The Business Finances section: read the books like a lender
15% of the Law and Business exam. Financial statements, a handful of ratios, where a cost belongs, and the tax calendar. Mostly definitions and arithmetic, which makes it very learnable.
You do not need to be an accountant for this section. You need to know what each statement shows, the three or four formulas a bank looks at, and which bucket a cost goes in. The CSLB Law Book's chapter on managing a business covers most of it in plain language, with worked examples.
What CSLB says it covers
The official study guide lists four topics under Business Finances (15%):
- Cash management — working capital, cash versus accrual, paying and getting paid.
- Budget and planning — direct costs, overhead, break-even.
- Taxes — estimated tax, self-employment tax, how long to keep records.
- Financial reporting — the balance sheet, the income statement, ratios.
The formulas and facts that get asked
| Item | What it is |
|---|---|
| Balance sheet | The business at one point in time: assets = liabilities + owners' equity |
| Income statement | A period of time: revenue minus expenses = profit or loss |
| Working capital | Current assets − current liabilities (a dollar amount) |
| Current ratio | Current assets ÷ current liabilities |
| Quick ratio | (Current assets − inventories) ÷ current liabilities |
| Fixed assets on the balance sheet | Original cost less accumulated depreciation, not market value |
| Break-even in units | Fixed costs ÷ (price per unit − variable cost per unit) |
| Estimated tax, individuals (2026) | Apr 15, Jun 15, Sep 15, Jan 15 (2027) |
| Self-employment tax | 15.3% (12.4% Social Security + 2.9% Medicare), once net earnings reach $400 |
| Keep tax records | Generally 3 years; employment tax records at least 4 years |
CSLB Law Book 2026, Section III, “Managing a Business”; SBA break-even guidance; IRS Publications 505 and 509 (2026), IRS pages on self-employment tax and record retention. Checked 28 September 2026.
Where people lose points
- Working capital is dollars, the current ratio is a ratio. Same two numbers, subtracted in one case and divided in the other. The choices will include both.
- The quick ratio drops inventory. Quick assets are current assets minus inventories, because inventory is the slowest thing to turn into cash. It is the stricter test.
- Snapshot or movie. The balance sheet is a single date; the income statement covers a period. “Which statement shows profit for the year?” is the income statement, every time.
- Direct cost or general and administrative? Anything you cannot pin to a specific job is G&A: office rent, office wages, advertising, bad debts — and, in CSLB's own sample question, depreciation on a car for the sales staff. Permits, bonds and equipment rented for a particular job are direct costs. The Law Book treats fuel, maintenance and small tools as indirect costs that may be charged to the project.
- Cash or accrual. Cash basis records income when received and expenses when paid. Accrual records revenue when earned and expenses when incurred, regardless of when the money moves. The Law Book says the cash method is not recommended for contractors.
- Percentage of completion vs completed contract. Both are for long jobs. Percentage of completion recognizes profit as the work progresses; completed contract waits until the year the job is finished.
- Individuals and corporations pay estimated tax on different months. Individuals (including sole owners and partners): the 15th of the 4th, 6th and 9th months and the 1st month after year-end. Corporations: the 4th, 6th, 9th and 12th months.
- Land is not depreciated. It does not wear out or get used up. Buildings, vehicles and equipment are.
How the questions tend to read
Many give you a few lines of a balance sheet and ask for a ratio, or describe a cost and ask where it goes. Two examples of our own, written the same way (not actual exam questions):
A contractor has $150,000 in current assets, including $40,000 of inventory, and $100,000 in current liabilities. What are the working capital, the current ratio and the quick ratio?
$50,000; 1.5; 1.1. $150,000 − $100,000 = $50,000. $150,000 ÷ $100,000 = 1.5. ($150,000 − $40,000) ÷ $100,000 = 1.1.
Where does the rent on your main office go: direct job cost, or general and administrative?
General and administrative. It serves the whole business and cannot be attributed to one project. A trailer rented for one job site would be a cost of that job.
How to study it
- Read the Law Book's “Managing a Business” chapter. It is short, written for contractors, and it contains the ratio examples.
- Write the four formulas on a card — working capital, current ratio, quick ratio, break-even — and do five examples of each with your own numbers.
- Sort twenty costs from your own business into direct and G&A. If you hesitate, that is the question to look up.
- Budget. In our study plan Business Finances gets about 2½ hours in two weeks and 4 in four.
Watch your sources. Some published material in this area is out of date: the Law Book still names the Board of Equalization for seller's permits (that is now CDTFA), and one SBA page divides a quarterly cost by four to get a monthly one. We leave those out. If a practice question hinges on one of them, check it against the agency itself.
Common questions
Do I need to know accounting to pass this section?
No. You need the definitions of the two main statements, the ratios above and where costs belong. That is a few evenings of work.
Is markup vs margin tested here or in Contracts?
It can appear in either, usually in bidding and pricing questions. See the worked example in the Contracts section.
Are tax rates on the exam?
Some are stable, like the 15.3% self-employment tax. Amounts that change every year are better learned from current material, or not at all.
Last reviewed 28 September 2026 against the CSLB Contractors License Law & Reference Book (2026, Section III), the CSLB Law and Business Examination Study Guide, SBA break-even guidance and IRS Publications 505, 509 and 946 and IRS pages on self-employment tax and record keeping. Tax rules change; confirm with the IRS and your tax professional. Study guidance, not tax or legal advice. We are not affiliated with CSLB or PSI.