Bizstartup.ie - Biz Centre

Cash is the lifeblood of every business, and managing cash flow is critical to the survival of every business. If the business does not collect payment from customers for the goods it sells, it puts pressure on cash flow because insufficient funds are available to pay suppliers.

By managing your cash flow successfully, you will also build up a good relationship with your bank, which will work in your favour if you need to get a loan at a later stage, and you can also minimise bank charges. If you do not manage your cash flow, you run the risk of exceeding your overdraft limit, for which you will be charged, and having items returned unpaid because there is no money to meet them.

Tips for comprehensive cash flow projections

• Include realistic costs of the premises, machinery, vehicles, office equipment
• Outline any assumptions used for cost of sales, administrative and selling expenses
• Detail proposed funding from key people, other private capital investment, grant aid and funding required from the bank should be given
• It is important that your projections are completed as accurately as possible. You may find it useful to get help from an accountant.

Break-even analysis calculates at what level of sales you break even – ie how many units you need to sell to cover your costs. Your accountant will be able to help you calculate this. Every unit you sell over break-even point contributes to profit. Break-even analysis examines some of the critical profit drivers of your business – sales volume, average cost of production and the average sales price.

To calculate the number of units you need to sell to break even, you need:

• Average sale price for product/service
• Average variable costs for producing your product / service
• Start-up (if new business) and/or fixed costs.

How do I calculate a break-even point?

(Average Sale Price x Units) – (Fixed/Start-up Costs

+ (Average Variable Costs x Units)) = 0

Example:

ABC Ltd

Average sale price of product: €25

Average variable costs to produce the product: €5

Start-up costs: €1,000

Break-even point calculation:

(€25 x Units) – (€1,000 + (€5 * Units)) = 0

(€25 x Units) = (€1,000 + (€5 * Units))

25 Units – 5 Units = 1000

20 Units = 1000

Units = 1000/20

Units = 50

ABC Ltd needs to sell 50 units of their product to breakeven. If they sell more than 50 units, they make a profit.

This article appears courtesy of AIB

This article © copyright Allied Irish Banks, p.l.c. 2010. The information does not constitute tax, legal, investment or any other advice by AIB. No representations or warranties are made as to the reliability, accuracy or completeness of the information.