IB Business & Management: Topic 3

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= working/current assets-current liabilities

Overdraft

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

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

Leasing

obtaining the use of equipment of 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

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

Long-term loans

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

Equity finance

permanent finance raised by companies through the sale of shares

Debentures/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 business, that have good profit potential, but to not find it easy to gain finance from other sources

Investment appraisal

evaluating the profitability or desirability of an investment project

Annual forecasted net cash flow

forecasted cash inflow- forecasted cash outflows

Average rate of return (ARR)

measures the annual profitability of an investment as a percentage of the initial investment

ARR (%)

(annual profit (net cash flow))/(initial capital cost)×100

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 (NPV)

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

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

Liquidity

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

Liquidation

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

Working capital cycle

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

Cash flow

the sum of cash payments to a business (inflows)- the sum of cash payments by the business (outflows)

Liquidation

turning assets into cash may be insisted on by courts if suppliers have not been paid

Insolvent

when a business cannot meet its short-term debts

Cash inflows

payments in cash received by the business, such as those from customers (debtors) or from the bank

Cash outflows

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

Debtors

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

Cash flow forecast

estimate of a firm's future cash inflows and outflows

Net monthly cash flows

estimated difference between monthly cash inflows and outflows

Opening cash balance

cash held by the business at the start of the month

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

Budget

a detailed financial plan for the future

Budget holder

individual responsible for the initial setting and achievement of a budget

Delegated budgets

control over budgets is given to less senior management

Incremental budgeting

using last year's budget as a basis and 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

Variance analysis

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

Adverse variance

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

Favourable variance

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

Income statement

records the revenue, costs and profit (or loss) of a business over a given period of time

Operating profit (net profit)

gross profit - overhead expenses

Profit after tax

operating profit - (interest costs + 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, including dividends, have been made. This is ploughed back into the company as a source of finance

Low-quality profit

one-off profit that cannot be easily be repeated or sustained

High-quality profit

profit that can be repeated and sustained

Balance sheet

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

Assets

items of monetary value that are owned by a business

Liabilities

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

Shareholders' equity

total value of assets-total value of liabilities

Share capital

the total value of capital raised from shareholders by the issue of shares

Goodwill

arises when a business is valued 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

Depreciation

the decline in the estimate value of a non-current asset over time

Straight-line depreciation

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

Net book value

the current balance sheet value of a non-current asset= original cost-accumulated depreciation

Reducing balance method

calculates depreciation from the previous year's net book value

Last In First Out (LIFO)

valuing closing stocks by assuming that the last one purchased was sold first

First In First Out (FIFO)

valuing closing stocks by assuming that the first ones bought in were sold first

Gross profit margin (%)

(Gross profit)/(Sales revenue)×100

Net profit margin (%)

(Net profit)/(Sales revenue)×100

Return on capital employed (%)

(Net profit)/(Capital employed)×100

Capital employed

(non current assets+current assets)- current liabilities

OR

(non current liabilities)+shareholders equity

Current ratio

(Current assets)/(Current liabilities)

Acid test ratio

(liquid assets)/(current liabilities)

Liquid assets

current assets-stocks

Stock (inventory) turnover ratio

(cost of goods sold)/(value of stock (average))

Stock turnover ratio (days)

(value of stocks)/(cost of sales/365)

Debtors days

(trade debtors (accounts receivable))/(sales turnover)×365

Creditor days ratio

(trade creditors)/(credit purchases)×365

Dividends

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

Share price

the quoted price of one share on the stock exchange

Dividend yield ratio (%)

(Dividends per share)/(Current share price)×100

Dividends per share

(Total annual dividends)/(Total number of issued shares)

Earnings per share

profit earned per share in the company=(Profit after tax)/(Total number of ordinary shares)

Gearing ratio (%)

(Long-term loans)/(Capital employed)×100