theme 2 key terms

Economic variables

Features of an economy which have effects on business and consumers e.g. unemployment, inflation and exchange rates

Internal finance

A source of (internal) finance provided by the owner of a business/personal money from the owner

Personal savings/owners' capital

The raising of capital/cash from within/inside the business

Retained profit

Profit is re-invested back into/kept by the business which is not paid as a dividend. It is an internal source of finance

Sale of assets

A type of internal finance, involves selling resources that belong to the business

Bank loan

An external method of finance/money borrowed from a bank paid back, with interest (over a period of time)

Business Angels

Individuals who invest in a business in exchange for a stake in the business (shares)

Crowd funding

An external source of finance where a large number of individuals provide funding for a business or project in return for shares/free products/discounts

External finance

Money raised from outside the business

Grant

A sum of money given by a government or other organisation. It does not need to be repaid and no interest is charged

Leasing

A contract to acquire the use of resources such as property or equipment

Loan

An external source/method; amount of money borrowed, usually repayable after a fixed term of more than 12 months

Overdraft

When a business has a negative balance in their bank account because the amount withdrawn is greater than the current balance

Peer-to-peer funding

When a person lends money to other individuals or businesses via online transactions

Share capital

The finance raised a business issuing/selling of new shares

Trade credit

Where a firm receives stock/inventory/raw materials from a supplier, which it does not have to pay for until later

Venture capital

External source of finance when the business issues shares to a small number of investor(s) in return for a capital injection into the company

Liability

A liability is an obligation to pay another person/lender/supplier

Limited liability

The obligation of a shareholder for the debts of a business is limited to the value of their investment.

Unlimited liability

The obligation of a business owner to cover all the debts of the business.

Business plan

A document giving details of a variety of aspects about the business in order to provide a strategic look at the business and to attract investors. It contains details such as the product, costs, revenues, cashflow forecasts

Cash flow

The movement of cash into and out of a business over a period of time.

Cash Inflow

The flow of cash into a business

Cash Outflow

The flow of cash out of a business

Cash-flow forecasts

The predicted flow of cash into and out of a business over a period of time

Closing balance

Cash left in the account at the end of the month.

Net cash flow

The difference between the cash flowing in and out of a business over a period of time cash inflows- cash outflows

Opening balance

Cash in the bank on the first day of the month

Consumer trends

Habits or behaviour of those involved in the use of goods and services

Economic uncertainty

Where firms/consumers are unable to predict their future sales/incomes and costs

Sales forecast

A prediction of the expected level of sales volume/revenue for a business for a future period

Average cost

The cost of producing one unit. Total costs/output

Fixed costs

Costs that do not change when output/sales changes

Revenue

The amount of income for a business generated from its sales. Selling price x quantity sold

Sales revenue

Selling price x sales volume

Total costs

Total fixed costs plus total variable costs.

Variable costs

Costs that vary according to the level of output

Break-even

The level of output where the total revenue is equal to the total cost.

Unit contribution

Selling price- variable cost per unit

Margin of safety

The difference between the current or planned level of output/sales and the break-even level of output

Adverse variance

Negative variance e.g. higher costs than budget

Budget

A financial plan of income and expenditure prepared/agreed in advance

Favourable variance

Positive variance e.g. lower costs than budget

Historical budgeting

A budget based upon previous financial figures

Variance analysis

Shows the difference between budgeted and actual figures and can be calculated at the end of a financial period, once actual figures are known

Zero based budget

A type of budget where no money is allocated for spending unless it has firstly been justified

Cash

An asset of a business which can come from investors, lenders or customers.

Cost of sales

the cost of inventory bought or produced.

Gross profit

Revenue - cost of sales

Gross profit margin

Gross profit/Sales revenue x100

Operating profit

Gross profit- other operating expenses

Operating profit margin

Operating profit/Sales revenue x100

Profit

Is recorded straight away after sales. Total revenue -total costs

Profit for the year margin

Net profit/Sales revenue x100

Profit for the year/net profit

Operating profit- interest

Statement of comprehensive income

A document to show income and expenditure of a business over a financial year

Profitability

Profit as a proportion of sales.

Tax

A charge made by governments on activities, earnings and income of individuals and businesses

Acid test ratio

Current assets-Inventory/Current liabilities

Assets

Valuable things that a business can use.

Capital

Cash put into the business by the owner

Current assets

Liquid assets, those assets that will be converted into cash within 12 months e.g. inventories, trade receivables and cash

Current liabilities

Debts owed by a business that must be repaid within one year

Current ratio

Current assets/Current liabilities

Liabilities

Debts owed by a business to lenders and suppliers.

Liquidity

The ability to pay bills in cash when they fall due or The ability to meet current liabilities with current assets

Net assets

Total assets-Total liabilities

Non current assets

Long term resources that will be used by the business for more than one year e.g. Property and equipment

Non current liabilities

Debts owed by the business for more than one year e.g. Loans

Shareholders equity

The value of the shareholders' investment in a business.

Statement of financial position/Balance sheet

A summary at a particular point in time of the value of a firm's assets, liabilities and equity

Total equity

Share capital + Retained profit or, owner's capital + retained profit less drawings

Working capital

The amount of cash available to pay for the day to day trading of a business or current assets - current liabilities.

External causes for business failure

The factors outside the control of a business which might cause it to fail, e.g. competition, legislation, customer tastes and economic conditions.

Financial factors for business failure

Factors which a business can control e.g. poor decision-making, loss of key staff.

Internal causes for business failure

Can come from inside or outside the business e.g. poor management, external shocks.

Non financial factors for business failure

Factors that do not directly relate to finances but can lead to business failure.

Overtrading

The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast.

Batch production

A manufacturing process in which components or goods are produced in groups (batches). The manufacturing of a limited number of identical products.

Capital intensive

This is where output of the firm is made primarily using machinery/capital goods relative to the use of labour.

Cell production

A method of manufacturing where employees are organised into multiskilled teams, with each team responsible for a particular part of the production process.

Efficiency

The ability to minimise waste therefore reducing the cost of production. Making the best use of its resources.

Flow production

The manufacture of an item/product in a continuous process.

Job production

A method of production where the production of a single good/service is carried out one at a time that involves producing this good/service to the specific requirements of the customer.

Labour-intensive production

A production method that requires a higher proportion of labour than capital.

Productivity

Output per person/machine per period of time.

Standardisation

Using uniform resources and activities or producing a uniform product.

Capacity utilisation

The current output of a factory measured as a percentage of the total maximum potential output. Current output/maximum possible output x100.

Downsizing

Involves reducing capacity, such as making employees redundant. This would reduce costs, such as wages.

Full capacity

The point where a business cannot produce any more output.

Over utilisation

The position where a business is running at full capacity and straining resources.

Under utilisation

The position where a business is producing at less than full capacity.

Buffer stocks

Stock held as protection in case of reduction in supply. Buffer stock is the minimum level of stock held by a business.

Inventory

The raw materials/work-in-progress held by a business.

Just in time (JIT)

A stock control system that organises operations so that items of stock arrive immediately before they are needed for production or sale.

Lean production

A production method that involves using as few resources as possible in the production of a good or service. It can include concepts such as waste minimisation, Just in Time (JIT) and TQM.

Total Quality Management (TQM)

A right first time approach ensuring that at every stage of production products are checked for quality, rather than a sample, which should eliminate any defects

Re order level

The level of current stock when new orders are placed

Re order quantity

The amount of stock ordered when an order is placed

Stock

Items held by the business for future sale/processing such as raw materials/work in progress (WIP)/finished products