Cash Flow Planning And Break Even Analysis
Small Business Victoria: Information Sheet
â–ŒBusiness essentials: cash-flow forecast and break-even point
The basics:
â–ŒMain topics
among the most important figures for your business is cash flow, use it to
- Overview
predict if you’ll have enough money to pay future bills
- The cash flow forecast:
don't confuse making a profit with cash flow. You might be making a profit,
cash is oxygen
but if you run out of cash to pay your bills, your business can't operate
- The break-even point is
you can be making what seems a healthy turnover but in fact making a loss:
where profit starts
work out the break-even point so you know how much you have to sell to
- Contacts details for
cover your costs
information and support
Overview
This information sheet describes two basic financial tools every business should
use, the cash-flow forecast and the break-even point. You don't have to be an
accountant to understand these terms, as once you read this information sheet
you’ll see why they are 'must haves' for success.
The cash flow forecast: cash is oxygen
Overview
â–ŒThe most important tool for business health Cash is the oxygen of
business, because unless cash is available to pay bills when needed the
business might be unable to operate or close its doors — even if profits are
being made.
A cash flow forecast helps you estimate how much you can spend today
without unexpectedly running out of cash. It uses estimated or real figures you
collect and add to a simple worksheet (Table 1 on page 4) from the day you
start the business. After 12 months you'll have a good idea as to what your cash
balance will be, month by month for your second year of operation. You can also
use the worksheet to write a business plan using cash flow projections
(estimates). For more details about writing business plans, visit the Business
Victoria website (www.business.vic.gov.au).
There are a few ways to use a cash flow forecast as a planning tool:
short term planning to see where more cash than usual is needed in a
month, for example, when several large annual bills are due, and the cash in
the bank is likely to be low.
business planning (long term planning) to find where cash flow could
break the business, especially when the business wants to expand. For
example, a seasonal swimwear retailer, after months of quiet winter trading
with a low cash flow, has to buy new season's stock, employ extra staff and
advertise. But it may also be planning to extend into the shop next door.
After several lean months, the cash supply may be at its lowest — even
without the added expense of the new premises. Cash will be very tight for
several months, even with good takings, so the cash flow will need careful
planning.
Page 1 of 6 | February 2010
Small Business Victoria: Information Sheet
â–ŒBusiness essentials: cash-flow forecast and break-even point
Using a cash flow spreadsheet
Having a cash flow spreadsheet is just the first step. You need to know how to
analyse the figures to see where the strengths and weaknesses of your
business are:
You should be doing all of the following
estimate your cash flow if you're writing a business plan
track your actual cash flow if you already have a business
stress test what will happen to your cash flow if there’s a increase or
fall in profits and expenses (depending on what you’re expecting)
Estimating your cash flow for a business plan
Another way to use the Table 1 is to estimate what will happen in the first year
without knowing the real figures, a common task for someone writing a business
plan.
To estimate your cash flow before the business starts (using Table 1):
Step 1: Write your estimates into Table 1. Be conservative, especially with
cash in. Don't forget to factor in GST, payroll taxes, superannuation etc
Step 2: Once the business starts operating, replace your estimates at the
end of each month with the real cash in and cash out figures
If you're going into business for the first time, estimating cash in and out is hard
as there are so many unknowns. Good market research is the answer. Perhaps
speak to another business like yours (and distant enough so they won't see you
as a competitor), or an accountant who prepares tax returns for your type of
business, or an industry association.
To find a business or industry contact, use the Contact Search on the Business
Victoria website (www.business.vic.gov.au). The website also has a section
called Planning Your Finances with more detailed information about cash flow.
Tracking your actual cash flow
To track your cash flow once the business starts (using Table 1):
Step 1: On the first day of the business, write the cash balance (the money
the business actually has in the bank) in the top row of Month one.
Step 2: At the end of the first month, write in the actual figures for cash in
and cash out. When a customer pays on a past invoice, add the payment to
the cash in, in the month you receive it. When you pay an invoice, add the
amount to cash out in the month you actually pay.
Step 3: at the end of the month, you can work out the net difference, that
is, if more cash came in, than went out (or vice versa). For example, if cash
in was $5000, and cash out was $3500, net difference was $1500. Or
perhaps month one was less than brilliant, cash in was $6000 and cash out
was $9000, so the net difference was –$3000.
Step 4: Add or subtract the net difference (step 3) from the opening cash
balance (step 1) for Month 1. The result is the first month's cash balance
(bottom row). For example, if the cash balance was $10,000 at the start of
month one, and the net difference was –$2000, then the new cash balance
for month one was $8000.
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Small Business Victoria: Information Sheet
â–ŒBusiness essentials: cash-flow forecast and break-even point
Step 5: Now write month one's cash balance in the top row of Month two:
this is now the cash balance for the start of month two. (Table 2 has a
worked example.)
▌
Stress test your business
Did you know?
Odd as it may seem, most
Another way to use a cash flow spreadsheet is to experiment with what will
small businesses are making
happen if there’s a fall in income or increase in expenses. This is also known as
a profit when they go out of
scenario planning.
business. Why? Because
they ran out of cash to pay
To stress test your cash flow (using the cash flow worksheet on the Business
their bills and had to close
Victoria website):
their doors.
Step 1: Write your estimates into the worksheet. Be conservative, especially
Use cash flow planning as a
with cash in. Don't forget to factor in GST, payroll tax, superannuation etc.
tool to make sure you know
Step 2: Use the cash flow scenario planner and select the cells in B6 and
the best times to spend,
B7. Using the drop-down fields at the top, choose a percentage change to
especially if you need extra
cash to expand the business.
your forecast income and expenses.
Step 3: On the tab labelled cash flow report you are able to view an
estimate of your cash position based on your scenario e.g. costs go up 5%.
Note: If your cash position is negative at any time you will need access to
cash to meet your commitments.
It is important to understand your profit is dependant on changes in income and
expenses. You will need to know how much expenses have to be reduced when
revenues fall to remain profitable.
Page 3 of 6 | February 2010
Small Business Victoria: Information Sheet
â–ŒBusiness essentials: cash-flow forecast and break-even point
Table 1: Cash flow for the first year: When you start the business, add your monthly figures for cash in and cash out. If you are using the table as part of a
Diagram 1 : Sample cash flow for the first three months. Note
business plan, fill out as much of the table as you can with the cash flow projections (estimates) and replace these with the real figures when you have them.
how the cash balance (bottom row) for the end of Month two is
the same as Month one, because the business has started to
Month *
Month
Month
Month
Month
Month
Month
Month
Month
Month
Month
Month
Month
cover its costs. Month three shows a net difference of $2,000,
one
two
three
four
five
six
seven
eight
nine
ten
eleven twelve
which means $2,000 more cash in than cash out, or profit.
Cash balance at the start of
each month
Cash in
Sales income
Investments
Other income
Total cash in at end of month
Cash out
Administration, insurance
Marketing
Cost of goods
Interest expense, bank charges
Capital costs
Tax, GST, wages, PAYG,
super etc
Other payments
Total cash out at end of month
Net difference â€
(subtract cash out from cash in)
Cash balance at the end of
each month ‡
Notes:
* You may wish to write in the names of the months under the numbers to keep track. The 1st month is the month you start the business
†'Net dif erence' shows if more cash came in, than went out, or vice versa; and how much.
‡ To get the cash balance (last row), add or subtract the Net difference from the Cash balance at the start of the month (top row). This figure becomes the next
month's new cash balance.
Page 4 of 6 | February 2010
Small Business Victoria: Information Sheet
â–ŒBusiness essentials: cash-flow forecast and break-even point
â–ŒTip
The break-even point is where profit starts
In some cases you'l need to
rely on loans or savings for
Every business needs to know how many sales have to be made before all the
more than a year until the
expenses are covered and actual profit begins. A business could well be turning
business turns over enough
over a lot of money — but running at a loss. This is where a simple calculation,
to be profitable.
the break-even point, is used to find where profit really starts.
Avoid taking money out of the
Break-even analysis: To find the break-even point we use a calculation called
business unless it's in your
the break-even analysis. Keep in mind it's just an estimate, because in reality
financial plan, as it will take
calculating an exact break-even point is complicated.
the business longer to reach
the break-even point.
Using the break-even analysis to calculate the break-even point
Consider using a small
business mentor along the
To do the calculation, we'll use three figures from an average month's sales,
way or another professional:
extracted from the twelve-month statements of profit and loss, and cash flow. If
they can offer objectivity and
you don't have these figures (perhaps you're writing a business plan for a
advice, especially if your
business prospects appear
business you want to start) use your best estimates. The following table defines
less than bright.
the terms using an ice-cream retail outlet as an example.
Contact details for the Small
Table 2: Three figures used to calculate the break-even, with examples from an ice-cream retail outlet
Business Mentoring Service
are on the last page.
Description of terms used to calculate break-even
Example: ice-cream shop
Average total revenue per unit: This is the price you charge the customer
Our shop sells natural ice-
for each sale (or hour of service for a service provider) before you deduct
creams at $5.00 each
any of your costs to produce it.
Average per unit cost: what it costs to make each unit (a unit can also be
The cost of materials and
an hour of service) once the business is set up and ready to produce and
basic labour for each ice-
â–ŒOnline break-even
sell it. The per unit cost includes the materials and direct labour costs. The
cream is $2.00 each.
calculator
cost doesn't consider complicating factors such as savings made from
buying materials in bulk.
Use this online calculator
An average month's fixed running costs: the costs for an average month
We spend $5,000 a month
from ANZ to help you analyse
for lighting, insurance, wages, office stationery, rent, interest payments.
to run a shop and lease
how much you need to sell to
These are basic running costs you have to pay in an average month to be
the equipment.
cover start-up costs, fixed
able to start producing and selling the very first item of anything.
costs in an established
business or to achieve a
The formula is:
desired profit level.
Average month's fixed running costs
Breakeven calculator
= break-even point (number of units to sell)
(Unit selling price – cost to produce)
Insert your figures here:
Example using the figures from the ice cream
shop:
$
average month's fixed running costs
$5,000
average month's fixed running costs
$
average revenue per unit
$5
average revenue per unit
$
average per unit cost
$2
average per unit cost
5000
= units you'll need to
(5 – 2) = we need to sell 1,667
sell per month before
ice-creams
a
month
you make a profit
before we make a profit
So, by adding up these expenses and takings, we can plot a simple graph
(Diagram 2) to see when a month's ice-cream sales will cover costs: in this case
it's when we sell 1,667 ice-creams (or we look at the break-even point for a
month in terms of $'s only, which would be 1,667 ice-creams x $5 = $8,333).
Remember this simple version of the break-even calculation uses just one
product — an ice-cream sold at one price. The calculation avoids the complex
Page 5 of 6 | February 2010
Small Business Victoria: Information Sheet
â–ŒBusiness essentials: cash-flow forecast and break-even point
realities of a business selling different products with different profit margins. The
â–ŒDid you know?
point of this exercise is to help you build an understanding of the value of
calculating the break-even point and its value to the business.
Odd as it may seem, most
small businesses are making
Note: The $5,000 month's running costs from the example above are listed as
a profit when they go out of
business. Why? Because
the -$5,000 loss in Diagram 2, because it is where zero ice-creams have been
they ran out of cash to pay
sold, so no running no costs have been covered by sales.
their bills and had to close
their doors.
Diagram 2: Graph shows how many ice-creams we have to sell before losses end and profits start
Use cash flow planning as a
Profit $4,000 -
tool to make sure you know
the best times to spend,
$3,000 -
especially if you need extra
$2,000 -
cash to expand the business.
$1,000 -
Break even point $0 -
The break-even point. Profit
starts above this point when
– $1,000 -
enough sales cover costs.
– $2,000 -
– $3,000 -
– $4,000 -
Loss – $5,000 -
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0 500 1,000 1,500 2,000 2,500 3,000
1,667
Ice-creams sold in an average month
Contact details for information and support
What they can help you with
Address and phone details
Website
All small business enquiries
Smal Business Victoria
www.business.vic.gov.au
Visit the Victorian Consumer & Business Centre
Visit the Business Victoria website for more
Ground Floor, 113 Exhibition Street, Melbourne VIC 3000
information about business finance
Business Victoria 13 22 15
TTY (telephone typewriter) Service (03) 9651 7596
For your nearest Victorian Business Centre (VBC) cal the
Business Victoria on 13 22 15
www.business.vic.gov.au/vbc
Look up licences and permits required by
Business Licence Information Service (BLIS) section of the
www.business.vic.gov.au/blis
business from state, federal and local
Business Victoria website
governments on the Business Licence
Information Service (BLIS)
Search for contact details across all levels of
Contacts section of the Business Victoria website
www.business.vic.gov.au/stepbystep
government and business organisations
Mentoring and business referrals
Small Business Mentoring Service (SBMS)
www.sbms.org.au
Call Business Victoria 13 22 15
Disclaimer: The information contained in this publication is provided for general guidance only. The State of Victoria does not make any representations or
warranties (expressed or implied) as to the accuracy, currency or authenticity of the information. The State of Victoria, its employees and agents do not accept
any liability to any person for the information or advice which is provided herein. Authorised by the Victorian Government, 113 Exhibition Street, Melbourne, 3000.
© Department of Innovation, Industry and Regional Development 2008
Page 6 of 6 | February 2010
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