Breakeven cash flow is when a company’s cash inflow matches its cash outflow. It is essential for business success and can be planned through cash flow forecasts. Profitability does not guarantee breakeven cash flow, and it is different from budgeting.
Breakeven cash flow is the point in a company’s operations when its cash inflow matches its cash outflow. The term is primarily associated with businesses, but an individual could use the term to describe personal income if they so wish. Cash flow is the actual movement of cash in and out of company accounts, so breakeven cash flow means that the amount of money coming in is the same as the amount of money going out to pay for bills.
A cash flow that has not yet broken even can result in the failure of the business, even if the business is technically profitable. Workers will not work for several months with a promissory note as payment. This means the company must start with money already in their accounts to cover costs if money from their sales or services doesn’t come in right away.
Cash flow is different from profit and loss statements. A company may appear profitable because it is selling items or gaining customers, but if the money comes in installments or is delayed for other reasons, the company will not have the cash on hand to handle the expenses that are due before the money comes in. To put it in smaller household terms, this is a paycheck or bills paid versus bills and rent. What the homeowner doesn’t really have in a bank account isn’t the equity in the home, nor is it the growing interest in a retirement plan that the employee can’t touch for 40 years. Someone might have a great pension owed in the future, but that means nothing if the person doesn’t have the cash to pay the electric bill today.
The level of cash flow can vary from month to month, with some months looking very positive and upbeat. Other months, however, may require more cash from the owner. Breakeven cash flow occurs once the business always has enough cash on hand from revenue to cover all expenses, including taxes, benefit payments, and all other possible costs.
Businesses can set up cash flow forecasts to plan for upcoming expenses and try to predict when they will get balanced cash flow. These forecasts are like monthly budgets that show what business owners need in terms of cash to keep going as they build up to the point where they consistently earn more than they spend. Cash flow forecasts flag those times when a sudden increase in cash flow is necessary, such as increased payroll costs from hiring more employees for the holidays at a retail store. However, business owners should not confuse cash flow with budget. A budget may set aside a certain amount of money for an item, but the actual amount spent may be different, resulting in a different amount of cash flow.
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