Chapter 3 BM

Capital Expenditure

Spending on non-current assets like machinery, technology, vehicles, and infrastructure to enhance productivity and expand operations.

Working Capital

Funds necessary for day-to-day operations covering expenses like inventory, payroll, and overhead costs to ensure smooth business functioning.

Research & Development (R&D)

Investment in technical research and product development to stay competitive and create new revenue streams.

Marketing

Finance required for marketing campaigns, market research, and brand building to attract customers, increase sales, and generate revenue.

Risk Management

Funds needed to manage risks, pay for insurance, and implement strategies to protect against unforeseen events.

Debt Servicing

Repayment of debts including loans and credit facilities, along with interest, over an agreed-upon period.

Business Performance

Finance as a metric to measure business success, often judged by profits, working capital, and liquid assets available.

Internal Source of Finance

Funds from within the business like owner's capital, retained profit, or sale of assets.

External Source of Finance

Funds from outside the business obtained through methods like loans, share capital, or trade credit.

Share Capital

Finance raised by selling shares in a company, giving shareholders ownership rights and entitlement to profits.

Loans

Borrowed funds typically repaid over a period with interest, secured or unsecured, to finance business activities.

Overdrafts

Short-term arrangement allowing a business to spend more than its account balance, aiding cash flow with agreed limits.

Trade Credit

Agreement with suppliers to buy goods on credit, paid for at a later date, usually interest-free for a specific period.

Leasing

Renting assets like machinery or vehicles for regular payments without ownership responsibilities for maintenance or repairs.

Crowdfunding

Accessing finance from numerous small investors online platforms by presenting a persuasive business plan.

Micro-finance Providers

Small lenders offering finance directly to individuals or businesses who may not qualify for traditional sources.

Business Angels

Individuals investing in start-ups or expanding businesses, providing funds and expertise in exchange for a stake in the business.

Sales revenue

A key business performance measure calculated as quantity sold multiplied by selling price.

Revenue streams

Sources of revenue other than sales, including dividends, donations, interest, subscription fees, merchandise, sponsorship, and advertising revenue.

Statement of Profit or Loss

Financial account showing income, expenditure, and profit over a period, consisting of the trading account, profit and loss account, and appropriation account.

Statement of Financial Position

Also known as the Balance Sheet, it shows a business's financial structure at a specific point in time, detailing assets, liabilities, and equity.

Stakeholders

Individuals or groups interested in a business, such as shareholders, employees, managers, directors, suppliers, creditors, government, and the local community.

Working Capital

The measure of a company's operational efficiency and short-term financial health, calculated as current assets minus current liabilities.

Intangible Assets

Assets that lack physical substance, such as intellectual property, brand value, and customer relationships, contributing to a company's value.

Depreciation

An accounting method to allocate the cost of tangible assets over their useful life, reflecting wear and tear or obsolescence.

Straight Line Depreciation

A method evenly spreading the depreciation expense over an asset's useful life, simplifying calculations but not reflecting actual usage.

Units of Production Depreciation

A method depreciating assets based on their usage or production output, suitable for assets wearing out with use or production.

Historic Cost

The original cost of an asset when it was acquired

Residual Value

The estimated value an asset will have at the end of its useful life

Depreciation

The reduction in the value of an asset over time

Book Value

The value of an asset as recorded on the balance sheet

Units of Production Method

A depreciation method based on the actual usage of an asset

Straight Line Method

A depreciation method where the same amount is depreciated each year

Ratio Analysis

Using financial ratios to evaluate a company's performance

Gross Profit Margin

The percentage of revenue that turns into gross profit

Profit Margin

The percentage of revenue that turns into profit before interest and tax

Return on Capital Employed

A measure of how effectively a business uses its capital to generate profit

Return on Capital Employed (RoCE)

A financial metric used to evaluate a company's profitability and efficiency in using its capital.

RoCE Comparison

Not recommended to compare RoCE across different industries due to variations in performance.

Strategic Decisions

RoCE can aid in making decisions like investments or divestments based on profitability and capital efficiency.

Importance of High RoCE

Higher RoCE signifies better profitability and efficient capital utilization, preferred by investors for low-risk growth.

RoCE Benchmark

A RoCE of at least 20% is generally considered a positive financial indicator.

Ways to Increase RoCE

Enhance profit levels without new capital, maintain profits while reducing capital, or close unprofitable branches.

Gross Profit Margin Improvement

Increase sales revenue or reduce direct costs to enhance the gross profit margin.

Liquidity Measurement

Current Ratio and Acid Test Ratio are used to assess a business's liquidity and ability to meet short-term obligations.

Efficiency Ratios

Metrics showing how well a business uses its assets and liabilities to generate sales and maximize profits.

Stock Turnover Ratio

Indicates how efficiently a business converts its stock into sales, calculated by dividing cost of sales by average stock value.

Stock Turnover Ratio

A financial metric indicating how many times a company has sold and replaced inventory during a specific period.

Gearing Ratio

A financial ratio that shows the proportion of a company's capital that is financed through debt compared to equity.

Debtor Days

A financial metric representing the average number of days it takes for a business to collect money owed by debtors.

Ways to Improve Stock Turnover Ratio

Strategies to enhance stock turnover, such as holding less stock, reducing costs, and managing inventory efficiently.

High Gearing Risks

Potential issues associated with high gearing, including financial risks, cash flow constraints, and impacts on investor perception.

Ways to Improve Gearing

Methods to lower gearing, like reducing long-term borrowing, raising equity capital, and restructuring debt.

Ways to Reduce Debtor Days Ratio

Techniques to decrease the time taken to collect payments from debtors, including streamlining processes, monitoring creditworthiness, and improving payment systems.

Further Ways to Reduce Debtor Days Ratio

Additional actions to lower debtor days, like refusing further goods until debts are paid, threatening legal action, and providing incentives for early payment.

Creditor Days

The average number of days a business takes to pay its suppliers for goods or services received.

Insolvency

The state of being unable to pay debts as they fall due, leading to potential business closure.

Working Capital

The difference between a company's current assets and current liabilities, representing funds available for day-to-day operations.

Profit vs

Profit is the financial gain after deducting expenses, while cash flow is the movement of money in and out of a business.

Liquidity Position

The ability of a business to meet its short-term financial obligations with its available assets, crucial for business survival.

Cash Flow Forecast

A prediction of anticipated cash inflows and outflows over a specific period, typically six to twelve months, crucial for identifying a business's financial needs.

Net Cash Flow

Calculated by subtracting total cash outflows from total cash inflows, indicating the surplus or deficit of cash within a period.

Opening Balance

The previous month's closing balance carried forward, serving as the initial amount for the current month's calculations.

Closing Balance

Determined by adding the net cash flow to the opening balance, representing the final cash amount at the end of a specific period.

Investment Appraisal

Involves comparing expected future cash flows of an investment with the initial expenditure, aiding in evaluating the profitability and recoupment period of an investment.

Simple Payback Period

The time taken for an investment to pay for itself, calculated by dividing the initial outlay by the net cash flow per period to determine the years or months required for payback.

Payback Period

The time taken for an investment to recoup its initial cost through net cash flows.

Average Rate of Return (ARR)

Compares the average profit per year generated by an investment with the initial capital cost.

Net Present Value (NPV)

Considers the effects of interest rates and time on future cash flows to determine the investment's worth.

Cost Centre

Business units incurring costs but not generating revenue, responsible for tracking and managing expenses.

Profit Centre

Business units generating revenue and incurring costs, expected to cover costs and make a profit, with managers accountable for financial performance.

Master Budget

A consolidation of delegated budgets like Sales, Marketing, Production, and Staffing.

Sales Budgets

Forecast sales volume and expected revenue.

Marketing Budgets

Plan finances for marketing activities like market research and promotion.

Production Budgets

Plan output levels, stock, overhead costs, and waste.

Staffing Budgets

Plan costs related to employing workers, including recruitment and training.

Historical Data

Previous performance influences budget setting; positive economic outlook may increase budgets.

Availability of Finance

Profitable businesses or those with finance can set more generous budgets.

Benchmarking

Budgets based on rivals' activities; e.g., marketing budgets may increase if competitors do.

Negotiation

Budget discussions between holders/managers and Financial Controller; rivalry between departments may occur.

Budget Variance

Difference between budgeted and actual figures; variance analysis explains differences.

Favourable Variance

Actual figure surpasses budgeted figure; e.g., lower costs than budgeted.

Adverse Variance

Actual figure falls short of budgeted figure; e.g., higher costs than budgeted.

Budgets & Decision-making

Budgets allocate resources, control spending, measure performance, and motivate employees.

Difficulties of Budgeting

Challenges include data accuracy, bias-free data, short-term focus, and conflicts between budget holders.