Cashflow & Breakeven

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Cashflow & Breakeven. Special thanks to Geoff Leese. Financial Aspects of Business. 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 - PowerPoint PPT Presentation

Transcript of Cashflow & Breakeven

Finance – Cashflow and Breakeven*
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
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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
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Accounts
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
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Operating profit
Buy assets:
Day-to-day operating costs
SALES Daily/weekly/monthly
CASH Daily/weekly/monthly
DEBTORS or STOCK TURNOVER Monthly
PRODUCTIVITY (wages:sales) Monthly
Death Valley
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
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Cash flow
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
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creditors
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
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Debtor control / 1
Debtor control / 2
Ensure correct costings
Centralise system in small firm
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Creditor control / 1
Agree best possible credit terms with suppliers and stick to them
Do not pay early
Establish key suppliers and make certain they are paid on time
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Keep bank informed
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Shows need for good cash flow analysis
Individuals – may lead to bankruptcy
Companies – may lead to liquidation
Trustee in bankruptcy or liquidator – specialist – appointed
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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)
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Total costs = variable costs + fixed costs
Variable costs are related to each item sold (usually direct materials and labour)
Fixed costs are all other costs
Revenue = selling price * volume sold
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R3
R2
R1