FinancePosted by Trusty Owl Thu, March 16, 2017 20:08:13
Businesses have costs. These can be VARIABLE or DIRECT costs which are directly related to the quantity of goods produced. If more is produced then the variable costs will increase.
Fixed costs or INDIRECT costs are those that are not directly to production. Examples of fixed costs will be premises costs, utility costs or vehicle maintenance. These costs would still have to be paid whether or not a business produces its goods or services.
Revenue is calculated by multiplying the quantity of goods sold by their selling price.
Profit or loss is calculated by taking TOTAL COSTS (Total Variable Costs + Fixed Costs) away from TOTAL REVENUE. If revenue is higher than total costs then a PROFIT is being made. If total costs are higher than total revenue then a LOSS is being made.
Cash flow forecasting allows a business to identify periods where there may be high cash inflows and periods where there might be high levels of expenditure.
Although costs are involved in the calculation of profit it should be remembered that a cash flow forecast cannot help with the prediction of profit. This would have to be carried out by using BREAK-EVEN ANALYSIS.
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