Unit Economics & Cash Flow
Financial Applications: Unit Economics & Cash Flow
Unit Economics & Cash Flow
Unit Economics & Cash Flow
What you'll learn
- Define unit economics: revenue and cost per single unit sold.
- Calculate break-even point using algebra.
- Understand contribution margin and cash flow for a small business.
Key concepts
Unit Economics Basics
| Term | Definition | Formula |
|---|---|---|
| Revenue per unit | Price charged for one unit | Selling price |
| Variable cost per unit | Cost that changes with each unit | Materials + labour per unit |
| Contribution margin | Revenue minus variable cost per unit | CM = SP − VC |
| Fixed costs | Costs that don't change with output | Rent, salaries, equipment |
Break-Even Analysis
Break-even point = Fixed Costs ÷ Contribution Margin per unit
The number of units where total revenue = total costs (no profit, no loss).
Example: Fixed costs = ₹60,000/month; Selling price = ₹500; Variable cost = ₹200
- CM = 500 − 200 = ₹300 per unit
- Break-even = 60,000 ÷ 300 = 200 units/month
Break-Even Graph
- X-axis: Units produced/sold
- Y-axis: Money (₹)
- Fixed cost line: Horizontal (constant)
- Total cost line: Starts at fixed cost, rises with slope = variable cost
- Revenue line: Starts at 0, rises with slope = selling price
- Break-even point: Where revenue line crosses total cost line
Contribution Margin Ratio
CM Ratio = Contribution Margin per unit ÷ Selling Price
Tells what fraction of each rupee of revenue contributes to covering fixed costs.
Cash Flow
Cash flow = Cash inflows − Cash outflows over a period.
| Type | Cash Inflows | Cash Outflows |
|---|---|---|
| Operating | Sales receipts | Wages, rent, supplies |
| Investing | Asset sales | Equipment purchase |
| Financing | Loans received | Loan repayments |
Positive cash flow ≠ profit. A business can be profitable but cash-strapped (if customers delay payment).
Profit vs Cash Flow Example
- Sell ₹1,00,000 worth of goods in January; customer pays in March.
- In January: profitable on paper, but cash flow is negative.
Quick check
- A product sells for ₹800. Variable cost is ₹300, fixed costs ₹1,50,000/month. Find break-even units.
- What is contribution margin? How does it differ from profit?
- Why can a business be profitable but still run out of cash?
- Calculate CM ratio if selling price = ₹600, variable cost = ₹240.
Open the Practice tab for graded questions on Unit Economics & Cash Flow.
Key Takeaways (TL;DR)
- What you'll learn
- Key concepts
- Quick check
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