business finance

capital expenditures

Major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights.

Revenue expenditure

The need for a business to finance their daily and routine operations.

Personal Funds

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

Retained profit

Profit which is kept back in the business and used to pay for investment in the business.

Sales of assets

when a business sells off its unwanted or unused assets to raise funds

Share capital

money raised from the sale of shares of a limited company

Loan capital

money required to run a business which is raised from loans rather than shares.

mortgage

If the borrower fails to repay the loan then the lender can take his property. (secured with collateral)

Debenture

A debt instrument unsecured by collateral

Collateral

The term collateral refers to an asset that a lender accepts as security for a loan.

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

Grants

Are a form of financial assistance from the government, given to qualifying business to aid their operations

Subsidies

Subsidies focus on providing extended benefits to society. e.g. public transport operators.

Debt factoring

A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.

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.

venture capital

money provided by large investors to finance new products and new businesses that have a good chance to be very profitable

Business Angels

wealthy individuals operating as informal or private investors who provide venture financing for small businesses

Working Capital

is a measure of both a company's efficiency and its short term financial health. (current assets - current liabilities)

fixed costs

costs that remain constant as output changes

variable costs

costs that vary directly with the level of production

Total Costs (TC)

fixed costs + variable costs

Semi-variable costs

Costs comprising both fixed and variable components

Direct Costs

costs that can be easily and accurately traced to a cost object

Indirect (overhead) costs

Indirect costs are recurring costs that cannot be clearly identified with the production or sale of a particular good or service. (e.g. rent, legal fees, salaries...)

revenue

Revenue refers to the money coming into a business, usually from the sale of goods and/or services (known as sales revenue).

Profit formula

TR-TC

or

Total Revenue - Total Cost

Revenue Streams

Most businesses have more than one source of revenue. These various sources of income are known as revenue streams.

break-even point (BEP)

the quantity at which total revenue and total cost are equal

break even

When a business has sold enough goods or services, so that the costs of production has been covered

Break-even quantity (BEQ)

Refers to the quantity of sales needed to break even

Break even revenue

is the level of sales revenue being earned by the firm at the break even level of output

Contribution per unit

Refers to the sum of money that remains after all direct and variable costs have been taken away from the sales revenue, i.e. the amount available to contribute towards paying fixed costs of production.

Total contribution

It is, essentially, a firm's gross profit. (gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes.)

Profit

Profit = Total sales revenue - total cost

Profit = Total contribution - TFC

Margin of safety

This means that the business can sell a special amount of products after the Break-even quantity without making any loss.

business angels

wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential

capital expenditure

investment spending on fixed assets such as purchase of buildings or land

debt factoring

A financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee.

external sources of finance

getting funds from outside the organization, e.g. through debt (overdrafts, loans and debentures), share capital, or the government.

grants

Government financial gifts to support business activities. They are not expected to be repaid by the recipient.

Initial Public Offering (IPO)

a business converting its legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time.

Internal sources of finance

Getting funds from within the organization, e.g. through personal funds, retained profits and the sale of assets.

leasing

A form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.

loan capital

medium to long term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans and debentures

medium term finance

sources of finance of one to five years in duration, used mainly to pay for fixed assets, i.e. capital expenditure

overdrafts

allow a business to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing in the short term.

personal funds

a source of internal finance, referring to the use of an entrepreneur's own savings. Personal funds are usually used to finance business start-ups.

retained profit

the value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders

revenue expenditure

spending on the day-to-day runnings of a business, such as: rent, wages, utility bills

sources of finance

The general term used to refer to where or how firms obtain their funds, such as from personal funds, retained profits, loans and government grants

stock exchange

highly regulated marketplace where individuals and businesses can buy and/or sell shares in public limited companies

subsidies

funded by the government to lower a firm's production costs as output provides extended benefits to society

trade credit

allows a business to 'buy now and pay later'. The credit provider does not receive any cash from the buyer until a later date (usually allow between 30-60 days).

venture capital

high-risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or shares in the business venture.

average cost

cost per unit of output

average revenue

value of sales received from customers per unit of a good or service sold

cost

sum of money incurred by business in the production process

direct costs

costs specifically attributed to the production or sale of a particular good or service

dividends

share of the net profit distributed to shareholders at the end of the tax year

fixed costs

costs that don't vary with output, they exists even if there is no output

indirect costs

costs that do not directly link to the production or sale of a specific product

revenue stream

the money coming into a business from its various business activities, e.g. sponsorship deals, merchandise, membership fees and royalties

running costs

the ongoing costs of operating the business, e.g. wages and salaries, insurance premiums, and the cost purchasing stocks.

Semi-variable costs

element of both fixed costs and variable costs

set up costs

the items of expenditure needed to start a business, e.g. obtaining premises, purchase of machinery and equipment, and deposits to utilities companies (gas, water, electricity and telephone)

variable costs

costs of production that change in proportion to the level of output

break even

costs = revenue

break even quanity

refers to the level of output that generates neither profit nor loss

contribution per unit

The difference between the selling price of a product and its variable costs of production, i.e. P-AVC. The surplus goes towards paying fixed costs

margin of safety

The difference between a firms level of demand and its break-even quantity, positive means the firm can decrease output without making a loss, negative means the firm is making a loss

target price

the price set by a firm in order to reach break-even or a certain target profit

target profit

amount of surplus a firm intends to achieve, based on price and cost data

Total contribution

unit contribution x output

Appropriation account

The final section of a profit and loss account which shows how the net profits and tax is distributed

balance sheet

contains financial information on an organisation's assets, liabilities and the capital invested by the owners on one specific day, shows a snapshot of the firm's financial situation

cost of goods sold

represents the direct costs of producing or purchasing stock that has been sold, cost of goods sold = opening stock + purchase - closing stock

current assets

short-term assets that belong to a firm, expected to remain in the business for up to 12 months

Depreciation

fall in the value of fixed assets over time, from wear and tear or obsolescence

final accounts

The published annual financial statements that all limited liability companies are legally obliged to report, i.e. the balance sheet and the P&L accounts.

fixed assets

items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organization, e.g. land, premises and machinery

goodwill

intangible asset which exists when the value of a firm exceeds its book value

gross profit

the difference between the sales revenue of a business and its direct costs incurred in making or purchasing the products that have been sold to its customers

intangible asset

fixed assets that do not exist in a physical form

long-term liabilities

debts owed by a business, which are expected to take longer than a year from the balance sheet date to repay

net assets

show the value of a business by calculating the value of all its assets minus its liabilities

net profit

the surplus (if any) that a business makes after all expenses have been paid for out of gross profit

profit and loss account

is a financial record of a firm's trading activity over the past 12 months, consisting of three parts: the trading account, the P&L account and the appropriation account.

reducing balance method

A method of depreciation that reduces the value of a fixed asset by the same percentage each year throughout its useful life. This is the more realistic method to use

residual value

asset is an estimate of the scrap or disposal value of the asset at the end of its useful life

share capital

refers to the amount of money raised through the sale of shares. It shows the value raised when the shares were first sold, rather than their current market value.

shareholders' funds

show the equity of the owners, i.e. the share capital invested by the owners and the retained profit and reserves that have been accumulated.

straight line method

a method of depreciation that reduces the value of a fixed asset by the same value each year throughout its useful life. This is the relatively easier method to calculate

trading account

The first section of the P&L account, showing the difference between a firm's sales revenue and its direct costs of trading, i.e. it shows the gross profit of a business.

window dressing

the legal act of creative accounting by manipulating financial data to make the results look more flattering

acid test ratio

A liquidity ratio that measures a firm's ability top meet its short-term debts. This ratio ignores stocks when calculating because some stocks (e.g. Ferrari cars or Airbus jets) cannot be quickly and easily turned into cash.

Capital employed

the value of all long-term sources of finance for a business