Explain the importance to a selected business of cash ow, working capital, costs and budgets and break-even.

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I am the assistant finance manager of PricewaterhouseCoopers (PwC) and I have been asked to write a report to Nintendo giving advice and guidance on the factors of business survival. These factors consist of cash flow, working capital, costs, budgets and break-even.

The first factor Nintendo need to consider is cash flow; Cash flow is the movement of cash going in and out a business over a period of time. Cash flow is important because it will allow Nintendo to identify problems before they occur. They can do this by looking at a cash flow forecast; this is a prediction of how much they are expected to make and pay. From the cash flow forecast Nintendo will be able to see if they will have any deficits. If they do they may need to find a solution. This could be, a loan, trying to reduce costs or trying to sell more of their products. Additionally, cash flow can help Nintendo use extra cash. The forecast will be able to predict when Nintendo will have excess cash and therefore Nintendo can plan in advance what they want to do with it. For example, if they have extra cash they may want to use this to release a new product, this is because they will be in less danger of deficits. Furthermore, it can help Nintendo plan with minimum borrowing. If the forecast shows that they will be in danger of deficit they will need to find a way to overcome this. Instead of applying for a loan Nintendo can find ways to reduce their costs, this may be by buying cheaper raw materials or making a decision whether or not they need all their staff. Also, Nintendo may want to produce less in the middle of the year than at Christmas. This is because at Christmas there is a high demand of their product whereas in the middle of the year they may struggle to sell all their products. However if Nintendo are unable to reduce their costs and still need to borrow money, cash flow will help them. Cash flow will allow Nintendo to gain financial help. This is because banks will always ask for a cash flow forecast, and if they don’t have one the bank may deny financial help.
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Next, Working capital is another factor which is helpful for business survival. Working capital is the cash available to a business that allow them to operate on a day-to-day basis. Working capital is the engine of the business, and is what produces profit. Working capital can be seen as an investment; the business wants to gain more money at the end of every cycle. The working capital cycle consist of a starting amount of cash which is used to buy raw materials, then labour turn the raw materials into the finished product which is then sold, this then ...

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