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

And it good for business to use this because, worst and most likely case scenarios it allow you to see how your business will fare if you suddenly hit tough times or better than expected trading conditions. Knowing how this effects your cash position allows you to make informed and educated decisions, and you’ll be more confident of running your business. 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. Changes in technology also can be an unforeseen factor.

A Break even analysis is use for determining how much sales volume your business needs to start making a profit. The breakeven analysis is especially useful when you are developing a pricing strategy, either as part of a marketing plan or a business plan. To conduct a breakeven analysis, use this formula: Fixed Costs divided by (Revenue per unit - Variable costs per unit)

Fixed costs are costs that must be paid whether or not any units are produced. These costs are "fixed" over a specified period of time or range of production. Variable costs are costs that vary directly with the number of products produced. For instance, the cost of the materials needed and the labor used to produce units is not always the same. If the business is not breaking even you could Increase the number of sales you make by promotions, increasing the frequency with which customers purchase from you opening earlier or later than usual, increase the amount of money each customer spends with you for example, buy one and get the other half price and reduce your costs outgoing costs. 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.