Business Finance and Money Management
This domain tests how a business raises and controls money. Expect questions on short- and long-term finance, working capital, cash budgets, capital and revenue expenditure, and the difference between profit and cash.
Sources of finance
Short-term (up to one year): bank overdraft, trade credit, short-term loan. Long-term: owner’s capital, retained profit, long-term bank loan, debentures, leasing. Internal sources include retained profit and sale of unused assets; external sources include loans and new capital. Debt must be repaid with interest; equity may dilute control.
Working capital and cash
Working capital = current assets − current liabilities. Manage stock, receivables and payables. A cash budget forecasts receipts and payments; profit is not the same as cash because credit sales, depreciation and stock changes affect them differently.
Capital and revenue
Capital expenditure buys or improves non-current assets; revenue expenditure covers day-to-day running costs. Loan repayment is capital; interest is revenue.
Worked example
Opening cash Rs. 50,000; expected receipts Rs. 200,000; expected payments Rs. 180,000; closing cash = Rs. 70,000. If the business requires a minimum balance of Rs. 60,000, the budget shows a Rs. 10,000 surplus. If payments rose to Rs. 195,000, closing cash would be Rs. 55,000, below the minimum, so the owner could delay purchases or arrange an overdraft.
Traps
Saying profit equals cash; treating loan repayment as an expense; ignoring the timing of receipts; using long-term loans for daily expenses.