A business's cash flow break even point is a vital calculation that can help you evaluate the financial health of a company. This figure takes into account not only how much the company needs in sales to pay its expenses, but also when the money from those sales will be collected versus when the bills are due. Learn how to calculate a cash flow break even point so you can foresee any periods where you may have to borrow money or sell assets to cover expenses.
Forecast sales for the coming year. This forecast should be based on strong factual evidence, past performance and an analysis of the market, the number of customers available, the strength or weakness of your competition, and the overall economic outlook. Make a conservative estimate of your sales on a month-by-month basis for the coming year.
Determine your average collection time on outstanding sales. For example, you may have large customers who expect a 60-day period to pay invoices, and you may have cash customers who pay on delivery. Determine the average of all your current customers' payment periods. Assume that your current customers are indicative of your customers for the coming year and that you can expect a similar delay in payment on average.
Examine your fixed costs, the ones you pay on a monthly basis. These can include rent, lease payments on equipment, loan service and wages. Mark down the amounts that will need to be paid for each month.
Write down your variable costs. These include materials and supplies, as well as the purchase of new equipment. It is not always possible to predict when these expenses will arise, but you can use past years as a guide and make some educated guesses.
Add up your cash on hand. Any cash you have in bank accounts should go into this figure. You can also add your accounts receivable that are currently due.
Perform your cash flow break even calculation. For each month, add your expected collections from past sales. Add up your projected expenditures. The amount where your collections equal your expenditures is the cash flow break even point for that month. Do this for each month and note any potential shortfalls you may have to cover with cash on hand, borrowing or sale of assets.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.