UNIT 3 BM VOCAB

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Start-up capital

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ACCOUNTS AND FINANCE

124 Terms

1

Start-up capital

capital needed by an entrepreneur to set up a business

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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

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Capital expenditure

purchase of assets that are expected to last for more than one year (buildings, machinery, etc.)

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Revenue expenditure

spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock

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Liquidity

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

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Sources of finance

From where or how businesses obtain their funds

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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

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External sources of finance

Raised from sources outside the business, e.g. through debt (overdrafts, loans and debentures), share capital and the government.

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Equity finance

permanent finance raised by companies through sale of shares

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Rights issue

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

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Debentures or long-term bonds

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

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Long-term loans

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

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Grants

awards given by one entity to a company to facilitate a goal or incentivize performance

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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

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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

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Subsidies

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

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Microfinance

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

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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

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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

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Overdraft

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

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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

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Trade credit

Delaying the payment of bills for goods or services received, “buy now, pay later”.

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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.

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Cost

Sum of money incurred by a business in the production process

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Direct costs

costs that can be clearly identified with each unit of production and can be allocated to a cost center

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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

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Fixed costs

costs that do not vary with output in the short run

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Variable costs

costs that vary with output

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Semi-variable costs

costs that have both a fixed and a variable cost element

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Revenue

the income received from the sale of a product

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Total revenue

total income from the sale of all units of the product

Total revenue = quantity x price

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Revenue stream

the income that an organization gets from a particular activity

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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

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Break-even analysis

Management tool used to calculate the level of sales needed to cover all costs of production.

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Margin of safety (MOS)

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

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Contribution per unit

Contribution per unit = selling price of a product- (direct) variable costs per unit

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Total contribution

Contribution per unit x output (units sold)

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Target profit of output

Target profit of output = (Fixed costs+Target profit)/Contribution per unit

  • Expresed in units

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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

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Target price

Break even target price = (fixed costs/production level)+direct cost

  • Expressed in $ per unit

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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

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Final accounts

Published annual financial statements that all limited liability companies are legally obliged to report (e.g. P&L accounts and balance sheets)

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Balance sheet

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

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Shareholders’ equity

total value of assets minus total values of liabilities

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Share capital

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

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Window-dressing

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

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Loss and profit account

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

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Liabilities

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

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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

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Sales revenue or sales turnover

The total value of sales made during the trading period

Sales revenue = selling price x quantity (volume) sold

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Gross profit

Equal to sales revenue less cost of sales

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Operating profit

Gross profit minus overhead expenses (costs of business not directly related to the number of items made or sold)

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Profit after tax

Operating profit minus interest costs and operating tax

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Dividends

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

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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

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Net profit

Surplus that a business makes after all expenses have been paid for out of gross profit

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Cost of goods sold (COGS)

Shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold.

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Intangible assets

Fixed assets that do not exist in physical form, e.g. goodwill, copyrights, brand names and registered trademarks

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Goodwill

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

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Net assets

Show the value of a business by calculating the value of all its assets minus its liabilities.

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Net book value

Value of an asset as shown on the balance sheet

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Historic cost

Purchase cost of a particular fixed asset

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Residual value

An estimate of the scrap or disposal value of the asset at the end of its useful life

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Depreciation

The fall in the value of fixed assets over time, from wear and tear or obsolescence

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Straight-line depreciation:

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

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Reducing balance method

Calculates depreciation by subtracting a fixed percentage from the previous year’s net book value

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Intellectual property

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

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Market value

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

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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.

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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

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Gross profit margin

Gross profit margin (%) = (gross profit/sales revenue) x 100

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Net profit margin

Net profit margin (%) = (net profit/sales revenue) x 100

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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

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Liquidity ratios

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

  • Current ratio

  • Acid test ratio

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Current ratio

Current ratio = current assets/current liabilities

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Acid test ratio

Acid test ratio = liquid assets/current liabilities

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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

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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

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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

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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

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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

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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.

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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.

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Net cash flows

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

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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

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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

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Liquidation

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

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Insolvent

when a business cannot meet its short-term debts.

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Debtors

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

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Creditors

Businesses that have sold goods or services on trade credit, so will collect this money from the debtors at a future date.

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Working capital cycle

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

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Cash flow statement

Financial document that records the actual cash inflows and outflows of a business during a specific trading period, usually twelve months.

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Cash flow forecasts

a financial document estimating future cash inflows and cash outflows, usually on a month-by-month basis.

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Structure of cash flow forecasts

  • Cash inflows

  • Cash outflows

  • Net monthly cash flow and opening and closing balance

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Net monthly cash flow

estimated difference between monthly cash inflows and outflows.

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Opening balance

cash held by the business at the start of the month

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Closing balance

cash held by the business at the end of the month becomes next month´s opening balance.

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Assets

Items with a monetary value that belong to a business, they can be fixed or current assets.

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Current assets

Liquid resources owned by a business (cash, debtors and stock)

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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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