Business Finance and Financial Management
This domain tests sources of finance, financial statements, budgeting, cash flow and break-even analysis. Expect calculations and questions on why profit and cash differ.
Core rules and concepts
- Debt finance is borrowed and repaid with interest; equity finance sells ownership and shares risk and control.
- Short-term finance covers working capital; long-term finance funds assets such as equipment or premises.
- Working capital = current assets minus current liabilities.
- The income statement shows profit over a period; the balance sheet shows assets, liabilities and equity at a date; the cash flow statement tracks cash movements.
- Break-even units = fixed costs ÷ (selling price per unit - variable cost per unit).
- Gross profit = revenue - cost of sales; net profit = gross profit - expenses.
Worked example
Fixed costs are N$24,000, selling price is N$40 and variable cost is N$16. Contribution per unit = N$24. Break-even = 24,000 ÷ 24 = 1,000 units. At 1,200 units, profit = 200 × N$24 = N$4,800. Reasoning: each unit contributes N$24 after variable cost. The first 1,000 units cover fixed costs; only unit 1,001 onward adds profit. If sales are on credit, cash may still be negative at break-even.
Traps that cost marks
- Treating profit as cash; credit sales and stock purchases create timing gaps.
- Forgetting loan repayments, owner's drawings or VAT obligations in cash flow.
- Mixing personal and business finances.
- Using break-even without checking whether capacity and demand can reach that volume.