Unit 2 - Finance

Capital Expenditure

the finance spent on fixed assets (or non-current assets)

Revenue Expenditure

finance spent on the daily operations of a business, such as the payment for wages, raw materials, etc

Fixed Assets (non-current assets)

e items of monetary value that have a long-term function for businesses, so they can be used repeatedly

Sources of Finance

where or how businesses obtain their funds

Internal Sources of Finance

money or funds that come from within the business

Retained Profit

the value of surplus that a business keeps to use within the organization after tax and dividends

Personal Funds

the use of an entrapreneur's own savings

External Sources of Finance

money or funds that come from outside the business

Share Capital

the money raised from selling shares in a limited liability company

Loan Capital

medium- to long-term sources of finance obtained from commercial lenders such as banks

Mortgages

secured loans for the purchase of property such as land or buildings

Business Development Loans

highly flexible loans catered to meet the specific needs of the borrower to develop aspects of business

Debentures

long-term loans issued by a business (holders receive interest payments even if business is making a loss)

Overdrafts

financial service that allows a business to temporarily overdraw on its bank account

Trade Credit

postponing payments or 'to buy now and pay later'

Crowdfunding

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

Leasing

a form of hiring whereby a lessee pays rental income to hire assets from the lessor, the legal owner of the assets

Microfinance

financial service aimed at entrepreneurs of small businesses, especially female and those on low incomes

Business Angels

extremely wealthy individuals who choose to invest their own money in businesses that offer high growth potential, i.e. high-risk, high-return business ventures

Short-term Sources of Finance

available for a period of less than one year, used to pay for the daily or routine operations of the business

Sale of Assets

selling existing items of value that the business owns, such as dormant and obsolete assets

Stock Exchange

a highly regulated marketplace where individuals and businesses can buy and/or sell shares in publicly traded companies

Long-term Sources of Finance

available for any period of more than 12 months from the accounting period, used for the purchase of fixed assets or to finance the expansion of a business

Cost

the sum of money incurred by a business in the production process

Direct Costs

costs specifically attributed to the production or sale of a particular good or service

Fixed Costs

the costs that do not vary with the level of output. They exist even if there is no output

Indirect Costs

costs that do not directly relate to the production or sale of a specific product

Price

the amount of money a product is sold for

Profit

exists if there is a positive difference between a firm’s total revenues and its total costs

Revenue

the money that a business earns from the sale of goods and services (calculated by unit price x quantity sold)

Revenue Stream

the money coming into a business from its various business activities

Running Costs

the ongoing costs of operating the business

Set-up Costs

the items of expenditure needed to start a business

Total Costs

the sum of all variable costs and all fixed costs of production

Total Revenue

the money coming into a business, usually from the sale of goods and/or services (calculated by Price X Quantity sold)

Variable Costs

costs of production that change in proportion to the level of output

Balance Sheet

Financial information about an organization’s assets, liabilities and the capital invested by the owners

Book Value

the value of an asset as shown on a balance sheet, the market value can be higher than book value because of intangible assets

Cost of Sales

the direct costs of producing or purchasing stock that has been sold to customers

Creditors

suppliers who allow a business to purchase goods and/or services on trade credit

Current Asset

cash or any other liquid asset that can be turned into cash within 12 months of the balance sheet date

Current Liabilities

debts that must be settled within one year of the balance sheet date

Depreciation

the fall in the value of non-current assets over time, caused by wear and tear or obsolescence

Expenses

Indirect or fixed costs of production

Final Accounts

published annual financial statements that all limited liability companies are legally obliged to report

Goodwill

intangible asset which exists when the value of a firm exceeds its book value

Gross Profit

the difference between the sales revenue and its direct costs

Historic Cost

purchase cost of a particular fixed asset

Intangible Assets

non-current assets that do not exist in a physical form but are of monetary value

Net Assets

the value of a business to its owners by calculating the value of all its assets minus its liabilities

Non-current Assets

items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organization

Non-current Liabilities

the debts owed by a business, which are expected to take longer than a year from the balance sheet date to repay

Profit

the surplus that a business earns aſter all expenses have been paid for from the firm’s gross profit

Profit and Loss Account

a financial record of a firm’s trading activities over the past 12 months, showing all revenues as well as costs and revenues

Residual Value (scrap value)

an estimate of the value of the non-current asset at the end of its useful life

Retained Profit

the amount of profit aſter interest, tax and dividends have been paid

Share Capital

the amount of money raised through the sale of shares, shown as the value raised when the shares were first sold

Straight Line Method

means of calculating depreciation that reduces the value of a fixed asset by the same value

Units of Production Method

calculating depreciation allocates an equal amount of depreciation to each unit of output rendered by a non-current asset

Window Dressing

the legal act of creative accounting by manipulating financial data to make the results appear more appealing

Acid Test Ratio

measures a firm’s ability to meet its short-term debts, ignores stock

Capital Employed

the value of all long-term sources of finance for a business, calculated by adding non-current liabilities and equity

Current Ratio

short-term liquidity ratio that calculates the ability of a business to meet its debts within the next twelve months

Gross Profit Margin (GPM)

a firm’s gross profit expressed as a percentage of its sales revenue

Liquid Assets

the possessions that can be turned into cash quickly without losing their value

Liquidity Crisis

a situation where a firm is unable to pay its short-term debts

Liquidity Ratios

looks at the ability of a firm to pay its short-term (current) liabilities, comprised of the current ratio and the acid test (quick) ratio

Profit Margin

a ratio that shows the percentage of sales revenue that turns into profit

Profitability Ratios

examine profit in relation to other figures, comprised of GPM and ROCE

Ratio Analysis

a quantitative management tool that compares different financial figures to examine and judge the financial performance of a business

Return on Capital Employed (ROCE)

a profitability ratio that measures the financial performance of a firm based on the amount of capital invested

Bankruptcy

the legal process declared by the courts that occurs when an individual or business entity is unable to repay its debts

Credit Control

the ability of a business to collect its debts within a suitable timeframe

Creditor Days Ratio

an efficiency ratio that measures the average number of days it takes for a business to pay its creditors

Debt and Equity Ratios

enable a business to calculate the value of their liabilities and debts against their equity

Debtor Days Ratio

an efficiency ratio that measures the average number of days it takes for a business to collect the money owed from debtors

Gearing Ratio

measures the percentage of an organization’s capital employed that comes from external sources

Insolvency

a financial state where an individual or business entity is unable to pay its debts on time

Liquidity

how easily an asset can be turned into cash

Profit Quality

the ability of a business to earn profit in the foreseeable future.

Stock Turnover Ratio

measures the number of times a business sells its stocks within a year

Bad Debts

exist when debtors are unable to pay their outstanding invoices (bills), which reduces the cash inflows of the vendor

Cash

a current asset and represents the actual money a business has

Cash Flow

the transfer or movement of money into and out of an organization

Cash Flow Forecast

a financial tool used to show the expected movement of cash into and out of a business, for a given period of time

Cash Flow Statement

the financial document that records the actual cash inflows and cash outflows of a business during a specified trading period

Cash Inflows

the cash that comes into a business during a given time period

Cash Outflows

to cash that leaves a business during a given time period, such as when invoices or bills have to be paid

Closing Balance

the amount of cash leſt in a business at the end of each trading period

Credit Control

the process of monitoring and managing debtors, such as ensuring only suitable customers are permitted trade credit and that customers do not exceed the agreed credit period

Net Cash Flow

the difference between a firm’s cash inflows and cash outflows for a given time period, usually per month

Opening Balance

the value of cash in a business at the beginning of a trading period

Overtrading

occurs when a business attempts to expand too quickly without the sufficient resources to do so

Working Capital Cycle

the time between cash outflows for production costs and cash inflows from customers who pay upon receipt of their finished goods and services

Average Rate of Return (ARR)

calculates the average annual profit of an investment project, expressed as a percentage of initial investment

Cumulative Net Cash Flow

the sum of an investment project’s net cash flows for a particular year plus the net cash flows of all previous years

Discount Factor

the number used to reduce the value of a sum of money received in the future in order to determine its present (current) value

Discounted Cash Flow

a discount factor (the inverse of compound interest) to reduce the value of money received in future years because money loses its value over time

Investment

capital expenditure or the purchase of assets with the potential to yield future financial benefits

Investment Appraisal

a financial decision-making tool that helps managers to determine whether certain investment projects should be undertaken based mainly on quantitative techniques