IB Business Unit 3 Terms

capital expenditure

Money spent to acquire items in a business that will last for more than a year and may be used over and over again

revenue expenditure

money spent to the day to day running of business

Personal Funds

a source of finance for sole traders that comes mostly from their own personal savings

retained profit

- profit that remains after a business has paid tax and dividends to shareholders

- profit put back into the business obtained from the profit and loss account

Sale of assets

when a business sells off its unwanted or unused assets to raise funds (obsolete machinery or redundant buildings

Share capital

money raised from the sale of shares of a limited company

Loan capital

money sourced from financial institutions such as banks, with interest charged on the loan to be repaid

overdrafts

When a lending institution allows a firm to withdraw more money than it currently has in its account

trade credit

the practice of buying goods and services now and paying for them later

Leasing

Obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. this avoids the need for the business to raise long-term capital to buy the asset. Ownership remains with the leasing company.

Business Angels

wealthy individuals operating as informal or private investors who provide venture financing for small businesses in return for ownership equity in the business

Microfinance

provision of small loans and other financial services to individuals and small businesses , typically developing countries, not through the traditional banking system

Crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

fixed costs

Costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

direct cost

a cost that can be easily and conveniently traced to a specified cost object

indirect cost

a cost that cannot be easily and conveniently traced to a specified cost object

total revenue

the total amount of money a firm receives by selling goods or services (price x quantity)

AKA sales revenue or turnover

Contribution per unit

the difference between the selling price per unit and variable cost per unit (price per unit - variable cost per unit)

Total contribution

Calculated when more than 1 unit is sold

- total revenue - total variable cost

or

- contribution per unit x number of units sold

break-even point

the point at which the costs of producing a product equal the revenue made from selling the product

margin of safety

difference between your actual or expected profitability and the break even point

target profit output

the level of output that is needed to earn a specified amount of profit ((fixed costs + target profit)/contribution per unit)

statement of profit or loss

A financial statement showing a business's revenues and costs and thus its profit or loss over a period of time. (net profit before interest and tax, net profit before tax, net profit after interest and tax)

Cost of Sales

the cost of goods sold; what you pay for what you sell

Gross Profit

sales - cost of goods sold

Profit before interest and tax

Gross Profit - Expenses

Dividends

earnings distributed to stockholders

Trading account

Appears at the top section of the profit and loss account and shows the difference between a firms sales revenue and its direct costs of trading.

Appropriation account

The final section of a profit and loss account which shows how the net profits (after interest and tax) of a business are distributed. Profits are appropriated in two ways: dividends and retained profits

Statement of financial position

A financial statement that reports assets, liabilities, and owner's equity on a specific date. (statement of financial position)

assets

Economic resources (things of value) owned by a firm.

Liabilities

what a company owes

working capital

-current assets - current liabilities

-measure of short term financial health and efficiency of a business

current assets

cash and other assets expected to be exchanged for cash or consumed within a year (short term)

Gross surplus

Revenue - cost of sales for a non-profit

non-current assets

Long-term assets that are relatively permanent such as land, buildings, or equipment. (last more than a year)

long-term liabilities

long term debts or borrowings payable after 12 months (mortgages, loans)

current liabilities

short term debts payable within 12 months (creditors, bank overdraft, tax)

Accumulated depreciation

The amount by which the value of a non-current asset has declined, as shown on a balance sheet

equity

share capital + retained profit (should equal net assets on the balance sheet)

net assets

total assets - total liabilities

intangible assets

Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

patents

exclusive rights to make or sell inventions

goodwill

the value of positive or favorable attributes that relate to a business. The difference between the market value of a firm and its book value on the balance sheet if it is bought out by another firm.

trademarks

Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products

Copyright

the exclusive legal right, given to an originator or an assignee to print, publish, perform, film, or record literary, artistic, or musical material, and to authorize others to do the same.

sources of finance (internal)

personal funds, retained profit, sale of assets

sources of finance (external)

share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capital, business angels

Intangibles

patents, goodwill, copyright laws, trademarks

Stock

Inventory - A tangible current asset

Debtors

Entities that owe a firm money from a prior purchase, within 12 months. Current asset.

Creditors

When a firm owes a supplier money due to a purchase that was made on trade credit. Current liability.

Gross profit margin

Gross profit/sales revenue x 100

Profit margin

Net profit/Sales revenue x 100

Current ratio

current assets/current liabilities (liquidity)

Quick ratio

(Current Assets - Inventory) / Current Liabilities

Cash flow

the total amount of money being transferred into and out of a business, especially as affecting liquidity.

Net cash flow

cash inflows - cash outflows

Average rate of return

Average annual profit / Cost of investment x 100

Payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Sea lion

An aquatic mammal that is definitely not a seal.