Business key terms 3.5, 3.7, 3.8

Gross profit margin

Gross profit margin

calculated by dividing the gross profit by the sales revenue, expressed as a percentage

Profit margin

Calculated by dividing the net profit before interest and tax by the sales revenue, expressed as a percentage

Profitability ratios

Assess the performance of a firm in terms of its profit-generating ability

Return on capital employed

Assesses the returns a firm is making from its capital employed

ROCE

profit before interest and tax / capital employed x 100

Capital employed

Non-current liabilities + equity

Liquidity ratios

Measure the ability of a firm to pay off its short-term debt obligations

Current ratio

A ratio that compares a firm's current assets to its current liabilities (by dividing)

Acid test ratio

(Current assets-stock)/current liabilities

Acid test (quick) ratio

Indicator of how well a firm is able to meet its short-term obligations

Cash flow

Money that flows in and out of a business over a given period of time

Cash inflows vs outflows

Money received by a business over a period of time vs money paid

Profit

The positive difference between sales revenue and total costs

Net cash flow

cash inflow - cash outflow

Cash flow forecast

The future predictions of a firm's cash inflows and outflows over a given period of time

Opening cash balance

The cash that a business starts with every month

Total cash inflows/outflows

A summation of all cash inflows/outflows during a particular month

Closing cash balance

The estimated cash available at the end of the month

Investment

The act of spending money on purchasing an asset with the expectation of future earnings

Investment appraisal

The quantitative techniques used in evaluating the viability or attractiveness of an investment proposal

Payback period

The length of time required for an investment project to pay back its initial cost outlay

Payback period formula

initial investment cost / annual cash flow from investment

Average rate of return

Measures the annual net return on an investment as a percentage of its capital cost

ARR formula

((total returns - capital cost) / years of usage) / capital cost) x 100

Ratio analysis

Financial analysis tool used in the interpretation and assessment of a firm’s financial statements. It determines certain trends and exposes various strengths and weaknesses

Liquidity

A measure of how quickly an asset can be converted into cash

Cash

A money that a business obtains through either the sale of its goods or services, borrowing from financial institutions, or investment by shareholders

Loss

The negative difference between sales revenue and total costs

Cash flow statement

It summarizes the amount of cash and cash equivalents entering and leaving a company

Working capital

The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities

Debt factoring

When a business sells its accounts receivables to a third party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms

Sale-and-leaseback

Assets can be sold to generate cash and these assets can then be hired back by the business for use in production

Hire purchase

A system by which one pays for a thing in regular instalments while having the use of it

Principal

the baseline sum in financial transactions—the initial amount invested or borrowed

Capital costs

 fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services