Financial Function and Financial Statements

Vocabulary flashcards covering the financial function, sources of finance, types of budgets and capital, financial statements, credit policy, and credit control.

Financial function

The function responsible for planning and managing all the funds and assets of the business.

Financial planning

Determining how much money the business needs and how it will be used.

Obtaining finance

Finding suitable sources of finance for the business.

Budgeting

A planning tool to estimate expected income and expenditure, assisting businesses to keep track of finances and ensure better profitability.

Financial control

Monitoring whether actual spending and income agree with the budget.

Record keeping

Keeping accurate records of financial transactions.

Financial analysis

Using financial information to assess the performance and financial position of the business.

Bank loans

Money borrowed from a bank repaid with interest over a period of time, usually used for long-term financing with fixed assets attached as surety.

Bank overdraft

A short-term loan added onto the account of the entrepreneur, repaid with interest over a set period of time.

Asset-based loan

Money lent to successful businesses that want to expand further, used to purchase an asset that belongs to the lender until fully paid off.

Grants

Money provided by government to small businesses that are developing, which does not have to be paid back if it benefits the community and environment.

Receivable finance

A loan equal to outstanding invoices provided to businesses waiting for payment of goods or services to avoid a cash flow shortage.

Angel funding

Money offered by wealthy entrepreneurs to other businesses for a share in that business, usually used at start-up and carrying high risk.

Venture Capital

Money offered by individuals or organisations to start up or expand a business in exchange for a share in the business and usually a management or board position.

Capital budget

A budget that estimates fixed capital, drawn up every five to ten years and revised annually to plan purchasing, upgrading, and changing of fixed assets.

Cash budget

A budget that estimates working capital, drawn up at the end of the financial year for the start of the new year and revised monthly.

Capital

The money or other financial resources available to a business to start, operate, or expand.

Fixed capital

Money used to pay for fixed assets (such as land and buildings) to finance the long-term capital needs of the business.

Working capital / operating capital

Money used to pay for day-to-day activities (such as trading stock) to finance short-term capital needs.

Own capital

Permanent capital provided by the owners of the business from savings, sale of assets, or equity investors.

Borrowed capital

Temporary capital borrowed from financial institutions or individuals that must be paid back with interest.

Short-term capital

Finance required for a short period, generally less than one year.

Long-term capital

Finance that is available for a long period, generally more than one year.

Statement of Comprehensive Income

A financial report showing the financial performance of a business over a specific period, indicating whether it made a profit or loss.

Revenue / Sales

Income earned from selling goods or services.

Cost of sales

Cost of the goods that were sold.

Gross profit

Calculated as $\text{Sales} - \text{Cost of sales}$.

Other income

Income earned from sources other than normal sales.

Operating expenses

Costs involved in running the business.

Operating profit

Profit generated from normal business operations.

Finance costs

Interest and other costs of borrowed finance.

Profit before tax

Profit calculated before income tax is deducted.

Income tax

Tax payable by the business.

Profit for the year

Final profit remaining after all expenses and tax are deducted.

Statement of Financial Position

A financial statement showing the financial position of a business at a specific date based on the accounting equation $\text{Assets} = \text{Equity} + \text{Liabilities}$.

Non-current assets

Assets held or used by a business for more than one year, such as land, buildings, vehicles, equipment, and machinery.

Current assets

Assets expected to be converted into cash or used in the short term, such as inventory/stock, trade receivables/debtors, cash, and bank.

Equity

The owner's financial interest in the business, comprising owner's capital and retained income/profit.

Non-current liabilities

Amounts owed by the business for more than one year, such as long-term bank loans or mortgage loans.

Current liabilities

Amounts owed by the business and generally payable in the short term, such as trade payables/creditors, bank overdraft, and short-term loans.

Debtor / trade receivable

A customer who has received goods or services but has not yet paid.

Credit policy

Consists of the rules a business uses when deciding who may buy on credit and under what conditions.

Credit standards

The rules that determine who qualifies for credit by investigating income, credit history, ability to repay, previous payment behavior, and financial position.

Credit period

Determines how long the customer has to pay their account (e.g., within $30\text{ days}$).

Credit limit

The maximum amount a customer is allowed to owe the business (e.g., maximum limit of $\text{R10 000}$).

Discount (Credit Policy)

A reduction offered for early payment (e.g., $2\%$ discount if payment is made within $10\text{ days}$) to encourage faster settlement and improve cash flow.

Credit control

The process of monitoring and managing credit sales and ensuring that customers pay their accounts on time.