Studied by 43 people
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
Capital expenditure
purchase of assets that are expected to last for more than one year (buildings, machinery, etc.)
Revenue expenditure
spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock
Liquidity
the ability of a firm to pay its short-term debts
Sources of finance
From where or how businesses obtain their funds
Internal sources of finance
Raised from the business’s own assets or from profits left in the business
Retained profit
Personal finds (for sole traders)
Sales of assets
Reductions in working capital/managing working capital more efficiently
External sources of finance
Raised from sources outside the business, e.g. through debt (overdrafts, loans and debentures), share capital and the government.
Equity finance
permanent finance raised by companies through sale of shares
Rights issue
existing shareholders are given the right to buy additional shares at a discounted price
Debentures or long-term bonds
bonds issued by companies to raise debt finance, often with a fixed rate of interest
Long-term loans
loans that do not have to be repaid for at least one year
Grants
awards given by one entity to a company to facilitate a goal or incentivize performance
Venture capital
Risk capital invested in business start-ups of expanding small businesses, which 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
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
Hire purchase
an asset is sold to a company which agrees to make fixed repayments over an agreed time period; the asset belongs to the company Medium-term loan
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 in cash
Trade credit
Delaying the payment of bills for goods or services received, “buy now, pay later”.
Sale-and-leaseback
A business sells a fixed asset but immediately leases the asset back. The lesee transfers ownership to the lessor but the assets does not physically leave the business.
Cost
Sum of money incurred by a business in the production process
Direct costs
costs that can be clearly identified with each unit of production and can be allocated to a cost center
Indirect costs or overhead costs
costs which cannot be identified with a unit of production or allocated accurately to a cost center
Production overheads: factory rent and rates, depreciation of equipment and power
Selling and distribution overheads: warehouse, packing and distribution costs and salaries of sales staff
Administration overheads: office rent and rates, clerical and executive salaries
Finance overheads: interest on loans
Fixed costs
costs that do not vary with output in the short run
Variable costs
costs that vary with output
Semi-variable costs
costs that have both a fixed and a variable cost element
Revenue
the income received from the sale of a product
Total revenue
total income from the sale of all units of the product
Total revenue = quantity x price
Revenue stream
the income that an organization gets from a particular activity
Break-even
The level of output at which total costs equal total revenue
When Total costs = total revenue
No profit or loss is made
Formula: fixed costs/contribution per unit
Break-even analysis
Management tool used to calculate the level of sales needed to cover all costs of production.
Margin of safety (MOS)
The amount by which the output level exceeds the break-even level of output
Contribution per unit
Contribution per unit = selling price of a product- (direct) variable costs per unit
Total contribution
Contribution per unit x output (units sold)
Target profit of output
Target profit of output = (Fixed costs+Target profit)/Contribution per unit
Expresed in units
Break-even revenue
The amount of revenue needed to cover both fixed and variable costs so that the business breaks even
Break-even revenue = (Fixed costs)/[1-(direct costs/price)]
Expressed in $ per unit
Target price
Break even target price = (fixed costs/production level)+direct cost
Expressed in $ per unit
Profit
The positive difference between a firm’s sales revenue and its costs.
Low quality profit: One-off profit that cannot easily be repeated or sustained
High quality profit: Profit that can be repeated and sustained
Final accounts
Published annual financial statements that all limited liability companies are legally obliged to report (e.g. P&L accounts and balance sheets)
Balance sheet
an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time
Shareholders’ equity
total value of assets minus total values of liabilities
Share capital
the total value of capital raised from shareholders by the issue of share
Window-dressing
Presenting the accounts in the best possible or most flattering way which could potentially mislead users of accounts
Loss and profit account
Records the revenue, costs and profit (or 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
Sections of a P&L account
Trading account
Sales revenue or sales turnover
Gross profit
Profit and loss sections
Operating profit (profit before interest and tax)
Profit after tax
Dividends
Appropriation account
Retained profits
Sales revenue or sales turnover
The total value of sales made during the trading period
Sales revenue = selling price x quantity (volume) sold
Gross profit
Equal to sales revenue less cost of sales
Operating profit
Gross profit minus overhead expenses (costs of business not directly related to the number of items made or sold)
Profit after tax
Operating profit minus interest costs and operating tax
Dividends
The share of the profits paid to shareholders as a return for investing in the company
Retained profits
The profit left after all deductions, including dividends, have been made; this is later sent back into the company as a source of finance
Net profit
Surplus that a business makes after all expenses have been paid for out of gross profit
Cost of goods sold (COGS)
Shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold.
Intangible assets
Fixed assets that do not exist in physical form, e.g. goodwill, copyrights, brand names and registered trademarks
Goodwill
arises when a business is valued at or sold for more than the balance sheet values of its assets
Net assets
Show the value of a business by calculating the value of all its assets minus its liabilities.
Net book value
Value of an asset as shown on the balance sheet
Historic cost
Purchase cost of a particular fixed asset
Residual value
An estimate of the scrap or disposal value of the asset at the end of its useful life
Depreciation
The fall in the value of fixed assets over time, from wear and tear or obsolescence
Straight-line depreciation:
a constant amount of depreciation is subtracted from the value of the asset each year
Reducing balance method
Calculates depreciation by subtracting a fixed percentage from the previous year’s net book value
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
Ratio analysis
Quantitative measurement tool that compares different financial figures to examine and judge the financial performance of a business. It requires the information from final accounts.
Profitability ratios
Examine the profit in relation to other figures, e.g. the GPM and NPM ratios. These ratios tend to be important to profit-seeking businesses rather than for not-for-profit organizations.
Gross profit margin
Net profit margin
Return on capital employed
Gross profit margin
Gross profit margin (%) = (gross profit/sales revenue) x 100
Net profit margin
Net profit margin (%) = (net profit/sales revenue) x 100
Return on capital employed (ROCE)
Return on capital employed (%) = (net profit/capital employed) x 100
Capital employed = (non-current assets + current assets) - current liabilities or non-current liabilities + shareholders’ equity
Liquidity ratios
Assess the ability of a firm to pay its short-term debts.
Current ratio
Acid test ratio
Current ratio
Current ratio = current assets/current liabilities
Acid test ratio
Acid test ratio = liquid assets/current liabilities
Efficiency ratios
Indicate how well a firm’s resources have been used, such as the amount of profit generated from the available capital used in the business.
Inventory (stock) turnover ratio
Debtor days ratio
Creditor days ratio
Gearing ratio
Inventory (stock) turnover ratio
Measures the number of times a business sells its stocks within a year.
Inventory stock ratio = cost of goods sold/inventory level
Can also be expressed as the average number of days it takes for a business to sell all of its inventories
Inventory turnover ratio (in days) = (value of inventories/cost of goods sold)/365
Debtor days ratio
Measures the average number of days it takes for a business to collect the money owed from debtors
Debtor days ratio = (debtors x 365)/revenue
Debtors turnover ratio = revenue/debtors
Creditor days ratio
Measures how quickly a business pays its suppliers during the year. The higher this result, the longer the business is taking to pay its suppliers.
Creditor days ratio = (trade creditors/credit purchases or cost of goods sold) x 365
Gearing ratio
Measures the degree to which the capital of the business is financed from long-term loans.
A result of over 50% would indicate a highly geared business
Gearing ratio = (long term loans/capital employed) x 100
Cash
A current asset and represents the actual money a business has. It can exist in the form of cash-in-hand or cash at bank.
Cash flow
Movement of money into and out of an organization. Cash inflows mainly come from sales revenue whereas cash outflows are for items of expenditure.
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.
Lease payments for premises
Annual rent payment
Electricity, gas, etc.
Labour cost payments
Variable cost payments
Cash inflows
payments in cash received by a business, such those from customers (debtors) or from the bank (loans).
Owner’s capital injection
Bank loan payments
Customer’s cash purchases
Debtor’s payments
Liquidation
when a firm ceases trading and its assets are sold for cash.
Insolvent
when a business cannot meet its short-term debts.
Debtors
Customers who have bought products on credit and will pay cash at an agreed date in the future.
Creditors
Businesses that have sold goods or services on trade credit, so will collect this money from the debtors at a future date.
Working capital cycle
the period of time between spending cash on the production process and receiving cash payments from customers.
Cash flow statement
Financial document that records the actual cash inflows and outflows of a business during a specific trading period, usually twelve months.
Cash flow forecasts
a financial document estimating future cash inflows and cash outflows, usually on a month-by-month basis.
Structure of cash flow forecasts
Cash inflows
Cash outflows
Net monthly cash flow and opening and closing balance
Net monthly cash flow
estimated difference between monthly cash inflows and outflows.
Opening balance
cash held by the business at the start of the month
Closing balance
cash held by the business at the end of the month becomes next month´s opening balance.
Assets
Items with a monetary value that belong to a business, they can be fixed or current assets.
Current assets
Liquid resources owned by a business (cash, debtors and stock)
Fixed assets
Iliquid resources owned by a business, not intended for sale within the next twelve months, yet continuously used to generate revenue (land, vehicles, trademarks)
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