Finance

Start-up capital

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. In accounting terms: working capital = current assets - current liabilities

Internal finance

raised from the business's own assets or from profits left in the business (ploughed-back or retained profit)

External finance

raised from sources outside the business

Retained profit

the profit left after all deductions, including dividends, have been made. This is 'ploughed back' into the company as a source of finance

Liquidity

the ability of a firm to pay its short-term debts

Overdraft

bank agrees to a business borrowing up to an agreed limit as and when required

Debt-factoring

selling of claims over debtors to a debt factor in exchange for immediate liquidity - only a proportion of the value of the debts will be received as cash

Hire-purchase

an asset is sold to a company that agrees to pay fixed repayments over an agreed time period - the asset belongs to the company

Leasing

obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. this avoids the need for the business to raise long-term capital to buy the asset. Ownership remains with the leasing company.

Equity finance

permanent finance raised by companies through the sale of shares

Long-term loans

loans that do not have to be repaid for at least one year

Debentures or long-term bonds

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

Rights issue

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

Venture capital

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

Business angels

individual investors who put in their own money in a variety of businesses and are seeking a better return than they would obtain from conventional investments

Subsidies

financial benefits given by the government to a business to reduce costs and encourage increased production

Microfinance

the provision of very small loans by specialist finance businesses, usually not traditional commercial banks

Direct cost

these costs can be clearly identified with each unit of production and can be allocated to a cost centre

Indirect cost

costs which cannot be identified with a unit of production or allocated accurately to a cost centre- also known as overhead costs

Fixed costs

costs that do not vary with output in the short run

Variable costs

costs that very with output

Semi-variable costs

costs that have both fixed and a variable cost element

Revenue

income received from the sale of a product

Total revenue

total income from the sale of all units of the product = quanitityxprice

Revenue stream

the income that an organisation gets from a particular activity

Break-even

the level of output at which total costs equal total revenue

Margin of safety

the amount by which the sales level exceeds the break-even level of output

Contribution per unit

selling price of a product minus direct costs per unit

Total contribution

unit contribution x output

Break-even revenue

the amount of revenue needed to cover both fixed and variable costs so that the business breaks even

Window dressing

Presenting the accounts of a business in the best possible, or most flattering, way which could potentially mislead users of accounts

Depreciation

The decline in the estimated value of a fixed asset over time

Assets

Items of monetary value that are owned by a business

Profit and loss account

Records the revenue, costs and profit/loss of a business over a given period of time

Liabilities

A financial obligation of a business that it is required to pay in the future

Gross profit

Equal to sales revenue less cost of sales

Sales revenue/total sales turnover

The total value of sales made during the trading period

Selling price x quantity sold

Cost of sales

The direct cost of purchasing the goods that were sold during the financial year

Operating profit (net profit/profit before interest and tax)

Gross profit-overhead expenses

Profit after tax

Operating profit-interest costs and corporation tax

Dividends

The share of the profits paid to shareholders as a return for investing in the company

Retained profit

the profit left after all deductions have been made, ploughed back into the company as a source of finance

Low-quality profit

One-off profit that cannot easily be repeated or sustained

High-quality profit

Profit that can't be repeated and sustained

Balance sheet

An accounting statement that records the values of a business's assets, liabilities and shareholder's equity at one point in time

Shareholders' equity

Total value of assets-total value of liabilities

Share capital

The total value of capital raised form shareholders by the issue of shares

Debtors

Customers who have nought products on credit and will pay cash at an agreed date in the future

Current liabilities

Debts of the business that will usually have to be paid within one year

Goodwill

Arises when a business is values at or sold for more than the balance sheet values of its assets

Intellectual property

An intangible asset that has been developed from human ideas and knowledge

Market value

The estimated total value of a company if it were taken over

Straight-line depreciation

A constant amount of depreciation is subtracted from the value of the asset each year

Reducing balance method

Calculated depreciation by subtracting a fixed percentage from the pervious year's net book value

Net book value

The current balance sheet value of a non-current asset

Original cost-accumulated depreciation

Liquidity

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

Gross profit margin %

Gross profit/sales revenue x 100

Net profit margin %

Net profit/sales revenue x 100

Return on capital employed %

Net profit / capital employed x 100

Capital employed

The total value of all long-term finance invested in the business

(non-current assets + current assets) - current liabilities

non-current liabilities + shareholders equity

Current ratio

current assets/current liabilities

Acid test ratio

liquid assets/current liabilities

Liquid assets

current assets - inventories

Inventory (stock) turnover ratio

cost of goods sold / inventory level

Debtor days ratio

debtors (accounts receivable) x 365/revenue

Creditor days ratio

trade creditors/credit purchases x 365

Liquidation

when a firm ceases trading and its assets are sold for cash

Insolvent

when a business cannot meet its short-term debts

Net cash flows

the sum of cash payments to a business (inflows) less the sum of cash payments made by it (outflows)

Cash outflows

payments in cash made by a business, such as those to suppliers and workers

Cash inflows

Payments in cash received by a business, such as those from customers (debtors) or from the bank; e.g. receiving a loan

Currents liabilities

debts of the business that must be paid within the next accounting period

Debtors

customers who have bought products on credit and will pay cash at an agreed date in the future

Working capital cycle

the period of time between spending cash on the production process and receiving cash payments from customers

Cash flow forecast

estimate of a firm's future cash inflows and outflows

Net monthly cash flow

estimated difference between monthly cash inflows and outflows

Opening cash balance

cash held at the end of the month becomes next month's opening balance

Closing cash balance

cash held at the end of the month becomes next month's opening balance

Credit control

monitoring of debts to ensure that credit periods are not exceeded

Bad debt

unpaid customers' bills that are now very unlikely to ever be paid

Overtrading

expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops

Investment appraisal

Evaluating the profitability or desirability of an investment project

Annual forecasted net cash flow

Forecasted cash inflow minus forecasted cash outflows

Payback period

Length of time it takes for the net cash inflows to pay back the original capital cost of investment

Average rate of return

Measured the profitability of an investment as a percentage of the initial investment

Criterion rate or level

The minimum level (maximum for payback period) set by management for investment appraisal results for a project to be accepted

Net present value

Today's value of the estimated cash flows resulting from an investment

Budget

A detailed financial plan for the future

Budget holder

individual responsible for the initial setting and achievement of budget

Delegated budget

Control over budget is given to less senior management

Incremental budgeting

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

Zero budgeting

Setting budgets to zero each year and budget holders have to argue their case to receive any finance

Cost centre

a section of a business, such as a department, to which costs can be allocated or charged

Profit centre

A section of a business to which both costs and revenues can be allocated

Variance analysis

The process of investigating any differences between budgeted figures and actual figures

Favourable variance

Exists when the difference between the budgeted and actual figure leads to a higher than expected profit.

Adverse variance

Exists when the difference between the budgeted and actual figure leads to a lower than expected profit