Business Management - Unit 3: Finance

Capital expenditure

Refers to business spending on fixed assets or capital equipment of a business.

Finance

Refers to the various available money that an organization has to fund its business activities.

Revenue expenditure

Refers to business spending on its everyday and regular operations.

Business angels

Wealthy and successful private individuals who risk their own money in a business venture that has high growth potential.

Crowdfunding

Rising finance for a business venture or project by getting small amounts of money from a large number of people, usually through online platforms.

External sources of finance

Finance that comes from outside the organization, usually with the help of a third-party provider, such as a bank, business angel, venture capitalist or government.

Initial public offering (IPO)

Finance raised by a public limited company when it issues (sells) shares for the very first time on a stock exchange.

Internal sources of finance

Finance that come from within the organization, from its own resources and assets without the help of a third-party provider.

Leasing

This financial service enables businesses to have access to fixed assets, by hiring these assets, but without the high costs of capital expenditure.

Loan capital

Also known as **debt capital**, this refers to borrowed funds from financial lenders, such as commercial banks.

Long-term finance

Refers to sources of finance of more than five years, for the purchase of long-term fixed assets or to fund the growth of a business in overseas markets.

Microfinance

An external source of finance provided by financier who support entrepreneurs of small businesses, especially females and those on low incomes who are ordinarily unable to secure loans from commercial banks.

Microfinance providers

Refers to the financiers or organizations that lend small amounts of money to entrepreneurs of small businesses, especially females and business owners on very low incomes.

Overdraft

A banking service that enables customers (personal and business customers) to withdraw more money from their account than exists in the account.

Personal funds

Internal source of finance, with entrepreneurs using their own savings, usually to finance their start-up business.

Retained profit

This is the surplus funds that are reinvested back in the business, rather than being distributed to the owners.

Revenue expenditure

Refers to business spending on its everyday and regular operations, e.g. spending on wages, raw materials and bills.

Sale of assets

An internal source of finance that involves the firm selling existing items of value that it owns.

Share capital

Also known as **equity capital**, this is finance raised through the issuing of shares via a stock exchange (or stock market).

Share issue

The process involving a public limited company selling additional shares in order to raise finance.

Short-term finance

Refers to sources of finance needed for the day-to-day running of the business, i.e., revenue expenditure.

Sources of finance

Refers to where a firm obtains its money to fund its business activities and operations, such as from personal savings, loan capital, crowdfunding, and share capital.

Stock exchange

A highly regulated marketplace where individuals and businesses can buy and sell shares in public limited companies.

Trade credit

Financial service that enables a business customer to purchase and obtain goods and services but to pay for these at a later date.

Average costs

This is the cost per unit of output. It is calculated by the formula: **AC = TC ÷ Q** where:

* AC = Average cost
* TC = Total cost, and
* Q = Quantity of output

Average revenue

This is the amount a business receives from its customers per unit of a good or service sold. Mathematically, **AR = TR ÷ Q = P** where:

* AR = Average revenue
* TR = Total revenue
* Q = Quantity of output, and
* P = Price

Costs

The charges that an organization incurs from its operations, e.g., rent, wages, salaries, and insurance.

Direct costs

Costs that are clearly associated with the output or sale of a certain good, service or business operation, e.g., raw materials.

Fixed costs

Costs that do not change with the level of output, e.g., loan repayments and management salaries.

Indirect costs

Also known as **overhead costs**, these costs are not easily identifiable with the sale or output of a specific good, service or business operation.

Price

Also known as **average revenue**, this is the amount of money a product is sold for.

Revenue

The money (income) received by a business from the sale of goods and/or services. Calculated by using the formula: price x quantity

Revenue stream

The different sources of revenue (or income) for a business, e.g., revenue from sponsorship deals, merchandise sales, membership fees and royalties.

Total costs

This refers to the aggregate amount of money spent on the output of a business. The formula is: TC = TFC + TVC where:

* TC = Total costs
* TFC = Total fixed cost, and
* TVC = Total variable cost.

Total revenue

This is the sum of income received by a business from its trading activities. It is calculated using the formula: TR = P × Q.

Variable costs

Costs that change with the level of output - they rise when output or sales increase, e.g., raw materials and packaging costs.

Accumulated depreciation (HL)

This refers to the accrued value of non-current assets, most of which fall in value over time due to depreciation.

Assets

The possessions owned by a business, which have a monetary value, e.g., buildings, land, machinery, equipment, inventories, and cash.

Balance sheet

Also known as the **statement of financial position**, this set of final accounts shows the value of a firm’s assets, liabilities, and the owners’ investment (or equity) in the business, at a particular point in time.

Cash

This refers to the money an organization has either “in hand” (at its premises) and/or “at bank” (i.e., in its bank account). It is the most liquid type of current assets.

Copyrights

These intangible assets give the registered owner the legal rights to creative pieces of work, such as the works of authors, musicians, conductors, playwrights (scriptwriters) and directors.

Costs of sales (COS)

These are the direct costs of production, such as the cost of raw materials, component parts, and direct labour.

Creditors

Also known as **trade creditors**, this refers to the suppliers that allow a business to purchase goods and/or services on trade credit.

Current assets

Short-term assets belonging to an organization which will last in the business for up to 12 months, e.g., cash, debtors, and stock (inventory).

Current liabilities

These are the short-term debts of a business, which need to be repaid within twelve months of the balance sheet date. Examples include bank overdrafts, trade creditors, and other short-term loans.

Debtors

A type of current asset, referring to individual or business customers that owe money to the organization as they have bought goods or services on trade credit, i.e., they need to pay within 30 and 60 days.

Depreciation (HL)

The fall in the value of a fixed asset over time, mainly due to wear and tear (usage) and obsolescence.

Dividends

These are the payments from a company’s profit (after interest and tax) paid to the shareholders (owners) of the company. The amount of dividends paid to an individual shareholder depends on the number of shares held by the individual.

Equity

Refers to the value of the owners' stake in the business, i.e., what the business is worth at the time of reporting the balance sheet.

Expenses

These are a firm’s indirect costs of production, e.g., rent, management salaries, marketing campaigns, accountancy fees, bank interest charges, travel expenses, utilities, repairs and maintenance, and general insurance.

Final accounts

These are the published accounts of an organization, made available to and used by different stakeholders, e.g., managers, employees, shareholders, sponsors, financiers, and investors.

Finished goods

These are the final products of a business, ready to be sold to customers.

Fixed assets (non-current)

The long-term assets (possessions) of an organization that have a monetary value and are used repeatedly but are not intended for resale within the next twelve months, e.g. property and equipment.

Goodwill

The reputation and established networks (know-how) of an organization, which adds to a firm’s monetary value.

Gross profit

This refers to the profit from a firm’s everyday trading activities. It is calculated by the formula: Sales revenue – Cost of sales.

Illiquid assets

These items of value, owned by the business, cannot be sold quickly, are difficult to sell, and/or cannot be sold easily without incurring a significant loss in value.

Intangible assets

Non-physical fixed assets that are valuable to a firm’s survival and success, such as brand value, goodwill, copyrights, trademarks, and patents.

Intellectual property rights

Abbreviated as IPRs, these are a firm's fixed, intangible assets with a monetary value, comprised of goodwill, patents, copyrights and trademarks.

Liabilities

The debts of a business, i.e., the money owed to others, e.g., money owed to financiers, trade creditors, and the government (for tax).

Net assets

Refers to the overall value of an organization’s assets after all its liabilities are deducted. It is calculated by the formula: total assets *minus* current liabilities *minus* non-current liabilities.

Non-current liability

Also known as **long-term liability**, this refers to debt owed by a business which will take longer than a year (from the balance sheet date) to repay.

Overdrafts

This financial service allows customers to temporarily take out more money than is available in their bank account.

Patents

The official rights given to a business to exploit an invention or process for commercial purposes.

Profit and loss account

Also known as the **income statement**, this shows a firm’s profit (or loss) after all production costs have been subtracted from the organization’s revenues, each year. It is also known as the statement of profit or loss or income statement.

Profit after interest and tax

Also referred to as **profit for period**, this section of the P&L account shows the actual value of profit earned by the business after *all* costs have been accounted for.

Profit before interest and tax

This section of the P&L account shows the value of a firm’s profit (or loss) before deducting interest payments on loans and taxes on corporate profits.

Raw materials

These are the natural resources used in the production process to create goods and provide services to customers.

Residual value (HL)

Also known as the **scrap value**, this is the value of a fixed asset at the end of its useful life before it is replaced.

Retained profit

Also referred to as **retained earnings**, this refers to the value of a firm’s earnings after all costs are paid (including interest and tax) and shareholders have been compensated (dividends).

Sales revenue

Shown on the profit and loss account, this refers to the money an organization earns from selling goods and services.

Share capital

The value of equity in a business that is funded by its shareholders, either through an initial public offering (IPO) or via a share issue.

Short-term loans

These are advances (loans) from a financial lender, such as a commercial bank, that needs to be repaid within 12 months of the balance sheet date.

Stocks

Also known as **inventories**, these are the goods that a business has available for sale, per time period.

Straight line depreciation (HL)

A method of depreciation that spreads the depreciation of a fixed asset evenly over its useful life, i.e., the value of the asset falls by the same amount each year.

Tax

Payment made to the government if the business earns profit after all costs and expenses have been paid.

Total assets

The sum of a firm’s non-current assets and its current assets.

Total liabilities

These are simply the sum of current liabilities and non-current liabilities, i.e., the sum of all the monies owed by the business.

Trade creditors

Suppliers may give trade credit, which needs to be repaid at a future date (typically 30 to 60 days).

Trademarks

A form of intellectual property or intangible asset which gives the listed owner the legal and exclusive commercial use of the registered brands, logos, and/or slogans (corporate catchphrases).

Units of production method (HL)

Method of depreciation that apportions an equivalent value of depreciation to a non-current asset based on each physical unit of output. Depreciation is based on the units of usage rather than time (as used for the straight-line method).

Window dressing

Also known as creative accounting, this is the legal manipulation of financial statements based on the accounting principles and rules in the country in order to make the figures look more flattering (in the same way that people clean and tidy their homes before guest are due to arrive).

Work-in-progress

Also referred to as **semi-finished goods**, these are parts and components used in the production process.

Working capital

The money available for the day-to-day running of a business. It is calculated by subtracting current liabilities from current assets.

Acid test ratio

Also known as the **quick ratio**, this short-term liquidity ratio measures an organization’s ability to pay its short-term debts without having to sell any stock (inventories).

Capital employed

The value of all sources of finance for a business, including internal and external finance.

Current ratio

A short-term liquidity ratio used to calculate the ability of an organization to meet its short-term debts (within the next twelve months of the balance sheet date).

Gross profit margin (GPM)

A profitability ratio that measures an organization’s gross profit expressed as a percentage of its sales revenue. It is also an indicator of how well a business can manage its direct costs of production.

Liquidity

Refers to the ease with which a business can convert its assets into cash without affecting its market value, i.e., it measures a firm’s ability to repay short-term liabilities without having to use external sources of finance.

Liquidity ratios

These are financial ratios that examine an organization’s ability to pay its short-term liabilities and debts, namely the current and acid test ratios.

Profit

The financial surplus after all costs, including expenses, have been paid. i.e., the positive difference between a firm’s sales revenue and its total costs of production.

Profit margin ratio (PM)

A profitability ratio that measures a firm’s overall profit (after all costs of production have been deducted) as a percentage of its sales revenue. It is also an indicator of how well a business can manage its indirect costs (overhead expenses).

Ratio analysis

A quantitative management planning and decision-making tool, used to analyse and evaluate the financial performance of a business. These can be further categorised as profitability, liquidity, and efficiency ratio analysis.

Return on capital employed (ROCE)

A profitability ratio that measures a firm’s efficiency and profitability in relation to its size (as measured by the value of the organization’s capital employed).

Bankruptcy (HL)

Sometimes referred to **receivership** or **corporate liquidation**, this means a situation when a person or business declares that they can no longer pay back their debts, so the entity collapses (fails).

Creditor days ratio (HL)

The efficiency ratio that measures the average number of days an organization takes to repay its creditors (suppliers who the business has bought products from using trade credit, so have yet to pay for these).

Debtor days ratio (HL)

The efficiency ratio that measures the average number of days an organization takes to collect debts from its customers (as they have bought goods and services on trade credit but have yet to pay for these).

Efficiency ratio (HL)

Financial planning and decision-making tool to measure how well the resources of a business are used in order to generate income from the firm’s capital.

Gearing ratio (HL)

The efficiency ratio that measures the extent to which an organization is financed by external sources of finance (i.e. loan capital as a percentage of the firm’s total capital employed).

Insolvency (HL)

Refers to the situation where a person or a business is unable to meet their bill and other debt obligations. The debts (liabilities) of the individual or organization exceed their assets.

Stock turnover ratio (HL)

The efficiency ratio that measures the number of days it takes a business to sell its stock (inventory). The ratio can also show the number of times during any given period of time (usually a year) that the business restocks or replaces its inventory.