business finance

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capital expenditures

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164 Terms

1

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.

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2

Revenue expenditure

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

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3

Personal Funds

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

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4

Retained profit

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

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5

Sales of assets

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

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6

Share capital

money raised from the sale of shares of a limited company

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7

Loan capital

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

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8

mortgage

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

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9

Debenture

A debt instrument unsecured by collateral

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10

Collateral

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

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11

Overdrafts

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

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12

trade credit

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

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13

Grants

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

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14

Subsidies

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

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15

Debt factoring

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

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16

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.

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17

venture capital

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

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18

Business Angels

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

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19

Working Capital

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

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20

fixed costs

costs that remain constant as output changes

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21

variable costs

costs that vary directly with the level of production

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22

Total Costs (TC)

fixed costs + variable costs

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23

Semi-variable costs

Costs comprising both fixed and variable components

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24

Direct Costs

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

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25

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...)

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26

revenue

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

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27

Profit formula

TR-TC

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28

or

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Total Revenue - Total Cost

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30

Revenue Streams

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

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31

break-even point (BEP)

the quantity at which total revenue and total cost are equal

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32

break even

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

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33

Break-even quantity (BEQ)

Refers to the quantity of sales needed to break even

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34

Break even revenue

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

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35

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.

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36

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.)

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37

Profit

Profit = Total sales revenue - total cost

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38

Profit = Total contribution - TFC

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39

Margin of safety

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

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40

business angels

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

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41

capital expenditure

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

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42

debt factoring

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

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43

external sources of finance

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

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44

grants

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

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45

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.

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46

Internal sources of finance

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

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47

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.

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48

loan capital

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

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49

medium term finance

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

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50

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.

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51

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.

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52

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

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53

revenue expenditure

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

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54

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

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55

stock exchange

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

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56

subsidies

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

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57

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).

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58

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.

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59

average cost

cost per unit of output

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60

average revenue

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

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61

cost

sum of money incurred by business in the production process

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62

direct costs

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

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63

dividends

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

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64

fixed costs

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

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65

indirect costs

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

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66

revenue stream

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

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67

running costs

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

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68

Semi-variable costs

element of both fixed costs and variable costs

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69

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)

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70

variable costs

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

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71

break even

costs = revenue

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72

break even quanity

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

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73

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

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74

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

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75

target price

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

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76

target profit

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

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77

Total contribution

unit contribution x output

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78

Appropriation account

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

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79

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

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80

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

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81

current assets

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

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82

Depreciation

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

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83

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.

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84

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

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85

goodwill

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

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86

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

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87

intangible asset

fixed assets that do not exist in a physical form

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88

long-term liabilities

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

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89

net assets

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

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90

net profit

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

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91

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.

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92

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

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93

residual value

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

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94

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.

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95

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.

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96

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

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97

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.

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98

window dressing

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

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99

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.

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100

Capital employed

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

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