Steady cash flow is the backbone of any business that accomplishes its breakeven point. In order to manage all business expenses and project the approximate income needed to reap profits, it is extremely important to chart out one’s cash flow.
Small and medium businesses are essentially dependent on proper cash flows, and especially for start-ups, one must create a process flow for all business expenses early in the venture. A cash flow ideally lists out the various aspects of an establishment and growing a business, such as:
- One-time expenses for setting the business
- Funding and investments required
- Approximate fixed, variable and semi-variable costs every month/year
- Estimated sales
Business costs are approximate of three categories:
- Fixed costs are the expenses remaining constant irrespective of business operations such as employee salaries and floor costs.
- Semi-variable costs are business expenses that are constant at particular ranges of business volume and change with changing levels of business volumes.
- Variable costs are business expenses that change in direct proportion with business volume and by business units such as materials costs, sales costs, and so on.
All these business cost factors help one in analyzing the breakeven point in a business’s cash flow. Breakeven point in the cash flow of businesses is determined by the number of sales business need to make (in applicable units) or the amount of revenue it must earn before:
- Business expenses are covered
- Profits are earned and tax calculations start
Determining the breakeven point of your business’s cash flow comes handy in preparing business plans and setting sales targets. Breakeven Point analysis, also known as Cost-Volume-Profit analysis, is a technique to analyze critical sales volume at which business ales equal business costs.
The breakeven point in a business cannot be expected to be achieved if the price of products is lower than the variable costs, production capacity is limited or there is a small volume of effective demand. There are two formulas one can use to determine the breakeven point of a business. They are:
- Breakeven unit value needed before net profit = Overhead expenses/ (1 – (Cost of Goods Sold / Total Sales))
- Breakeven number of units to be sold before net profit = Overhead expenses / (Unit selling price – unit cost to produce)
Determining your business’s breakeven point will help you handle the most important aspect of setting up your new business – the number of units a product must sell to cover all costs. The analysis of the breakeven point will help you comprehend the relationship between fixed costs, variable and semi-variable costs, and the incoming cash flows.
Before establishing your venture, make sure you calculate the breakeven point to assess the time, costs and actions that will be required for you to reach the particular critical volume. Remember, every importantly, it will also help you decide on the launch of new goods, services or technologies in your business.