Download - Cashflow & Breakeven
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Cashflow & Breakeven
Special thanks to Geoff Leese
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Financial Aspects of Business
This block of six lectures covers financial aspects of business
The mission of all business is to make a profit
Clear monitoring and control is needed to ensure that this can happen
This means that you need to set up a good Information System from the start
These lectures cover the tools and skills necessary to monitor and control the money
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Software
Businesses use software for their accounting
Excel spreadsheets are widely used for simple accounts. You need to know something about accounting to set up the sheets and use the functions
Specialist software also requires a knowledge of accounting practices. GIGO!
Sage software is a widely sold specialist range of accounting packages, for all sizes of business
Microsoft Money is inexpensive and popular for small businesses
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Accounts
These are the profit and loss account and the balance sheet of a company
An account is a statement of indebtedness from one person or company to another
Companies are required by law to keep accounts, which are audited annually by persons who are members of an authorised body
Accounts are kept in books (see Excel terminology), hence bookkeeping
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Topics in this lecture The Flow of Money The Death Valley curve Managing cash flow Break even analysis and
“contribution”
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The flow of moneyThe flow of money
Obtain capital: own capital, share capital, loans
Operating profit
Buy assets:fixed and current
SalesNet profit
Retained profit Withdrawals or dividends
Taxation
Loan interest and other non-routine costs
Day-to-day operating
costs
Money leaving the business
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The six financial drivers of small firms
SALES Daily/weekly/monthly CASH Daily/weekly/monthly PROFIT MARGINS Monthly MARGIN OF SAFETY or BREAK-EVEN Monthly DEBTORS or STOCK TURNOVER Monthly PRODUCTIVITY (wages:sales) Monthly
UPDATE INFORMATION
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Death Valley curveDeath Valley curve
Businesslaunch
Establish businessand find
customersFirst Sale
TIME
Sales
£-
CASH£+
£0
Maximum borrowing
Cash flow
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Death Valley
The venture capital belonging to a firm is used during start-up, and can run out before its income reaches predicted levels
Leaching of capital makes it difficult for the company to obtain any further investors who can provide additional venture capital
Maximum slippage is the period between the start of earned income and the date to which the venture capital will support it, before heading to death valley
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Cash flow Cash flow is the life blood of a business; it
pays all the bills, including salaries and wages. But many firms run low, particularly small businesses
You can be making a profit and still run out of cash which means that bills go unpaid
Start ups face the danger of Death Valley Cash flow projection lists all expected
payments and receipts over a stated period Managers use cash flow projections to plan
payments of creditors (and employees)
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Managing cash flow
Cash in bank
Money youowe yourcreditors
Your (company) working capital is the amount of cash needed to keep the business going on a day to day basis. I.e. tied up in stocks + debtors, + cash in bank, and - what is owed to creditors. To minimise borrowing and ensure the maximum money is available for investment (or paying yourself) the working capital needed to be as low as possible
Money owedto you by
your debtors
Stocks -Current liabilitiesCurrent assets
MinimiseMaximise
creditterms
Overall
increase in cash
available
Minimise
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Managing cash flow
Debtors - minimise outstanding debt
Creditors - maximise credit termsStocks - minimise stock levels
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Choosing Trade references Bank references Published information Credit checks Sales visits
Limits Amounts Time allowed Obtain stage
payments
Choose credit customers and set credit limitsChoose credit customers and set credit limits
Debtor control / 1
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If all else fails: Withhold supplies Try reclaiming goods Consider using debt collectors Take legal action
Tips on speeding up payments cont.
Debtor control / 2
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Stock control Have a reliable system that accurately
reflects practice Ensure correct costings Ensure easy to use Ensure everyone uses it Aim at JIT Centralise system in small firm Police system and avoid shrinkage –
everything must be paid for in monetary terms or paper accounts
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Creditor control / 1
Agree best possible credit terms with suppliers and stick to them
Do not pay early Establish key suppliers and make
certain they are paid on time Take repeat business to suppliers
where possible to develop relationship
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Creditor control / 2
If there are problems:Work with creditors (eg agree part payments)Keep bank informedRemember that the Inland Revenue and Customs and Excise are the most likely organisations to put a firm into liquidation, so keep them informed and paid
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Insolvency
Inability to pay debts when they are due Shows need for good cash flow analysis
Individuals – may lead to bankruptcy Companies – may lead to liquidation Trustee in bankruptcy or liquidator –
specialist – appointed Gathers and disposes of all assets
available, to pay creditors
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Breakeven analysis
Cost-volume-profit analysis CVP Costs analysed into fixed costs and
variable costs Compared with potential sales revenue
to determine the output level at which the business makes neither a profit or a loss (breakeven point)
Unit contribution is sale price less variable cost; when total contributions exceed fixed overheads, all further contribution is profit
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Some Definitions
Total costs = variable costs + fixed costs Variable costs are related to each item sold
(usually direct materials and labour) Fixed costs are all other costs Revenue = selling price * volume sold Breakeven point = the volume of sales at
which the total costs are equal to revenue
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Cost–profit–volume chart
Output volume
Cost or revenue £
Total revenue
Total costs
B
A
Target profit
X Y
C Break-even pointC
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Output volume
Cost or revenue £
X2
C2
X3X1
C3
C1
V1V2 V3
Contribution (C) = Revenue-Variable cost ( R-V)
R3
R2
R1
Fixed costs
Variable costs
Total costs
Revenue