Importance of break-even point and cash flow

First of all, let’s consider what break-even point and cash flow are. Then, the definition of Boston Box matrix and Porter’s account are to be identified. Finally, follow by a discussion why both groups of business management approach are as important as one another.

Break-even point is very important to businesses, because it indicates the point of sale that can be cover the total initial investment. If the firm’s revenue is above the number of break-even point, then it is considered profitable from the investment, however, if the firm’s revenue is below that point, then the firm is still at a loss.

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On the other hand, cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. There are 3 types of cash flow:

Operational Cash Flows – Incoming/outgoing cash from business’s activity (this must be positive to remain solvent)

Investment Cash Flows – Long-life assets, investment

Financing Cash Flows – Debt, equity

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Cash flow is an alternate method of measuring business’s profitability when accounting concepts do not represent firm’s actual revenue (bartering) and also represents business’ liquidity. It also indicate firm’s liquidity.

Break-even point and cash flow represent the point that business will overcome its investment cost and become profitable instead of loss and the actual solvent status of the business respectively, while other business management approaches do not. They both are “physical” status indicator of a business, whether the business will be able to stand on its own feet or going under. Also, despite the fact that a business’s overall revenue is at loss for many months, if its operational cash flow is positive, the business is not considered bankrupt. For example, a business may use break-even point to plan a strategy to determine the minimum of amount of production in order to cover its initial manufacturing cost. Doing so, the firm usually uses the break-even point to initiate its business start-up plan. Then, it can use cash flow to indicate the actual profitability of the firm during any period of time. In conclusion, business usually start with negative cash flow, then after reaching the break-even point, its cash flow will become positive, which represent firm’s profitability, liquidity and rate of return.

Boston Box is formally known as Boston Consulting Group Growth-Share Matrix. It was developed by Bruce Henderson in 1970’s. It is a tool of portfolio management and evaluates the products of an organization according to their market share and to their growth prospects. On that basis, it can reveal insights about firm’s financial needs or their ability to generate cash. Boston Box divides actual business’s return investment into 4 quadrants, which are related to the rate of created influence (Market Growth) and degree of influence achieved (Relative Market Share). The Boston Box is as followed:

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Star Box: Company’s products allocated in star box have high market share and high market growth rate; they achieve good return on investment.

Question Mark: Having low market share but high market growth rate. If the products are located in this quadrant, the firm must be aware of them turning to Dog quadrant.

Cash Cows: High market share but low market growth rate. They are considered good opportunities for cash generation. But the investment in promotion is probably not required. At this stage, company need to increase its budget.

Dog: Low market share and market growth rate. Despite their poor prospects, they still can become profitable and enjoy the stable demand. Even though, they might face new competitors.

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Porter’s 5 Forces of Competitiveness Model is one of the most important models in analyzing the competitiveness in an industry. As there are several variables and elements, which mainly influence the company strategy and working pattern by determining the competitive of the market through this model, it would help to expose competitive forces and build up the performance in an industry. Generally, companies try hard in protecting their competiveness over the competitor as it yields stronger and safer business positions. The competitive in an industry compose of 5 competitive forces; new entrants, buyers, substitutes, supplier, and competitor:

New Entrants

This model applies to every company in any period of their life-cycle for analyzing industrial phenomenon in order to readjust their strategy. There are several variables to consider in penetrating the market, which actually obstructs the new entrant companies such as the economic O-scale, government policy, capital requirements, proprietary, and technology know-how and so on.

Substitutes

In every industry, there usually are substitute products, which exist or newly introduced into the market and have the same performance or can out-perform existing products. As many companies avoid or do not realize the newly developing products and services which might increase the competitive threat on substitute product. Company needs to consider on the threat of substitutes.

Buyers

An industry analysis would determine the buying companies’ purchase volume over supplier. With any high purchasing volume, the buying company generally gains the bargaining power. Moreover, some companies have high price sensitivities with high competing supplier; they might easily lose the business over the price sensitiveness. Companies must consider buyer’s bargaining power over price, volume and overall revenue.

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Suppliers

One of the most important competitive analysis’s forces is to determine the suppliers operation and their bargaining power in particular industry. In an industry where there are large numbers of supplier with small number of competitive, the purchasing companies have strong bargaining power and vice versa

Competitors

In the industry, companies generally need to analysis the competitor in different types of good and service. The competitors have been determined in several perspectives such as market demand, pricing, customer demand or customer attitude in measuring market response and develop or adjust their competitive strategy.

By analyzing the competitive forces, it is really useful for company because it will help them in evaluating the market and an industry before or during the processing. It is simple and easy in applying it with any company size or any industry which would provide them with a clear and better view on competitive environment forces in order to prepare for future action.

The Boston Box Matrix is also one of the most important measuring materials of marketing as a result of when its credibility and profile are just as insufficient resources and time. Many companies obviously have more than one project at a time, thus, they require considering how to separate their resources among them and realize what to do when the project has reached the end of its life.

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How and why these four approaches are used? Give illustrative case examples of typical ways they are used.

In order to answer this question, illustrations or case studies for each business approach are provided as follow:

Break-even Point

Collins and Sons manufacture a range of concrete products such as sleepers and slabs. They are made by pouring concrete into moulds. In August 2005 the company received an order for a new style of slab from Mole Valley Council. Collin’s calculated the cost of producing the new mould and other fixed costs would be £1,200. Variable costs for the slab would be £1.50 each. The price Collin’s agreed with the council was for £1.80 each.

Calculate the number of slabs Collin’s would have to sell to break even.

Calculate the number of slabs Collin’s would have to sell to break even if he was able to charge £2 for each slab

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X = Unit that you have to sell

Break-even: Fixed cost / [(Slab-Sold) x Unit]

= £1,200 / (£1.8 – £1.5)X = 4,000 Units

Therefore, no profits are made from sale of this product until more than 4,000 pieces are sold (i)

If selling price go for £ 2.00 then

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Breakeven: Fixed cost / [(Slab-Sold) x Unit]

= £1,200 / (£2.0 – £1.5)X = 2,500 Units

Therefore, no profits are made from sale of this product until more than 2,500 pieces are sold (ii)

As the result of this case study, you have to sell products more than 4,000 pieces or 2,500 pieces with selling price are £1.8 and £2.0 respectively for reaching break-even point. You can make decision for purchasing the machine to product your products. It can help you to predict the amount of investment cost to invest and how long that you will get profit in your organization.

Cash Flow

Additional example of an indirect annual cash flow statement of Citigroup, Inc. from Yahoo Finance is provided at the end of this report (Table1).

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Boston Box

In the early 1970s, the centre party in British politics was followed in “Stars” growth and in the mid 1970s it reached “Cash Cows”. In a short period of time the party vote declined. By the time the product was reinvented in 1981. By launching all new social democratic party and it was immediately became question mark like as Phoenix from the ashes through the fast stage again.

Porter’s Forces of Competitiveness

Porters Five Forces can be classically applied to Tesco PLC, including a supplier bargaining power, buyer bargaining power and substitutes by other supermarket. Tesco is actually gain an advantage of supplier bargaining power over the small shop as their large number of supplier which would like to supply their product to Tesco as gaining high purchase volume – Tesco have gain the power in bargaining power over the supplier price as if the supplier does not reduce price, Tesco may go with other suppliers. Unfortunately Tesco has the threat of substitute’s product which has to compete with Morrison, Sainsbury or Iceland which lead to the price competition over the market. In this industry the buyer bargaining power relay more o the price sensitivity. If the prices of Tesco products are expensive the buyer can simply move to Iceland or Sainsbury. The supermarket industry should not do a price war as it would destroy the industry in the long term as it will reduce the gap of their profit margin. However Tesco has advantage over the economics of scale which consider as the barriers for new entry to compete in the same product category as the amount which need to be pay to the supplier surely less that the small shop does as it can only buy from the supplier in small amount of good with higher price than Tesco pay.

Evaluate also the limitations of the methods.

Break-even Point Limitations

It ignores main advantage of convertible, which protection on downside risk on the underlying equity and the margin of safety offered by the convertible with the payment of principal at maturity

Cash Flow Limitations

Cash flow statement or balance sheets are created using past data; therefore do not represent complete information to assess business’s future cash flow. The actual data can also be manipulated to become profitable and attract more investors to invest more in its equity.

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Boston’s Box Limitations

The Boston Boxes provide a frame work for assessing the life cycle of project and allocating with the source among different project and campaign. They are suitable for carrying out a group that includes resources those manage organization’s research project and to indentify the position in the cycle of each of the current research and policy influence product or messages. However, the model can only value and illustrate on the actual of companies product that need to improve the product furthermore many product or services are not really profitable there are necessary to complement the main product and distinguish from the competitor that the customer expect.

Porter’s Competitive Model Limitations

As the company work through the models, there are some limitations which the company would need to apply with other model too. The model is mainly analyzing more on the external environment factors, for company operation, it needs to analyze all factors which would effect to their business. It is not only the external or competitive factors which need to be analyze but also look at their company strength and weakness in order to develop and the organization from the root or problem solving which are controllable factors.

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