Finance, Budgeting and Sources of Business Funding
What a candidate must understand
Know the three financial statements: the income statement (revenue minus expenses over a period), the balance sheet (assets, liabilities and equity at a point in time), and the cash-flow statement (operating, investing and financing flows). Understand the accounting equation: assets = liabilities + equity.
Budgeting is the process of planning and controlling income and expenditure. Know fixed and variable costs, direct and indirect costs, contribution margin, break-even, and the difference between profit and cash. Understand working capital (current assets minus current liabilities) and why growing firms often need more of it.
Sources of funding divide into debt (bank loans, overdrafts, leasing, trade credit-repaid with interest, no ownership dilution) and equity (founders' capital, business angels, venture capital-ownership dilution, no fixed repayment). Also know grant funding (including EU and Bulgarian national programmes), crowdfunding, bootstrapping, and retained earnings. Consider cost, control, risk and repayment obligations when comparing them.
Traps in questions
- Confusing profit with cash; depreciation is a non-cash expense.
- Treating grants as free money-they carry eligibility, co-financing and reporting obligations.
- Assuming equity is cheaper than debt because there is no interest; dilution is a cost.
- Forgetting that a balance sheet is a snapshot, while the income statement covers a period.
Worked example / rule of thumb
A firm has 30,000 BGN revenue, 18,000 BGN variable costs and 9,000 BGN fixed costs. Contribution margin is 12,000 BGN; profit is 3,000 BGN. Break-even revenue is fixed costs ÷ contribution margin ratio = 9,000 ÷ 0.4 = 22,500 BGN. Rule of thumb: match funding to the asset-short-term needs to overdrafts and trade credit, long-term assets to loans or equity.