which the total costs are equal to revenue
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Cost–profit–volume chart
Cost or revenue £
Target profit
C
Break-even point
B
A
X
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Y
Output volume
Contribution (C) = Revenue-Variable cost ( R-V)
Revenue
Cost or revenue £
Total costs
R3
C3
R2
Variable costs
C2
Fixed costs
C1
R1
V2
V3
V1
X1
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X2
X3
Output volume