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Evaluate the importance of cash flow and breakeven for the effective management of business finance.

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Introduction

´╗┐To Jackie Mitchell From Deneisha Ross D1 - Evaluate the importance of cash flow and breakeven for the effective management of business finance. The two main ways of managing business finance is to use breakeven and cash flow forecasting. Robust cash flow forecasting & management helps run smooth & un-interrupted business operation. Cash flow forecast will to improve cash position and implement cash flow forecasting process thereby assisting in managing funds flow effectively because all business needs cash to survive. Even if the business is profitable on paper, you need cash flowing into the business faster than it's flowing out. If it doesn't the business will be in a position where you're unable to pay suppliers or your staff. Understanding cash flow is the key to running a successful small business. Good cash flow management will help ensure your business runs smoothly and it gives you the insight to keep on top of your business? financial health. Cash flow forecasting is use for forecasting an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. ...read more.

Middle

You can use your cash flow forecast to check if your business is meeting your expectations. Comparing your actual income and expenses with your forecasts can identify areas where your business is over or under performing. Reviewing your actual performance against your forecasts alerts you to any variance so you can investigate and find out why there is a difference. If your sales are higher or lower than forecast for example, you’d want to find out why. Are your forecasts too high or too low? Has a competitor changed strategy or has a new competitor entered your market? Do you have a customer service or quality control issue? Using forecasts in this way allows you to actively manage your business. It empowers you to ask the right questions, and ultimately make the right decisions. However, there are some dis-advantages to this the estimates can prove to be wrong in some cases. The percentages, however, can be incorrect and display inaccurate results. For example, companies may expect to receive £5,000 from selling widgets in the northeast. Cash receipts only result in £4,000 from sales due to current conditions and Unforeseen Factors such as a significant increase in competition or excessive government regulation can quickly change expected cash flows. ...read more.

Conclusion

Although, break-even analysis is a very useful risk assessment technique and a useful device for testing the sensitivities of business performance, the following limitations must be considered. All costs resolved into fixed or variable, variable costs fluctuate in direct proportion to volume and fixed costs remain constant over the volume range. The selling price per unit is constant over the entire volume range and if the company sells only one product or mix of products tends to remain constant. Conclusion In my opinion I think a cash flow is the balance of amount being received and paid by a business during a period of time. A cash flow statement is a statement that shows a business cash flow, what means it shows the money that is coming in and out what is called cash flow in- and outflows. This statement shows the changes in balance and income. A cash flow forecast is a business cash flow over a specific time what means is the change in cash from one period to the next period. Break-even analysis is valuable as a preliminary decision-making tool, but care should be taken so that the management doesn?t reply solely on this technique. It doesn?t guarantee that the firm would make a profit rather it is a great planning tool. ...read more.

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