This chapter explores various sources of business finance essential for starting and operating a business. Understanding these sources is vital for making informed financial decisions.
Sources of Business Finance – Formula & Equation Sheet
Essential formulas and equations from Business Studies, tailored for Class 11 in Business Studies.
This one-pager compiles key formulas and equations from the Sources of Business Finance chapter of Business Studies. Ideal for exam prep, quick reference, and solving time-bound numerical problems accurately.
Key concepts & formulas
Essential formulas, key terms, and important concepts for quick reference and revision.
Formulas
Total Capital Requirement = Fixed Capital + Working Capital
Total Capital Requirement indicates the overall funds needed for operation, where Fixed Capital refers to long-term investments (e.g., land, machinery) and Working Capital supports daily operations (e.g., salaries, materials).
Working Capital = Current Assets - Current Liabilities
Working Capital measures the liquidity of a business. Current Assets cover short-term assets (like cash and inventory), while Current Liabilities consist of short-term debts. A positive value indicates sufficient operational funds.
Debt to Equity Ratio = Total Debt / Total Equity
This ratio indicates a company's financial leverage, comparing total liabilities (debt) to shareholders' equity. A high ratio may suggest higher risk due to reliance on debt financing.
Return on Investment (ROI) = (Net Profit / Total Investment) × 100
ROI helps evaluate the efficiency of an investment, expressed as a percentage. It quantifies profit relative to total investment outlay.
Cost of Debt = (Interest Expense / Total Debt) × 100
Cost of Debt indicates the effective rate paid by a business for borrowed funds. This can help in assessing the company's leverage and financing efficiency.
Net Income = Revenue - Total Expenses
Net Income reflects profitability, showing the remaining income after all expenses have been deducted from total revenue. Critical for assessing performance.
Earnings Per Share (EPS) = Net Income / Number of Outstanding Shares
EPS measures company profitability on a per-share basis, indicating potential profitability for investors and is vital for stock performance evaluation.
Current Ratio = Current Assets / Current Liabilities
This liquidity ratio measures a firm's ability to cover its short-term obligations, with a ratio above 1 often deemed healthy.
Gross Working Capital = Current Assets
Gross Working Capital refers to the total current assets of a business, highlighting the asset side of working capital management.
Retention Ratio = (Retained Earnings / Net Income) × 100
This shows the proportion of net earnings retained after dividends, indicating management's decision to reinvest profits back into the business.
Equations
Debt/Equity Financing = (Debt + Preferred Equity) / (Common Equity)
This equation determines the proportion of debt and equity financing in a business's capital structure, critical for risk assessment in finance.
Dividend Payout Ratio = (Dividends / Net Income) × 100
This shows the percentage of earnings distributed to shareholders as dividends, providing insights into a company's dividend policy.
Interest Coverage Ratio = EBIT / Interest Expense
This ratio indicates how easily a company can pay interest on outstanding debt, where EBIT means Earnings Before Interest and Taxes.
Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
This metric shows how efficiently a company collects receivables, crucial for understanding cash flow management.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
This indicates how efficiently inventory is managed, reflecting the number of times inventory is sold during a period.
Asset Turnover Ratio = Net Sales / Average Total Assets
This ratio measures the effectiveness of the use of assets in generating sales, indicating operational efficiency.
Liquidity Ratio = (Cash + Cash Equivalents + Marketable Securities) / Current Liabilities
Liquidity Ratio provides insight into the business's capability to meet short-term obligations using its most liquid assets.
Total Assets = Total Liabilities + Shareholders' Equity
This fundamental accounting equation outlines that a firm's total assets are financed by debt and equity, key in balance sheet formulation.
Capital Adequacy Ratio = (Capital / Risk-Weighted Assets) × 100
This ratio ensures that a bank has enough capital to sustain operations and absorb potential losses, crucial for regulatory compliance.
Break-Even Point (BEP) = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit)
BEP determines the sales volume required to cover costs, essential for business planning and sustainability assessments.
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