THE FINANCIAL STATEMENTS
KEY FINANCIAL INDICATORS
ACCOUNTING ISSUES
WHAT-IF ... SENSITIVITY MODELS
TIMING MATTERS
JUSTIFYING INVESTMENT
SCORECARDS AND VALUE MANAGEMENT

ACTIVITY: What-if Quiz

Research has shown that active recall, pushing yourself to recall new information rather than simply going over it again, has a big positive impact on learning and long-term memory. Also by trying to answer questions, you gain new insights and expose gaps in your knowledge.

So here is a short active recall activity. Click on the  heading to check your answer.

For each combination of price and cost, there will be a break-even point – the point of zero profit at which all costs are covered but there is no surplus. Once the break-even point is reached, the contribution from each additional sale is net profit.

In financial terms: 

where

In units

Inputs may be divided into Global (remain the same for the forecast period) and Periodic (changeable for each period – eg monthly).

A cash flow forecast is a forecast of the net cash position each month, taking into account all cash incomings (from whatever source – investment, customer payments etc) and cash outgoings (of whatever type – purchase of assets, payments to suppliers etc).

Profit is not cash.

A sale is normally recognised in the accounts when the customer receives the product or service and an invoice is issued. However, the customer may not pay for several months. In the meantime, the company must still pay its suppliers and operating expenses – so cash is going out of the business.

A business may use money received from customers to buy equipment and stock – so cash is used up – but profits are not affected.

Working Capital is the money tied-up in the trading cycle and is summarised in the image below: