Business Arithmetic

This page contains the CBSE entrepreneurship class 12 chapter Business Arithmetic notes. You can find the questions/answers/solutions for the chapter 5 of CBSE class 12 entrepreneurship in this page. You can also find the videos for the problems in this lesson.

is acronym for Stock keeping unit. It is an alphanumeric code and is used for providing a unique code for each product. SKU code might contain codes that describe the various characteristic like size, color, weight, version. Bar Codes and RFID use SKUs to track the products.

Cash Flow refers to the movement of money into and out of a business during a particular period of time.

Cash inflow: The movement of the money into the business is referred to as Cash inflow

Cash outflow: The movement of the money out of the business is referred to as Cash outflow

Re-order point: Re-order point refers to the point at which the order need to be placed, by making a guess of the demand in the future. It takes into account

Cash flow projection: Cash Flow Projection deals with how the cash is supposed to flow into and out of the business. It helps the entrepreneurs to know when to pump in additional investment or when to put the surplus cash into investments. It is part of the business plan and helps to quickly get the amount of capital investment required by the business to be setup.

Cash conversion cycle: Operating Cycle (also referred to as CCC or Cash Conversion Cycle) is the amount of time lapsed from the point when the business has

CCC indicates the number of days for which the cash is held up in the business operations.

It is Pareto’s law that formed the basis for the technique ABC Analysis

ABC analysis is an inventory control technique derived from Pareto principle. As per this an business unit analyzes its inventory and classifies them into three categories. The categorization is not a standard one and varies from one company to the other. From the perspective of inventory it refers to arriving at relative ratio of the quantity of stock and monetary value of the purchased/consumed stock.

Pareto’s Principle. is an economic principle introduced by the Italian economist Vilfredo Pareto. It states that a relative handful of things will generate the bulk of the results or if you consider any group there will be few vital elements and many trivial elements. This principle emerged from his observation of land owndership in 1900 where in he discovered that 20% of the people owned 80% of the land in Italy.

Pareto principle is widely used in the businesses to control the inventory level. If the business has to manage the entire inventory, it will be time consuming and expensive. So, by applying the Pareto’s principle, companies will focus on few items that generate majority of the value and focus more on these items. For example, if a business a wide range of products, only 20% of the products will be generating 80% of sales and the remaining 80% of the products will be generating just 20% of the sales. On a similar note 20% of the employees will be responsible for the 80% of the productivity or 20% of the customers are contributing to 80% of the sales. For this reason, this principle is often referred to as “80/20” rule. Businesses use this principle and stay more focussed on the 20% that generates more value.

Based on the Pareto’s principle, an inventory management technique named ABC analysis is born and is widely adopted.

Financial ManagementFinancial management is the application of general management principles to manage the financial resources of the business. It includes

the financial activities. For instance it deals with the financial activities like

etc. It deals with the procurement, allocation and control of the financial resources of an enterprise.

The primary objective of financial management is to ensure maximum returns for the shareholder’s investments. So, it deals with the objectives

The following are the three elements that play key role in the process of financial management.

1. Financial Planning: Financial planning makes sure that the funding is available to the business at all times needed.

Financial control: Financial control is a key element that help the business to meet the objectives. It deals with

Financial decision making: This key element deals with the investment, financing and dividends.

The following aspects are given due consideration during financial decision making.

Budget: The term budget is synonymous to the “allocation of resources”. Budget is defined as the quantitative expression of a plan for a given period of time, for a given business. Few aspects the budget covers are

Essential of budget: The essentials of budget include

Inventory control: Inventory control is a system that enables the businesses to control the inventory of items so that they are never out of stock, while ensuring that the cost of maintaining the inventory is lowest. In other-words inventory control is a system that ensures that the items are always in stock while consuming lowest possible cost.

Objectives of inventory control: The inventory control systems serves the following objectives.

Budgeting is followed in the large corporations collectively by various department in the organization. These departments prepare their plan keeping them in alignment with the organization goals, which are set by the top management team in the organization. Each department prepares these plans so that they help the organization realize the goal. Managers from each of these departments come up with the various allocations for

etc. Considering these elements, the operating profits and the returns on the investment they want to use are computed.

Budget will project all these values over the next fiscal/financial or calendar year. During this process,

The budget planning document contains

The road-map for the operations over the upcoming year depend solely on the approved budget. In an ideal scenario, there should be monthly or quarterly budget reviews to monitor the effective utilization of the budget. During these reviews, the deviation between the allocated budget and actual budget spending is tracked and if required additional budget might be approved. The performance of the managers usually is decided by how effectively they justify the budget allocated to them.

As provided below, there are different budget types that help different business units to estimate their budgeting needs.

1. Capital Budget: The capital budget is used to determine whether the long term investments on various elements specified below are worthy or not.

2. Cash flow/Cash budget: This budget deals with the estimation of future expenditures and future cash receipts over a given period of time. This is usually done for short terms. This type of budget helps the business to know when the income can meet the expenses or when the outside financing will be required.

3. Marketing budget: A estimate of the budget associated with the

so as to market the product or service.

4. Production Budget: It deals with the estimation of the number of finished products to be produced so as to meet the sales targets. It also covers the other costs like labor, material etc which are associated with the manufacturing of the finished goods.

5. Project Budget: An estimate of the cost to complete a project in a company. It considers the costs associated with labour, materials and other related expenses. It usually splits the entire project into individual specific taks. Each of these tasks is allocated with a budget. To arrive at the project budget, the cost estimate is used.

6. Sales budget: An estimate of the future sales. These sales are usually broken down into both currency as well as units. Usually used to establish the sales goals for the business.

The most widely used forms of the budgeting process are

1. Traditional budgeting: In this form of budgeting the historical performance of the budgeting process is evaluated. After the review the budget is projected based on this information after introducing the appropriate changes. In the event where in the inflation is high, the cost variations over the past several years are projected in place. In such cases the adjustments are made for

In this case, the historical sales patterns are projected using the trend followed in the sales growth. In case new products are introduced, the new sales are then included.

2. Zero-based budgeting: While following this strategy to create the budget, the budget is prepared right from scratch without any consideration to the historical information. When this form of budgeting is followed, each and every expenditure as well as income is documented and justified.

Working capital is defined as the amount of money required to fund the day to day routine operations of a business.

Working capital is required, especially during the start-up period, to pay for the expenses and debts as and when they arise. It is more significant during the start up period because the business will not yet be ready to make profits (it takes some time for the business to start earning profits, not on the first day) and the break even point is not yet reached.

Need for a working capital: The businesses need a working capital for

You can find more problems in the accounting equation at accounting equation

The working capital requirement of Ramu for buying and selling ice creams is as follows.

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