Business finance, budgeting and record keeping
Money concepts that must not be mixed
Finance covers sources and uses of funds. Start-up capital buys assets and covers early costs; working capital funds day-to-day operations. Short-term finance covers current needs, while long-term finance funds assets used for years. Debt must be repaid with interest; equity gives ownership. A budget is a plan of expected income and spending; variance analysis compares budget with actual. Record keeping produces books of account, including a cash book, sales and purchases records, petty cash book, payroll records and bank reconciliations. Profit is income minus expenses over a period; cash flow is money actually received and paid. Fixed costs do not vary with output in the short run; variable costs do. Break-even occurs where total contribution equals fixed costs.
Traps
Candidates often treat profit as cash, forget loan principal repayments, or confuse capital expenditure with revenue expenditure. Drawings are not a business expense. Depreciation is a non-cash expense. A sale on credit is not cash received. Another trap is ignoring petty cash and personal spending mixed with business money.
Worked example
Fixed costs are P6,000 a month. Each item sells for P50 and has variable cost P30, so contribution is P20. Break-even is P6,000 divided by P20, equal to 300 items a month. If actual sales are 250, the business makes a loss of P1,000 (50 times P20). Rule of thumb: record every transaction on the day it happens and keep business cash separate from personal cash.