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Break-even cash flow is the point in a company’s operations when its cash income matches its cash outflow. The term is mostly associated with businesses, but an individual could use the term to describe personal income if so desired. Cash flow is the actual movement of cash in and out of the company’s accounts, so break-even cash flow means the amount of money coming in is the same as the amount of money going out to pay expenses.
A flow of cash that hasn’t yet reached the break-even point can result in the business failing even if the business is technically profitable. Workers won’t work for several months with an IOU as pay. This means the company must start off with money already in its accounts to cover costs if money from its sales or services isn’t coming in immediately.
Cash flow is different from profit and loss statements. A company may look profitable because it is selling items or gaining clients, but if the money comes in installments or is delayed for other reasons, the company won’t have the cash in hand to handle expenses that are due before the money comes in. To put it into smaller household terms, this is a paycheck or paid invoices versus bills and rent. It’s not equity in the house that the owner doesn’t really have in a bank account, nor is it the growing interest on a retirement plan that the employee can’t touch for 40 years. Someone could have an excellent pension due in their future, but that means nothing if the person doesn’t have the cash to pay the electric bill today.
The level of cash flow can vary from month to month, with some months looking very positive and optimistic. Other months, however, may require more cash than an owner has. Break-even cash flow occurs once the business always has just enough cash on hand from income to cover all expenses, including taxes, benefit payments and all other possible costs.
Businesses can set up cash flow forecasts to plan for upcoming expenses and to try to predict when they will obtain break-even cash flow. These forecasts are like month-by-month budgets showing what business owners need in terms of cash to keep going while building up to the point where they are consistently making more than they are spending. Cash flow forecasts mark those times when a sudden increase in cash flow is necessary, such as increased payroll costs when hiring more employees for the holidays in a retail store. Business owners shouldn’t confuse cash flow itself with budgeting, though. A budget might set aside a certain amount of money for one item, but the actual amount spent could be different, resulting in a different cash flow amount.