Need to sell enough product to cover costs = Break even point
Variable costs e.g. raw materials
Fixed costs e.g. Rent, wages
Fixed costs make less of a contribution when you make more products !
Working Capital Cycle Cash Purchases Materials Accounts Payable Production Finished Inventory Sales Accounts Receivable Collections
Balance Sheet – A ‘snap shot’ of the companies financial situation at a point in time (e.g. end of year)
Assets, Liabilities, Owner’s Equity
Profit and Loss Statement – From…..to….
Income (Revenue) and Expenses
Cash flow Statement – From ….to….
Cash in and Cash out
Three main statements
Small Business Management , 11th edition
Longenecker, Moore, and Petty
South-Western College Publishing
Flow of Cash Through a Business Owner’s Investment Borrowed Funds Sale of Fixed Assets Cash Sales Purchase of Fixed Assets Payment of Expenses Collection of Accounts Receivable Payment of Dividends Payment for Stock Cash
The flow of cash in to and out of a business
Can be net positive or negative
Continuously moving picture
Especially important for a new start-up company- may update daily!
NOT simply sales minus expenditure
Cash Flow Long Term Short Term Positive Cash Flow Profits Essential Essential Desirable Essential Cash is King
Analysing Cash Flow
Net Cash Flow +ve or –ve? What are the problems?
Determine main causes of problem – costs or income?
Profitable companies with full order books can still fail !
Use the Pareto (80:20) Rule
Profit and Loss Statement
Reports on expenses and income over a period of time.
How does that relate to cash?
Cost of Goods sold
Profit and Loss Details
- Cost of Goods sold
= Gross Profit
= Operating Profit or Earning before interest and Tax (EBIT)
= Earnings before Tax (EBT)
= Net Profit
Why do this ?
To show investors you are profitable (or to forecast profitability)
To identify areas where the company could improve and identify potential problems
To show investors you are efficient
To show customers and suppliers you will still be around next year !
It may be required by law !
What do we expect
Three years of projected financial statements – Cash Flow, Profit and Loss, Balance sheet
A break even analysis – how well do you need to do before you make a profit ?
Estimation of costs and how much money you would ask from investors