Breakeven
When revenue and expenditure are the same. there is no profit or loss
variable costs
raw materials, change as output
... [Show More] increases
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.
costs of sales
money it costs to make a product
gross profit formula
revenue take away cost of sales
gross profit
money made from selling a product after the cost of producing it has been deducted
positive gross profit
good news to the business.
money to pay for expenses.
money available for better equipment or expansion.
the cost of sales is not too high.
negative gross profit
cost of sales is higher than revenue
bad news to the business.
no money to pay for expenses or wages without a loan or overdraft which increases costs.
cost of sales is too high.
sales revenue is too low.
net profit is the money made from selling a product after all costs have been deducted
amount you have left after you have deducted your expenses from your gross profit
net profit formula
gross profit take away expenditure
positive net profit - good news to the business
gross profit is more than expenditure.
expenditure is less than gross profit.
the business has money it can use to expand or improve.
negative net profit - bad news to the business
gross profit is less than expenditure.
expenditure is too high.
the business is losing money.
buying cheaper raw materials
improve gross and net profit
financial statements
shows whether or not a business is doing well
assests
items owned by the business that are worth money.
liabilities
debts or obligations owed by the business
income statement, profit and loss account
shows profit or loss made by the business over a period of time
statement of the financial position, balance sheet
this lists assets and liabilities
fixed assets
needed for the business to be able to trade
current assests
which are cash or which can be easily converted into cash.
stock - which is sold to customers.
cash - received from customers and paid out to buy new stock.
trade receivables - debtors
customers who owe money
current liabilities
debts that must be paid soon
trade payables creditors
suppliers that the business must pay
overdrafts
short-term. bank loans
long-term liabilities
funds borrowed over a long time
working capital
the money the business needs every day to trade.
needs to be enough to run the business
working capital formula
current assets take away current liabilities
capital
money from internal sources such as shareholders or from external sources such as bank loans
retained profit
earlier profits the owner has kept in the business; an internal source of capital
stock
too much, sell it off
too little, buy some more
trade receivables
if this is high then collect payments from debtors
cash
if this is low, chase up debts or sell off slow-moving stock
trade payables
of debts to suppliers are high, they may stop providing goods [Show Less]