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Break-Even Analysis Income Statement Relationships Basic Assumptions Break-even Analysis

Break-Even Analysis Income Statement Relationships Basic Assumptions Break-even Analysis Working Capital. CASH IS KING A healthy company generates a positive cash flow. Financial Statements help in the process of examining the condition and performance of a company.

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Break-Even Analysis Income Statement Relationships Basic Assumptions Break-even Analysis

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  1. Break-Even Analysis • Income Statement Relationships • Basic Assumptions • Break-even Analysis • Working Capital

  2. CASH IS KING A healthy company generates a positive cash flow. Financial Statements help in the process of examining the condition and performance of a company. The key Statements to use are; Income Statement (Profit & Loss) Balance Sheet Cash flow

  3. LIMITATIONS OF BREAK EVEN ANALYSIS • Break-even analysis is concerned with the relationship between output, costs, revenues, and profit. It is a useful tool for profit planning. It does not show • Complex cost structures • Multiple products • Values that change over time (ie currency, gold, petrol) • Product with values that are not related

  4. BASIC ASSUMPTIONS OF BREAK-EVEN ANALYSIS • Cost classification • Constancy of unit selling price • Stability of product mix • No change in inventory

  5. RATIOS help keep track of performanceThere are many types of ratios that you can use to measure the efficiency of your company’s operations. The five useful ratios are: Cash in Bank / Monthly Expenses = Number of Months Until Bankruptcy Overhead Expense Percentage (OEP) = Overhead Expenses / Sales Marketing and sales: track work already signed but not yet billed/produced Production: track how efficiently your company is using its resources. Human Resources: By track how engaged your employees are.

  6. WORKING CAPITAL A measure of cash flow. It should always be a positive number. Lenders use it to evaluate a company’s ability to weather hard times. Loan agreements often specify that the borrower must maintain a specified level of working capital.The debt-to-worth ratio (or leverage ratio) is a measure of how dependent a company is on debt financing as compared to owner’s equity. It shows how much of a business is owned and how much is owed.

  7. DETAILS TO KNOW 1. Does the company have enough cash to meet all its obligations?2. Does the company generate sufficient volume of sales to justify recent investment?3. Does the company collect outstanding accounts from customers without creating a burden on its cash flow?4. Does the company make timely payments to suppliers to take advantage of discounts?5. Does the company utilize the inventory in an efficient manner?6. Does the company have sufficient working capital?7. Does the company maintain an adequate profit margin?8. Does the company produce sufficient return on investment?

  8. IN SUMMARY Break Even Point To calculate identify your Fixed costs – expenses that are constant – rent, salaries for administration, paid regardless of sales, often referred to as overhead costs Variable costs  - go up and down based on sales volume, they include inventory, shipping, and manufacturing.I

  9. Group WorkOn top of your papersClass # Names of group members present Company name Date • For your company: • Create a Cash Flow Statement for your first year • Homework for session Read Chapter 19 – Sources of Long Term Financing • From Financial-Management.Info – Session 17 & 18 • Bring PPT to Class and have Assignment Started

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