Finance

Investment Appraisal

A process of deciding whether a project is worth the money

Payback Period

The time it takes for an investment project to earn enough profit to pay back its initial investment. 

Average rate of return

How much profit does an investment make on average a year

Net present value

Objectives

Specific goal that firm wants to achieve

Risk profile

Shows how much risk a business is willing and able to take

State of economy 

The current economic state of a country

Corporate image

The perception and opinion the public has of the firm.

Exogonous shocks

Unpredictable events that have a huge impact on the firm

Ratio Analysis

A quantitative management tool for analysing the financial performance of a business

Profitability Ratios

Examine profit in relation to other figures, such as the ratio of profit to sales revenue.

Gross profit margin

Analyzes the profitability of a firm after deducting the direct costs, with: The provision of services, and the making and selling goods

Profit Margin

Analyzes the profitability of a firm after deducting indirect costs from gross profit

Return on capital employed

A profitability ratio that measures the financial performance of firm compared with the amount of capital invested

Liquidity Ratios

Looks at the ability of a firm to pay its short-term liabilities

Current Ratio

A company’s ability to pay its short-term liabilities with its short-term assets.

Quick (acid test) Ratio

Like the current ratio, except it ignores stock when measuring the short-term liquidity of a business

Cash Flow

Movement of money in and out of the business

Liquidity

How easily an asset can be into cash

Liquidity Crisis

Situation where an individual, business, or entire market has a severe shortage of cash or easily convertible asset

The working capital cycle 

Measures the time it takes for a company to convert its current assets into cash

Personal Funds (Sole traders)

Any financial resources an owner or founder contributes from their individual assets.

Retained profits

The value of finance that the business keeps (after paying taxes to the governments and dividends to its shareholders) to use within the business

Sale of assets

When the company sells individual assets to another company for cash.

Share capital

The total amount of money a company raises by selling shares to investors

Loan capital

The capital needed to run a business. The capital is raised from borrowing rather than from the sale of shares.

Overdrafts

A line of credit on your business bank account that gives you more short-term cash flow than your business can fund from its own capital

Trade credit

A short-term financing arrangement between a business and a supplier allows a customer to receive goods or services now and pay for them later 

Crowdfunding 

A method of raising business capital by gathering small contributions from a large number of individuals

Leasing

A financial arrangement where a company pays a fee to a leasing company for a temporary fixed asset over a period of time.

Microfinance providers

Organizations that offer financial services to low-income individuals and small businesses

Business Angels

A private individual with a high net worth who directly invests part of their assets in new growing private businesses

Role of finance

Businesses need money to finance their various activities

Capital expenditure

Expenditure on finance is allocated to fixed assets. → items used repeatedly in the long term to generate sales revenue

Revenue expenditure

Finance spent on the daily running of the business

Finance

The management of money, including how businesses manage their money and how they use it.

Efficiency Ratios

How well a business uses its assets and resources to generate income or sales.

Stock Turnover

The number of times a firm sells its stocks within a time period

Debtor days

The average number of days it takes a business to collect money from their debtors

Creditor Days

The average number of days it takes for a business to pay their trade creditors.

Gearing Ratio

Assess a firm’s long-term liquidity position

Insolvency

When firms are unable to settle their debts due to lack of funds