Cash Breakeven Analysis and Leverage Indices

Keishiro Matsumoto and James P. Hoban ()
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Keishiro Matsumoto: Division of Business Administration, University of the Virgin Islands, St. Thomas, VI 00803, USA
James P. Hoban: Department of Finance, Ball State University, Muncie, IN 47306, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2003, vol. 06, issue 04, 501-547

Abstract: This paper presents a new model of cash breakeven analysis that is designed to assess the risk of insolvency due to illiquidity. Its first step is to parametrize the cash flow statement to this end. Then, it derives several cash breakeven formula. Next, it derives new leverage indices and establishes their linkage to the cash sales coverages. The comprehensive index shows the sensitivity of the firm's surplus cash balance to changes in the sales level after all planned payments, both required and voluntary, are made. The new cash breakeven analysis is contrasted with the traditional profit breakeven analysis by means of a hypothetical example firm. A simulation experiment is provided to elucidate the strengths of the method as a contemporary tool of financial planning.

Keywords: Cash breakeven analysis; cost-volume-profit; leverage indices; elasticity indices (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1142/S0219091503001183

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