Finance & Operations · StudentHub Lesson
Cash Flow & Break-even Analysis
Cash flow tracks money moving in and out, while break-even analysis finds the sales level where costs equal revenue.
What you will learn
- Define cash flow and explain why it differs from profit
- Identify fixed costs and variable costs
- Explain the break-even point concept
- Calculate break-even point using a formula
- Recognize risks of poor cash flow management
Watch the lesson
What is Break Even Analysis? · Bizconsesh
Watch on YouTubeTopic notes
Main Idea
Cash flow tracks the actual movement of money in and out of a business, while break-even analysis identifies the sales volume needed to cover all costs with no profit or loss.
Key Concepts
- Cash flow: timing of money coming in (sales, loans) and going out (expenses, purchases)
- A profitable business can still run out of cash if payments are delayed (cash flow problem)
- Fixed costs: costs that stay the same regardless of sales volume (rent, salaries)
- Variable costs: costs that change with production/sales volume (materials, packaging)
- Break-even point: the sales level where total revenue equals total costs
Definitions
- Fixed cost: an expense that doesn't change with output level
- Variable cost: an expense that changes in proportion to output
- Contribution margin: selling price minus variable cost per unit
Formulas
- Break-even units = Fixed Costs ÷ (Price per unit − Variable cost per unit)
Examples
A business has $2,000 fixed costs, sells a product for $20, with $10 variable cost per unit. Break-even = 2000 ÷ (20-10) = 200 units needed to cover costs.
Common Mistakes
- Confusing profit with available cash (a business can be profitable on paper but cash-poor)
- Forgetting to separate fixed and variable costs correctly
- Ignoring break-even analysis before pricing decisions
Key concepts
Important terms
- Fixed cost
- An expense that stays the same regardless of production or sales volume.
- Variable cost
- An expense that changes in proportion to production or sales volume.
- Break-even point
- The sales level at which total revenue equals total costs, resulting in zero profit.
Worked examples
Problem
Fixed costs are $3,000. Price per unit is $50, variable cost per unit is $30. Find the break-even point in units.
- 1. Contribution margin = 50 - 30 = 20
- 2. Break-even units = 3000 ÷ 20
Answer: 150 units
Quick revision
- Cash flow ≠ profit; timing matters
- Fixed costs stay constant; variable costs scale with output
- Break-even units = Fixed Costs ÷ (Price − Variable cost)
- A business can be profitable but still run out of cash
- Break-even analysis helps guide pricing and cost decisions
Check your understanding
Question 1 · Multiple choice
What is a fixed cost?
Question 2 · Multiple choice
Break-even point is the sales level where:
Question 3 · True or false
A profitable business can never run out of cash.
Question 4 · Short answer
If fixed costs are $1,000, price per unit is $25, and variable cost per unit is $15, what is the break-even point?
Question 5 · Multiple choice
Variable costs are best described as costs that:
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