Finance and Accounts (copy)

Unit 3

Business angels

are wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential

Capital expenditure

is investment spending on fixed assets such as the purchase of land and property

Debt factoring

is a financial service whereby a factor (such as a bank) collects debts on behalf of other businesses, in return for a fee

Grants

Are government financial gifts to support businesses activities. They are not expected to be repaid by the recipient lol

Venture capital

is the high risk capital invested by venture capital firms, usually at the start of a business idea. The finance is usually in the form of loans and/or share in the business venture

trade credit

allows a business to "buy now" and "pay later". The credit provider does not receive any cash from the buyer until a later date (usually all between 30-60 days)

Subsidies

are funded by the government to lower a firm;s production cost as output provides extended benefits to society, e.g farmers are often provided with subsidies to stabilise food prices

Leasing

Is a for of hiring whereby a contract is agreed between a leasing company(the lessor) and the customer (the lessee). The lessee pays rental income to hire asses from the lessor, who is the legal owner of the asset

Loan captial

Refers to a medium to long term soruce of interest bearing finance obtained from commercial lenders. Examples include mortgages, loans, debentures, etc.

Overdraft

Allow a usiness to spend in excess of the amount in its bank account, up to a predetermined limit. They are the most flexible form of borrowing short term

Retained profits

Is the value of surplus that the business keeps to use within the business after paying corporate texes on its profit to the government and the dividends to its shareholders

Initial public offerings (IPO)

Refers to a business converting its legal status to a public limited company by floating (Selling) its shares on a stock exchange for the first time

Share issue

(also know as share placement) exists when an existing public limited company raises further finance bu selling more of it shares

Revenue expenditure

refers to spending on the day to day running of a business, such as rent, wages an utility bills.

Cost

refers to the sum of moue incurred by a business in the production process, e,g the costs of raw materials, wages and salaries, insurance, advertising and rent

Direct costs

are costs specifically attributed to the production or sale of a particular good or service. Direct costs can be traced back to the product and /or cost centre.

Fixed cost

are the costs that do not vary with the level of output. They exist even if there is no output, e.g, the cost of rent, management of salaries and interest repayments on bank loans.

Indirect costs(or overhead costs)

are costs that are not directly link to the production or sale of a specific product, e.g, rent, wages of cleaning staff and lighting

Price

refers to the amount of money a product is sold for , i.e,, the sum of paid by the customer

Revenue

is the money that a business collects from the sale of its good and services. It is calculated by multiplying the unit price for each product by the quantity sold

Sale-and-leaseback

is a source of external finance involving a business selling a fixed asset (such as its computer systems or a building) but immediately leasing the asset back. In essence, the lessee transfer ownership to the lessor but the asset does not physically leave the business.

Sources of finance

is the general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits,loans and government grants

Internal sources of finance

Means of getting funds from within the organization e.g through personal funds, retained profits and the sales of assets

Sales of assets

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

Semi-variable costs

Costs that are both fixed and variable, the costs may be fixed if the service/product is unused, but may increase with usage.

Contribution per unit

The difference between the selling price per unit and variable cost per unit

Total contribution

The difference between the total sales revenue and the total variable costs

Profit

Obtained by subtracting total fixed costs from the total contribution

Break-even chart

A graphical method that measures the value of a firm's costs and revenues against a given level of output. It measures the costs and revenues on the y axis, and the number of units on the x axis.

Break-even quantity

A measures of output where total revenue equals total costs

Margin of safety

The distance between the actual number of goods sold from the break even quantity (in units). Actual units - BEQ

Target profit output

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

External sources of finance

Getting funds from outside the organisation. Typically done so through bank loans, microfinance providers, debt factoring businesses, grants, subsidies, share capital, overdrafts, trade credit and leasing.

Profit and loss acount

Shows the records of income and expenditure flows of a business over a given time period

Costs of goods sold

The direct cost of producing or purchasing the goods that were sold during that period

cost

Refers to the sum of money incurred by a business in the production process

fixed costs

The costs that do not vary with the level of output.

revenue stream

Refers to the money coming into a business from it's various business activities

Total costs

The sum of all variable costs and all fixed costs of production

variable costs

Costs of production that change in proportion to the level of output

Net profit before interest and tax

The difference between gross profit and expenses

Net profit before tax

Found by subtracting interest from net profit before interest and tax

Dividends

A sum of money paid to shareholders decided by the board of directors of a company

Retained profit

The amount of earnings left after dividends and other deductions have been made

Balance sheet

A financial statement that outlines the assets, liabilities and equity of a firm at a specific point in time

Assets

Resources of value that a business owns or that are owed to it

Liabilities

A firm's legal debts or what it owes to other firms, institutions or individuals

Working capital

Helps establish whether a firm can pay its day-to-day running costs

Net assets

Found by subtracting long-term liabilities from total assets less current liabilities

Equity

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

Intangible assets

Fixed assets that lack physical substance or are non-physical in nature. E.x. brand value, goodwill, trademarks, patents, copyrights.

Patents

Provide inventors with the exclusive rights to manufacture, use, sell or control their invention of a product

break even point

refers to a position on a break even chart where the total costs line intersects the total revenue line

Goodwill

An intangiable asset which exists when the value of a firm exceeds the book value. The value of positive or favorable attributes that relate to a business

Trademark

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

Copyright laws

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

Net profit after interest and tax

Is the net profit of the business after both interest and tax have been removed. Seen in a profit&loss account (income statement)

Balance sheet

A financial statement that outlines the assets, liabilities and equity of a firm at a specific point in time

break even analysis

a management tool used to calculate the level of sales needed to cover all costs of production

Depreciation

The decrease in the value of a fixed asset over time

Straight-line depreciation

A method that spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation of the asset's value per annum.

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= (purchase price - residual value) / lifetime

Residual value

An estimation of an asset's worth or value over its useful life. The final value of an asset once it does not ‘depreciate’ anymore. (When it will be sold).

Net book value

An asset's net value at the beginning of an accounting period, calculated (total) depreciation from the cost of the fixed asset

Reducing-balance depreciation

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

Appropriation account

refers to the final section of a P&L account and shows how the net profit after intrest and tax is distributed

Gross profit margin

Calculated by dividing the gross profit by the sales revenue, expressed as a percentage

Net profit margin

Calculated by dividing the net profit before interest and tax by the sales revenue, expressed as a percentage

Current ratio

A ratio that compared a firm's current assets to its current liabilities

Acid test ratio

A stringent ratio that subtracts stock from the current assets and compared this to the firm's current liabilities

Return on capital employed

Assesses the returns a firm is making from its capital employed

Stock turnover ratio

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

Debtor days ratio

Measures on average, the number of days it takes for a firm to collect its debts

Creditor days ratio

Measures the average number of days a firm takes to pay its creditors

Gearing ratio

Measures the extent to which the capital employed by a firm is financed from loan capital

Cash flow

Money that flows in and out of a business over a given period of time

Insolvency

A situation where business runs out of cash but may still be profitable

Working capital

The difference between current assets and current liabilities

Liquidation

A situation where all a firm's assets are sold off to pay any funds owning

Working capital cycle

The period of time between payment for goods supplied to a business and the business receiving cash from their sale

Cash flow forecast

The future prediction of a firm's cash inflows and outflows over a given period of time

Investment

The act of spending money on purchasing an asset with the expectation of future earnings

Efficiency ratios

They show how well a firm's resources have been used, such as the amount of time taken by the firm to sell its stock (inventory) or the average number of days taken to collect money from its debtors.

Credit control

The ability of a business to collect its debts within a suitable timeframe.

Ratio analysis

A quantitative management tool that compares different financial figures to examine and judge the financial performance of a business.

Profitability ratios

They examine profit in relation to other figures. These ratios tend to be relevant to profit-seeking business rather than not-for-profit organisations.

Liquidity ratios

They look at the ability of a firm to pay its short-term liabilities, such as by comparing working capital to short-term debts.

Liquidity crisis

A situation where a firm is unable to pays its short-term debts, i.e. current liabilities exceed current assets.

Liquid assets

The possessions of a business that can be turned into cash quickly without losing their value, i.e. cash, stock and debtors.

Capital employed

The value of all long-term sources of finance for a business, e.g. bank loans, share capital and reserves.

Share capital

The amount of money raised through the sale of shares. It shows the value raised when the shares were first sold, rather than their current market value.

Shareholders' funds

The equity of the owners, i.e. the share capital invested by the owners and the retained profit and reserves that have accumulated.

Trading account

The first section of the profit and loss account, showing the difference between a firm's sales revenue and its direct costs of trading, i.e. shows the gross profit.

Gross profit

The difference between to sales of a business and its direct costs inccurred in making to products that have been sold to customers.

Historic cost

The purchase cost of an asset

Final accounts

The published annual financial statements that all limited companies are legally obliged to report, i.e. the balance sheet and the P&L accounts.

Fixed assets

Items are owned by the business, not intended for sale within the next 12 months, but used repeatedly to generate revenue for the business.

Book value

The value of an asset shown on a balance sheet. The market value of assets can be higher than its book value because of intangiable assets such as the brand value or goodwill of the business.

Average rate of return

Calculates the average annual profit of an investment project, expressed as a percentage of initial investment

Discounted cash flow

Using a discount factor to reduce the value of money received in the future

Net present value

A calculation of the total discounted net cash flows minus the initial cost of an investment