Breakeven
When revenue and expenditure are the same. there is no profit or loss
variable costs
raw materials, change as output
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margin of safety
is the amount by which sales would have to fall before the break-even point is reached
total costs
fixed costs plus variable costs
break-even point
when a business has made enough money through product sales to cover the cost of making the product
selling price
total revenue divided by maximum number of products
increasing the price
break even point falls
reduce the price
break even point becomes higher
break even analysis
planning tool that helps businesses to make the right decisions and increase their chances of success
benefits of break even analysis
business knows the fixed and variable costs linked to a product.
the business can set the best price for a product.
it allows the business to set a margin of safety.
risks of ignoring breakeven analysis
the business does not know the costs of production and running costs.
the business does not know how many items it must sell to make a profit.
the business may make a loss without realising or knowing why.
break even point will change
if costs change or if the selling price changes
if costs fall
the breakeven point is lower so the business makes a profit
the lower the breakeven point
the fewer the sales needed to make a profit
total sales revenue formula
number of sales times price per unit
to make a profit
revenue must be higher than expenditure
profit formula
revenue take away expenditure
netflow/outflow formula
inflows take away outflows
net inflow
increases money already in the bank
net outflow
reduces the money already in the bank
improving inflows
chase up late payments.
avoid giving credit to unknown customers.
give discounts for early payment.
improving outflows
delay some payments.
reduce stock levels.
make cutbacks to reduce expenditure.
cash flow forecasting
planning tool, it helps businesses avoid the risk of serious money problems and to plan for success
benefits of cash flow forecasting
expensive items can be bought at the best time.
the timing of inflows and outflows is known.
surplus cash can be invested.
risks of not forecasting cash flow
late inflows may not be identified.
there may not be enough cash to pay for bills or wages.
the business may run out of money and have to cease trading. [Show Less]