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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.
