Cash break-even refers to the level of sales or revenue required for a company to cover its cash expenses, resulting in zero net cash flow. In other words, it is the point at which a company’s cash inflows equal its cash outflows.
To calculate the cash break-even point, a company can use the following formula:
Cash break-even point = Total fixed cash expenses / (Price per unit – Variable cash cost per unit)
Where:
- Total fixed cash expenses: all cash expenses that do not change with changes in the level of production or sales, such as rent, salaries, and insurance premiums
- Price per unit: the amount charged for each unit of product or service
- Variable cash cost per unit: the cash cost incurred for producing or providing each unit of product or service, which can vary with the level of production or sales.
The cash break-even point is a useful metric for determining the minimum level of sales required to cover a company’s cash expenses, and can help management set prices and make decisions about production levels. However, it does not take into account non-cash expenses such as depreciation, which can affect a company’s profitability. Therefore, it should be used in conjunction with other financial analysis tools to provide a more complete picture of a company’s financial performance.