breakeven analysis

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Financial forecasting

Financial forecasting is a very important part of a businesses planning for the future. It allows the company to see how much they can spend and they can then compare that to what they need to buy or use money for.

Financial forecasting has a wide range of uses. It is used by the company:

* to help in decision making

* as a management tool to aid control

* to assess the profitability of the business

* to plan strategies

* to control resources

* to measure the efficiency of the business

* to forecast possible future trends

For a business to be able to plan how to use it's finances it needs to forecast what is likely to happen in a specific amount of time e.g. the next 6 months, year or 5 years.

Three tools are used to aid financial planning:

* Calculation of unit cost of production

This shows the company how much the average cost will be to them to produce 1 item. It is calculated by working out how much it costs to make a batch of products, including materials and labour and then dividing it by the amount of individual items produced. It is useful to the company because they can work out the eventual selling price from the cost price by adding a % mark up e.g. 10% which will give them their profit.
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* Break even analysis

This shows the company when their costs are covered and where they begin to make profit. It is usually shown in the format of a graph. It can be used to identify when prices need to be raised, fixed or dropped depending on the company's income.

* Cash flow forecasting

This is a very important part of financial forecasting. It involves looking forward and looking at the cash flow in and out of the company. By using this tool the company can predict how much money they will have from month ...

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