Financial information, sources of finance and financial management
Domain 6: Financial information, sources of finance and financial management
The exam tests whether you can read basic financial statements, calculate key figures, and choose suitable sources of finance.
Core rules
- The income statement shows revenue, costs and profit over a period. Profit = revenue − total costs.
- The statement of financial position lists assets (what the business owns or is owed), liabilities (what it owes) and equity at a point in time.
- Fixed costs do not change with output (rent); variable costs do (raw materials). Total cost = fixed cost + variable cost.
- Break-even output = fixed costs ÷ contribution per unit, where contribution = selling price − variable cost per unit.
- Cash flow is money in and out; profit is not the same as cash. A profitable business can run out of cash if customers pay late.
- Internal sources: retained profit, sale of assets, owner's capital. External: bank loan, overdraft, trade credit, leasing, share issue, government grant.
- Working capital = current assets − current liabilities. It funds day-to-day operations.
Worked example
A t-shirt printer has fixed costs of N$12,000 per month. Each shirt sells for N$100 and has variable costs of N$60. Contribution is N$40. Break-even = 12,000 ÷ 40 = 300 shirts per month. If it sells 350 shirts, profit = (350 × N$40) − N$12,000 = N$2,000. A bank loan may finance a new press, but the monthly repayment must be covered by cash flow.
Traps
Do not treat a loan as revenue. Do not confuse profit with cash. Do not include fixed costs in contribution. Do not call retained profit an external source. Do not ignore repayment terms when recommending finance.