Business BTEC - Business finance key terms

Accounting

Accounting involves the recording of financial transactions, planned or actual, and the use of these figures to produce financial information

Income

Income is the money coming into a business

Capital income

The money invested by the owners or other investors, used to set up the business or buy additional equipment e.g. loan, mortgage, shares, owner’s capital, debentures (medium to long term sources of capital income)

Revenue income

The money that come into the business from performing its day-to-day function selling goods or providing a service e.g. sales (cash or credit), rent received, commission received, interest received, discount received 

Expenditure

The money spent by a business

Capital expenditure

Used to buy capital items, which are assets that will stay in the business for a long period of time

Non-current assets

Tangible items that will appear on the statement of financial position and include things like land, premises, equipment and vehicles

Intangible assets

Cannot be touched but add value to the business e.g. goodwill, patents, trademarks and brand names

Revenue expenditure

Spending on items on a day-to-day or regular basis. These expenses are shown on the statement of comprehensive income e.g. inventory, rent, rates, heating and lighting, water, insurance, salaries, wages, bank charges, interest paid, depreciation allowance, discount allowed

Retained profit

Money kept in the business to fund expenditure

Profit = sales revenue - total costs

Net current assets

Shows the money available in the business to fund day-to-day expenditure

Current assets - current liabilities

Sale of assets

Selling an item of value in order to achieve a cash injection

Owner’s capital

Money invested into the business from the owner’s personal savings

Loans

Money borrowed from a financial institution normally for a set period of time and a specific purpose

Crowdfunding

Attracting investments from a large number of speculative investors, may of whom may invest relatively small amounts

Mortgages

Long term loans, normally around 25 years, that are secured against a specific asset e.g. a building

Venture capital

Investment from an experienced entrepreneur in return for a stake in the business

Debt factoring

Selling the debts of a business to a third party in order to receive a quick cash injection

Hire purchase

Paying to use an asset in instalments to spread the cost over its useful life

Leasing

Paying to use an asset in instalments, however the ownership of the asset remains with the supplier throughout the lease agreement

Trade credit

A period of time, offered by suppliers, to allow the customer to purchase now and pay later

Grants

A lump sum provided to a business by the government or another organisation to be used for a specific purpose  

Donations

Sums of money given voluntarily to a charity or social enterprise

Peer-to-peer lending

Involves one business lending money to another business person in return for interest payments

Invoice discounting

Reductions offered to customers making a product or service cheaper. Usually applied as a percentage of the total value

Break-even analysis

Break-even is the point at which a business is not making profit or loss. The money received from sales is the same as the money being spent on costs. Total revenue = Total costs

Variable costs

Costs that change with the level of output e.g. raw materials

Semi-variable costs

Part of the cost stays the same and part varies in relation to the degree of business activity e.g. a worker paid a fixed rate of pay but addition may receive variable amounts of overtime

Fixed costs

Costs that do not vary with output. They remain the same e.g. rent

Total costs

The total of fixed costs and total variable costs

Fixed costs + total variable costs

Total revenue

The total amount of money coming in from sales

Selling price x quantity sold

Total sales

The amount of sales made in a set time period e.g. one year. It can be expressed as value (monetary) or volume (quantity)

Selling price per unit

The amount the customer will pay for each unit purchased

Sales in value

Sales expressed in a monetary value e.g. £

Sale in volume (units)

Sales expressed as a quantity e.g. units

Cash flow forecast

A cash flow forecast tries to predict the cash flowing into and out of a business. A healthy cash flow is crucial to the survival of a business

Cash inflows/receipts

Money coming into the business from various sources e.g. cash sales, credit sales, loans, capital introduced, sale of assets and bank interest received

Cash outflow/receipts

Money going out of a business for various purposes e.g. cash purchases, credit purchases, rent, rates, salaries, wages, utilities, purchase of assets, VAT and bank interest paid

Opening balance

The amount of cash available in a business at the end of the start of the month

Closing balance

The amount of cash available in a business at the end of the month. 

Opening balance + net cash flow

Liquidity

Measures a firm’s ability to meet short term cash payments

Statement of comprehensive income (SOCI)

Shows the trading position of the business which is used to calculate gross profit. It then takes into account all of the expenses to calculate the profit or loss for the year

Accrual

When the expense is paid after the period to which it relates

Prepayment

When an expense is made advance of the the period to which it relates

Statement of financial position (SOFP)

Provides a snapshot of the net worth of a business at a particular moment in time, normally at the end of the financial year. It is a summary of everything a business owns (assets) and everything it owes (liabilities)

Non-current assets (2)

Items of value that are owned by the business and likely to be held for more than one year e.g. premises and fixtures and fittings (2)

Current assets

Items of value that are owned by the business whose value is likely to fluctuate on a regular basis e.g. inventories, trade receivables, prepayments, cash in the bank and cash in hand 

Current liabilities

Things owned by the business that must be repaid within a 12-month period e.g. overdrafts, accruals and trade payables

Non-current liabilities

Things a business owes that will take longer than one year to repay e.g. mortgages and bank loans

Depreciation

An accounting concept used to spread the cost of an asset over its useful life. Assets appear in the statement of financial position at a realistic value (net book value) and the annual monthly amount by which the assets are depreciated is included as an expense on the statement of comprehensive income

Straight-line depreciation

Asset is depreciated by a set amount each year

Reducing balance depreceation

Asset is depreciated by a set percentage if its remaining value each year. The percentage will be set by a senior account and means that the asset will be depreciated by a lower amount as it ages

Gross profit margin

This ratio looks at gross profit as a percentage of sales turnover

Mark-up

This ratio calculates gross profit as a percentage of the cost of sales

Net profit margin

This ratio shows the net profit as a percentage of sales

Return on capital employed (ROCE)

This ratio shows the percentage return a business is achieving from the capital invested to generate the return

Current ratio

This ratio shows a business the amount of current assets it owns in relation the amount of current liabilities it owes

Liquid capital ratio

This ratio gives a more accurate reflection of the true liquidity of a business as it removes the least liquid of all current assets from the equation I.e. inventories

Trade receivable days

This ratio measures, on average, how long it takes for debtors to pay and is expressed as a number of days

Trade payable days

This ratio shows, on average, how long it takes a firm to pay for goods and services bought on credit and is expressed as a number of days

Inventory turnover

This ratio shows the average amount of time an item of stock is held by a business and is expressed as a number of days