Business Arithmetic

SKU (Stock Keeping Unit) is a unique code used to identify a specific inventory item.

Example: Blue T-shirt, size M, may have SKU code TS-BLU-M-01.

Cash flow is the movement of money into and out of a business.

Example: Money received from sales and money paid for rent together form cash flow.

Cash inflow means money coming into the business.

Example: Cash received from customers after selling goods is cash inflow.

Cash outflow means money going out of the business.

Example: Payment of wages, rent, or electricity bill is cash outflow.

Re-order point is the inventory level at which a fresh order should be placed.

Example: If stock falls to 50 units, the business places a new order.

Cash flow projection is an estimate of future cash receipts and payments.

Example: A monthly forecast showing expected sales collection and expected expenses.

Cash conversion cycle is the time between buying inventory and receiving cash from customers.

Example: Buying raw material today and receiving payment after final sale later.

The three key elements are:

The key aspects of financial decision-making are:

A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales, revenues, resources, costs, and expenses.

The essentials of a budget are:

Inventory control means managing stock properly so that the business has the right quantity of materials at the right time. It includes techniques such as ABC analysis, EOQ (Economic Order Quantity), and re-order point.

Its main objectives are:

The budgeting process is the process of preparing a budget. The unit explains that while the budget is the final product, the process of arriving at a budget is the budgeting process. In large organizations, it is a collective process in which operating units prepare their plans according to the corporate goals set by top management. Each unit prepares projections of sales, operating costs, overhead costs, and capital requirements, and also calculates expected operating profits and returns on investment.

These plans are then presented to higher management for review. Changes may be made after instructions or negotiations. Supporting explanations and justifications are usually included along with the figures. Once approved, the budget becomes the roadmap for operations for the coming year. The unit also states that monthly or quarterly reviews are ideally conducted to compare actual performance with the budget, and managers may be judged on how well they perform against it.

So, the budgeting process is not just making estimates. It is a structured system of planning, reviewing, approving, and controlling business operations through budgets.

Yes, the chapter clearly shows that different types of budgets can be prepared to monitor different financial aspects of a business, so there is a budget to suit every business and its need.

The unit lists several types of budgets:

So, every budget serves a different purpose, and businesses choose the one—or combination—that matches their operational needs.

The unit states that the two dominant forms of budgeting processes are traditional budgeting and zero-based budgeting. It also says that in practice, business planning is usually a combination of both.

So, traditional budgeting depends on past records, while zero-based budgeting starts fresh and requires complete justification.

Working capital is the money needed to fund the normal day-to-day operations of a business. It is used for routine business needs such as buying raw materials and packing materials, paying rent, wages, salaries, insurance, and utility bills. The chapter clearly states that money needed for daily operations is known as working capital.

The need for working capital arises because a business has to spend money before it receives money from customers. In a manufacturing business, first raw materials are purchased, then they are converted into finished goods, and during this time many expenses like wages, rent, salary, electricity, and insurance have to be paid. After that, the product is sold, and cash is received either immediately (cash sale) or after some time (credit sale).

So, working capital is necessary to:

In simple words, working capital ensures that the business can continue operating without interruption while waiting for cash to come in.

To calculate this, we first identify current assets and current liabilities.

So, Gross Working Capital = ₹ 3,01,000 and Net Working Capital = ₹ 1,14,000.

Ramu will need working capital to run his ice-cream business on a daily basis. The unit defines working capital as the money needed to fund the normal day-to-day operations of a business.

In Ramu’s case, working capital will be needed for:

Since ice-cream is a perishable product, Ramu must maintain enough stock for sales, but not too much, otherwise it may melt, spoil, or remain unsold. So he needs careful inventory control and enough cash to keep the cycle running smoothly.

Thus, Ramu’s working capital requirement is mainly for stock purchase, daily selling expenses, and managing the operating cycle until sales money comes in.