Essay
Business Financial Performance level 3 P1 UNIT 2
- Institution
- PEARSON (PEARSON)
Explain the importance to a selected business of cash flow, working capital, costs and budgets and break-even.
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I will be explaining the importance of cash flow, working capital, costs and budgets and break-even toASDA.
Cash inflow is money entering the business such as sales and cash outflow is money going out of the
business which will be their expenses. Break-even is when a business does not lose money or make a
profit. Cost is the expenses of the business such as what they have to pay or buy such as rent. Budget is
their plan and how much they can spend in a certain time on something. Working capital is the measure
of the businesses liquid funds; current assets-current liabilities will equate to liquid funds which is what
the business owns that can be turned into money.
Cash inflow is important because it shows if the business can afford to keep running and if they are doing
well. Cash inflow will give ASDA the opportunity to afford to pay any debts in difficult situations and they
can also afford to expand and create ideas to make more cash inflow. If ASDA wanted to make a loan or
was looking for an investor cash flow is what will make the bank or investor make the decision to borrow
ASDA money or the investor to invest in them as they will need to know if they will certainly get their
money back. Cash inflow is important because the business will be able to use the money for
emergencies and they will not be stuck in an difficult situation and they can use the cash to meet their
important needs. Also cash inflow shows customers like their product or service. Cash flow is important
because it shows a business can manage their income and expenses, even though they are making
money they will also have expenses to pay such as their suppliers. Cash outflow is important because the
business will need to pay their employee’s wages and suppliers etc, in order to keep the business
running.
Break-even is important because even if a business does not make profit, they did not lose money either.
Break-even can happen when a business does a sale and it is important because it allows them to know
whether they should continue to do a sale like that or if they can come up with another type of sale
which will bring them profit and not break even. Also break-even is important because it also allows a
business to know that their costs must be paid first before they can make a profit. Break-even lets a
business know if they are selling their products too high or too low and if they need to find cheaper
suppliers because if their suppliers charge them a lot and it cost them a lot to make the product and they
do not make a profit or loss, they should find cheaper suppliers for them to actually make a profit.
A budget is important because it stops the business from over spending, when they know their budget
and that is what they can afford only they will over spend and go into debt, a budget makes a business
organised and they will not have to rush things and be looking for a loan last minute because they did
not budget and now overspent. A budget also lets the business know an estimate of how much they will
be earning and this allows them to plan for their expenses. If a business is in debt and they create their
budget they will come out of the debt sooner if they budget correctly as they know everything they will
need to spend on and not overspend. A budget also allows a business to identify what they have been
wasting money on, which they can stop and now save that money. Budgeting also allows the business to
know what they can and cannot afford and gives them time to find low priced alternatives and with
budgeting the business knows they will allows have enough money for what they need and a budget will
allow the business to know if they have a extra money or if they do not have enough which when they
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