5. Finance

Start-up capital

The capital needed by an entrepreneur to set up a business

Working capital

The capital needed to pay for raw-materials, day-to-day running costs, and credit offered to customers

Short-term finance

Money required for short periods of time up to one year

Long-term finance

Money required for more than one year

Profit

The value of goods sold (revenue) minus costs

Liquidity

The ability of a business to pay its short-term debts

Administration

When administrators manage a business that is unable to pay its debts with the intention of selling it as a going concern

Bankruptcy

The legal procedure for liquidating a business which cannot fully pay its debts out of its current assets

Liquidation

When a business ceases trading and its assets are sold for cash to pay its suppliers and other creditors

Current assets

Assets that are either cash or likely to be turned into cash within 12 months (inventory and trade receivables or debtors)

Current liabilities

Debts that usually have to be paid within one year

Capital expenditure

The purchase of non-current assets that are expected to last for more than one year, such as buildings and machinery

Revenue expenditure

Spending on all costs and assets other than non-current assets, which include wages, salaries and inventory of materials

Internal sources

Raising finance from the business’s own assets or from profits left in the business (retained earnings)

External sources

Raising finance from the sources outside the business, ex: banks

Retained earnings

Profit after tax retained in a company rather than paid out to shareholders as dividends

Non-current assets

Assets kept and used by the business for more than one year

Overdrafts

A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required

Debt factoring

Selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in exchange for immediate liquidity

Hire purchase

A company purchases an asset and agrees to pay fixed repayments over an agreed time period. The asset belongs to the purchasing company once the final payment has been made

Leasing

Obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to raise long-term capital to buy the asset. The asset is owned by the leasing capital

Long-term loans

Loans that do not need to be repaid for at least one year

Debentures

Long-term bonds issued by companies to raise debt finance, often with a fixed rate of interest

Share capital

Permanent finance raised by companies through the sale of shares

Business mortgages

Long-term loans to companies purchasing a property for business premises, with the property acting as collateral security on the loan

Venture capital

Risk capital invested in business startups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources

Collateral security

An asset which a business pledges to a lender and which must be sold off to pay a debt if the loan is not repaid

Rights issue

Existing shareholders are given the right to buy additional shares at a discounted price

Microfinance

Providing financial services for poor and low-income customers who do not have access to the banking services, such as loans and overdrafts, offered by traditional commercial banks

Crowd funding

The use of small amounts of capital from a large number of individuals to finance a new business venture

Insolvent

When a business cannot meet its short-term debts

Cash flow forecast

A forecast of the future cash inflows and outflows of a business

Cash inflows

Cash payments into a business

Cash outflows

Cash payments out of a business

Net cash flow

Estimated difference between cash inflows and cash outflows for the period

Opening cash balance

Cash held by the business at the start of the month

Closing cash balance

Cash held by the business at the end of the month, which becomes next month’s opening balance

Credit control

Monitoring of debts to ensure that credit periods are not exceeded

Bad debts

Unpaid customers’ bills that are now very unlikely to ever be paid

Overtrading

Expanding a business rapidly without obtaining all of the necessary finance, resulting in a cash flow shortage

Cost centre

The section of a business, such as a department or a product, that incurs the costs

Direct costs

These coats can be clearly identified with each unit of production and can be allocated to a cost centre

Indirect costs (overheads)

Costs that cannot be identified with a unit of production or allocated accurately to a cost centre

Fixed costs

Costs that do not vary with output in the short run

Variable costs

Costs that vary with output

Total costs

Variable cost plus fixed cost

Profit centre

A section of a business to which both costs and revenues can be allocated, so profit can be calculated

Average cost

Total cost divided by the number of units produced

Full costing

A method of costing in which all indirect and direct costs are allocated to the products, services or divisions of a business

Contribution costing

Costing method that allocates only direct costs to cost centres and profit centres, not overhead costs

Marginal cost

The additional cost of producing one more unit of output

Break-even analysis

Uses cost and revenue data to determine the break-even point of production

Margin of safety

The amount by which the current output level exceeds the break-even level of output

Contribution per unit

The price of a product minus the direct (variable) costs of producing it

Budgeting

Planning future activities by establishing performance targets, especially financial ones

Budget holder

The individual responsible for the initial setting and achievement of a budget

Variance analysis

Calculation of the differences between budgets and actual figures, and analysis of the reasons for such differences

Delegated budgets

Budgets for which junior managers have been given some authority for setting and achieving

Incremental budgeting

Uses last year’s budget as a basis, and an adjustment is made for the coming year

Zero budgeting

Sets budget to zero each year and budget holders have to argue their case for target levels and to revive any finance

Favourable variance

A change from the budget that leads to higher than planned profit

Flexible budgeting

Cost budgets for each expense are allowed to vary if sales or output vary from budgeting levels

Adverse variance

A change from the budget that leads to lower than planned profit