Business Finance and Trade
Core
Business finance provides funds for fixed assets and day-to-day operations. Fixed capital funds land, buildings, machinery and long-term assets. Working capital funds current assets such as stock, debtors and cash and is calculated as current assets minus current liabilities. Sources include owner's funds (equity, retained earnings), borrowed funds (term loans, debentures, bonds) and short-term sources (trade credit, bank overdraft, factoring, commercial paper). The money market deals in short-term funds up to one year and is regulated by RBI; the capital market deals in long-term securities and is regulated by SEBI.
Trade is the exchange of goods and services. Internal trade is within a country; external trade is import, export or entrepot. Export and import procedures involve inquiry, indent, credit arrangement, shipping, customs clearance and documents such as the letter of credit, bill of lading, shipping bill, commercial invoice and mate's receipt.
Worked example
A firm has current assets of ₹8,00,000 and current liabilities of ₹3,00,000. Net working capital = 8,00,000 − 3,00,000 = ₹5,00,000. Current ratio = 8,00,000 ÷ 3,00,000 = 2.67:1. If inventory is ₹2,00,000, quick assets = 6,00,000 and the quick ratio = 2:1. Reasoning: a high current ratio may look safe, but if inventory is slow-moving, the quick ratio gives a stricter liquidity test.
Traps
Finance is not accounting: accounting records; finance decides funding and investment. Fixed capital is not only land and buildings. Working capital is not simply cash. A letter of credit reduces payment risk; a bill of lading is a transport document and a document of title. Do not distinguish the money market from the capital market by transaction size; maturity is the key.