Advanced Reports and Analyses By Knowing your cash flow forecasts Position now and in the future. you can 1. Make certain you have enough cash to purchase sufficient inventory for seasonal cycles. 2. show lenders your ability to plan and repay financing
how is a working capital analysis prepared?
Advanced Reports and Analyses
This section introduces some of the more common reports prepared from an accounting system that have, over the years, proven to be valuable tools for managing a business. These include:
• Cash flow forecasts
• Working capital analyses
• Break-even analysis
• Profitability analyses
Cash flow forecasts
There is a saying in business that “Cash is King”. One of the worst things that can happen to a company is to run short of cash unexpectedly.
By knowing your cash flow forecasts position now and in the future, you can:
Make certain you have enough cash to purchase sufficient inventory for seasonal cycles;
• Take advantage of discounts and special purchases;
• Properly plan equipment purchases for replacement or expansion;
• Prepare for adequate future financing and determine the type of financing you need (short term credit line, permanent working capital, or long-term debt).
• Show lenders your ability to plan and repay financing.
For a new or growing business, the cash flow projection can make the difference between succeeding and failure. For an ongoing business, it can make the difference between growth and stagnation.
Working capital analyses
Working capital is commonly defined as the funds a business needs to support its normal operations. In some ways, a working capital analysis is similar to a cash flow forecast, but it differs in its focus on the operating cycle of the business.
A working capital analysis is prepared such that assumptions are made about the impact on working capital as a result of activities during the forecast period in order to provide the business owner with assurance that adequate working capital to support operations will be generated by normal business operations. If not, alternative sources of working capital must be lined up, and the earlier such a need is recognized, the better.
A break-even analysis is designed to show you how much revenue must be generated to cover your fixed and variable costs. Revenue below the break-even point means the business is losing money and revenue above the break-even point means the business is profitable.
To conduct your break-even analysis, take your fixed costs, divided by your price minus your variable costs. As an equation, this is defined as:
Break-even Point = Fixed Costs/(Unit Selling Price - Variable Costs)
This calculation will let you know how many units of a product you will need to sell to break even. Once you have reached that point, you have recovered all costs associated with producing your product (both variable and fixed).
Above the break-even point, every additional unit sold increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits. As an equation, this is defined as:
Unit Contribution Margin = Sales Price - Variable Costs
There are many types of analyses that managers prepare in order to gain a deeper insight into the operations of their businesses. One of the most important of these is profitability analyses.
Managers, know, intuitively, that some customers are more profitable than others, that they make more gross margins on some products than others, and if the business has more than just local coverage, that some geographical regions are more profitable than others. While it is good to know such things intuitively, it is better to know them for sure. And knowing them for sure requires that systematic analyses be prepared
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