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

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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. A forecast usually covers the next 12 months; however it can also cover a short-term period such as a week or month. Cash flow forecasts can help predict upcoming cash surpluses or shortages to help you make the right decisions. It can help in tax preparation, planning new equipment purchases or identifying if you need to secure a small business loan. You can also use it to see the effect of an upcoming business change or decision. If you’re considering hiring a new employee for example, you would add the additional salary and related costs into your forecast. The new figures in your cash flow forecast will tell you whether hiring that additional employee is likely to place your business in a stronger position and help you decide whether to hire them or not.

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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 ...

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