IBDP Business Management Unit Finance

Capital Expenditure

Money spent to acquire items in a business that will last for more than a year and can be used over and over again

Fixed Assets

Ex. Machinery, land, equipment, and buildings. Overtime they provide income for the business

Revenue Expenditure

money spent on the day to day running of a business. Ex. Wages, insurance, rent, and raw materials. (Should make sure it does not get high)

Personal Funds

A source of finance for sole traders that comes mostly from their own personal savings

Retained Profit

Profit which remains after a business paid corporation tax to the government and dividends to shareholders

Sale of Assets

When a business sells off its unwanted/unused assets to raise funds.

Share Capital (Equity Capital)

Money raised from the sale of shares of a limited company on the stock exchange.

Loan Capital (Debit Loan)

Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid.

Interest

Cost of borrowing or the reward for saving money in the bank

Overdrafts

When a lending institution allows a firm to withdraw more money than it currently has in its account

Trade Credit

An agreement between businesses that allows the buyer of the goods/services to pay the seller at a later date.

Grants

Funds usually provided by a government, foundation, trust, or other agency to businesses which does not need to be repaid.

Subsidies

Financial Assistance granted by a government, NGO, or an individual to support businesses that are in the public interest

Debt Factoring

a financial agreement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the owed debt in cash

Leasing

A source of finance that allows a firm to use an asset without having to purchase it by cash

Venture Capital

Financial capital proved by investors to high-risk, high potential start ups or small businesses.

Business Angels

Highly affluent individuals who provide financial capital to small startups in return for ownership in their business.

High Geared

Large proportion of loan capital to share capital

Low Geared

Small proportion of loan capital to share capital

Cost

The total expenditure incurred by a business in order to run its operations

Revenue

Measure of the money generated from the sale of goods/services

Revenue Streams

Firms utilizing different sources/methods to generate income

Fixed Cost

Costs that do not change with the amount of goods/services sold. Ex: Rent, insurance, salaries, interest payments

Variable Costs

Costs that change with the amount of goods/services produced. Volume related since they are paid per quantity produced. Ex: Raw materials, packaging, sales commissions, advertisements

Semi-Variable Costs

Costs comprising of both fixed and variable components. They remain fixed for a given level of production and after which they become variable once that level is exceeded.

Ex. Electricity bills or workers monthly salary + extra hours worked

Direct Cost

Costs that can be identified with the production of specific goods or services

Ex: Cost of flour in making bread at a bakery

Indirect Costs (Overheads)

Costs that are not clearly identified with the production of specific goods/services, not directly traceable.

Ex: Audit fees, rent, office staff salaries

Contribution

Calculates how many products need to be sold in order to cover a firms costs.

Contribution Per Unit (CPU)

Refers to the difference between the selling price per unit and the variable costs

CPU = Price per unit = variable cost per unit

Total Contribution

Calculated when more than one unit is sold.

Total contribution = total revenue (TR) - total variable costs (TVC)

or

Total contribution = CPU x number of units sold

Profit

The financial gain made by the business

Profit = Total contribution - total fixed costs (TFC)

or

Profit = TR - TC

Break-even point

When the total costs = the total revenue. This is when the business will not make a profit or a loss.

Margin of Safety

The difference between the break-even level of output and the actual (current) level of output

Margin of Safety = current output - breakeven output

Break-Even Quantity

fixed costs/CPU

or

fixed costs/(price per unit - variable costs per unit)

Break-Even Revenue

( fixed costs/CPU ) x price per unit

or

[ fixed costs/(price per unit - variable costs per unit) ] x price

Total Revenue

TR = Price x quantity

Target Profit Output (TPO)

The level of output that is needed to earn a specified amount of profit

TPO = (Fixed costs + Target profit) / CPU

Trading Account

Shows the difference between the sales revenue and the cost to the business of those sales

Profit and Loss Account

Second part of the income statement that shows the net profit before interest and tax, net profit before tax, and net profit after interest

Appropriation Account

final part of the profit/loss account that shows how the company's net profit after interest and tax is distributed

Gross Profit

profit made by a company (sales revenue - cost of goods sold)

net profit

he positive difference between a company's gross profit and its expense (gross profit - expenses)

Cost of Goods Sold (COGS)

Cost of producing or purchasing the goods that were sold during that period

Dividends

A sum of the money paid to shareholders which is decided by the board of directors

Stock

unsold goods, raw materials or work-in-progress that the company has in hand at the end of the trading period

Opening Stock

the quantity of goods produced/owned by the business that are unsold in the previous accounting period

Closing Stock

the quantity of goods produced/owned by the business after sales at the close of the accounting period such as a year

Balance Sheet

a statement of the financial position of a business in terms of assets, liabilities and owner's equity at a particular point in time

Assets

all items of value that are owned by the firm, such as cash or buildings

Fixed Assets

Long-term assets that last in a business for more than 12 months (Ex. vehicles, buildings, and machinery)

Current Assets

Short-term assets that last in a business for up to 12 months (Ex. Cash, debtors, stock)

Liabilities

all funds owed by the company to financial and other institutions, such as banks and suppliers

Long-term liabilities

Long-term debts payable after 12 months by the business (Ex. Mortgages)

Current Liabilities

Short-term debts that are payable within 12 months (Ex. creditors, tax, overdraft)

Working Capital

(Net current assets) Helps establish whether a firm can pay its day-to-day running costs

Equity

Shows how the net assets are financed using shareholders' capital and retained profit

Debtors

people who owe money

Creditors

People who lend money

Intangible Assets

assets that do not have physical substance

Patents

exclusive rights to make or sell inventions

Goodwill

the value of all favorable attributes that relate to a company that relate to the business

Copyright Laws

laws that provide creators with the exclusive right to protect the production and sale of their artistic or literary work

Trademarks

Recognizable symbol, word, phrase, or design that is officially registered and identifies a product or business

Depreciation

A decrease or loss in value

Obsolescence

state of being no longer useful or in fashion

Straight-line method

Spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation

Reducing Balance Method

A method where a predetermine percentage depreciation rate is used and subtracted from the net book value of the previous year

Residual Value

the estimated value of a fixed asset at the end of its useful life

Net book value

cost - accumulated depreciation

Ratio Analysis

Financial tool used in the interpretation and assessment of a firms financial statements

Profitability Ratios

show a company's overall efficiency and performance

Gross profit margin

(Gross profit) / (sales revenue) x 100

Net profit margin

(Net profit before interest and tax) / (Sales Revenue) *100

Return on Capital Employed (ROCE)

Measures efficiency and profitability of a firms invested capital

Capital Employed

long term liabilities + share capital + retained profit

Liquidity Ratios

the firm's ability to convert its short-term assets into cash

Current Ratio

current assets/current liabilities

Acid Test Ratio

Current Assets - Stock / Current Liabilities

Stock Turnover Ratio

Measures how quickly a firm's stock is sold and replaced over a given period

Debtor Days

Measures the number of days it takes on average for a firm to collect its debts from customers it has sold goods to on credit.