Business Finance
What this domain tests
The exam tests finance needs, fixed versus working capital, the operating cycle, and the link between profitability and liquidity.
Core rules
- Fixed capital buys long-term assets such as machinery, land and equipment; working capital funds day-to-day operations.
- Working capital = current assets − current liabilities, or the funds tied up in stock, debtors and cash.
- The operating cycle is raw material holding + production + finished goods holding + receivables − payables.
- Capital structure mixes owner's funds, or equity, and borrowed funds, or debt; more debt raises risk through interest.
- Profit is an accounting result; cash flow shows money actually available.
Worked example
A unit holds raw material for 20 days, produces in 10 days, holds finished goods for 15 days and collects receivables in 30 days. It gets 15 days' credit from suppliers. Operating cycle = 20 + 10 + 15 + 30 − 15 = 60 days. If daily operating cost is ₹2,000, working capital need is about ₹1,20,000. Reasoning: the cycle measures how long cash is locked before recovery.
Traps
Do not call machinery working capital. Do not assume profit means cash in the bank. Do not ignore supplier credit. Do not assume more debt is always cheaper once risk is considered.