Cash Flow and Break Even

Question 1

Breakeven point

Answer 1

The point at which the business is neither making a profit or a loss.

Question 2

Fixed costs

Answer 2

Do not vary with output

Question 3

Variable costs

Answer 3

Vary with output

Question 4

Breakeven sales level

Answer 4

BE sales level = Overheads/ Gross Margin %

Question 5

Margin of safety

Answer 5

Shows how much the output could fall before the company makes a loss.

Question 6

Fixed vs Variable costs and BE

Answer 6

High fixed costs will often make breakeven sales level high, but this risk may be rewarded.

High variable costs and low fixed costs makes for a low breakeven, and is more adaptive to change but less risk, less reward.

Question 7

Limitations of BE

Answer 7

Simplistic.

Costs don’t rise in straight lines.

Question 8

Advantages of BE

Answer 8

+ Analyses viability of a business.
+ Gives an indication of cost structure.
+ Predictive tool - profits or losses at different volume levels.
+ Gives indication of Margin of Safety.

Question 9

Cash conversion cycle

Answer 9

The process of turning a company’s product or service into cash.

Debtor days + stock days - creditor days

Question 10

Free cash flow

Answer 10

The surplus cash that the company generates after taking into account all of its operational needs.

(After tax, working capital requirements and capital expenditure)

Net profit after tax + depreciation - Change in net working capital - capital expenditure.