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Economic variables
Features of an economy which have effects on business and consumers e.g. unemployment, inflation and exchange rates
Internal finance
The raising of capital/cash from within/inside the business e.g. business/owner's capital, personal savings, retained profit
Personal savings/owners' capital
A source of (internal) finance provided by the owner of a business/personal money from the owner
Retained profit
Profit is re-invested back into/kept by the business which is not paid as a dividend. It is an internal source of finance
Sale of assets
A type of internal finance, involves selling resources that belong to the business
Bank loan
An external method of finance/money borrowed from a bank paid back, with interest (over a period of time)
Business Angels
Individuals who invest in a business in exchange for a stake in the business (shares)
Crowd funding
An external source of finance where a large number of individuals provide funding for a business or project in return for shares/free products/discounts
External finance
Money raised from outside the business
Grant
A sum of money given by a government or other organisation. It does not need to be repaid and no interest is charged
Leasing
A contract to acquire the use of resources such as property or equipment
Loan
An external source/method; amount of money borrowed, usually repayable after a fixed term of more than 12 months
Overdraft
When a business has a negative balance in their bank account because the amount withdrawn is greater than the current balance
Peer-to-peer funding
When a person lends money to other individuals or businesses via online transactions
Share capital
The finance raised a business issuing/selling of new shares
Trade credit
Where a firm receives stock/inventory/raw materials from a supplier, which it does not have to pay for until later
Venture capital
External source of finance when the business issues shares to a small number of investor(s) in return for a capital injection into the company
Liability
A liability is an obligation to pay another person/lender/supplier
Limited liability
The obligation of a shareholder for the debts of a business is limited to the value of their investment.
Unlimited liability
The obligation of a business owner to cover all the debts of the business.
Business plan
A document giving details of a variety of aspects about the business in order to provide a strategic look at the business and to attract investors. It contains details such as the product, costs, revenues, cashflow forecasts
Cash flow
The movement of cash into and out of a business over a period of time.
Cash-flow forecasts
The predicted flow of cash into and out of a business over a period of time
Net cash flow
The difference between the cash flowing in and out of a business over a period of time cash inflows - cash outflows
Consumer trends
Habits or behaviour of those involved in the use of goods and services
Economic uncertainty
Where firms/consumers are unable to predict their future sales/incomes and costs
Sales forecast
A prediction of the expected level of sales volume/revenue for a business for a future period
Average cost
The cost of producing one unit. Total costs/output
Fixed costs
Costs that do not change when output/sales changes
Revenue
The amount of income for a business generated from its sales. Selling price x quantity sold
Sales revenue
Selling price x sales volume
Total costs
Total fixed costs plus total variable costs.
Variable costs
Costs that vary according to the level of output
Break-even
The level of output where the total revenue is equal to the total cost. Fixed costs/Unit contribution
Unit contribution
Selling price - variable cost per unit
Margin of safety
The difference between the current or planned level of output/sales and the break-even level of output
Adverse variance
Negative variance e.g. higher costs than budget
Budget
A financial plan of income and expenditure prepared/agreed in advance
Favourable variance
Positive variance e.g. lower costs than budget
Historical budgeting
A budget based upon previous financial figures
Variance analysis
Shows the difference between budgeted and actual figures and can be calculated at the end of a financial period, once actual figures are known
Zero based budget
A type of budget where no money is allocated for spending unless it has firstly been justified
Cost of sales
The cost of inventory bought or produced.
Gross profit
Revenue - cost of sales
Gross profit margin
Gross profit/Sales revenue x100
Operating profit
Gross profit - other operating expenses
Operating profit margin
Operating profit/Sales revenue x100
Profit
Is recorded straight away after sales. Total revenue - total costs
Profit for the year margin
Net profit/Sales revenue x100
Profit for the year/net profit
Operating profit - interest
Profitability
Profit as a proportion of sales.
Statement of comprehensive income
A document to show income and expenditure of a business over a financial year
Tax
A charge made by governments on activities, earnings and income of individuals and businesses
Acid test ratio
Current assets - Inventory / Current liabilities
Assets
Valuable things that a business can use.
Capital
Cash put into the business by the owner
Current assets
Liquid assets, those assets that will be converted into cash within 12 months e.g. inventories, trade receivables and cash
Current liabilities
Debts owed by a business that must be repaid within one year
Current ratio
Current assets / Current liabilities
Liabilities
Debts owed by a business to lenders and suppliers.
Liquidity
The ability to pay bills in cash when they fall due or The ability to meet current liabilities with current assets
Net assets
Total assets - Total liabilities
Non current assets
Long term resources that will be used by the business for more than one year e.g. Property and equipment
Non current liabilities
Debts owed by the business for more than one year e.g. Loans
Shareholders equity
The value of the shareholders' investment in a business.
Statement of financial position/Balance sheet
A summary at a particular point in time of the value of a firm's assets, liabilities and equity
Total equity
Share capital + Retained profit or, owner's capital + retained profit less drawings
Working capital
The amount of cash available to pay for the day to day trading of a business or current assets - current liabilities.
External causes for business failure
The factors outside the control of a business which might cause it to fail, e.g. competition, legislation, customer tastes and economic conditions.
Financial factors for business failure
Factors which a business can control e.g. poor decision-making, loss of key staff.
Internal causes for business failure
Can come from inside or outside the business e.g. poor management, external shocks.
Non financial factors for business failure
Overtrading: The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast.
Batch production
A manufacturing process in which components or goods are produced in groups (batches). The manufacturing of a limited number of identical products.
Capital intensive
This is where output of the firm is made primarily using machinery/capital goods relative to the use of labour.
Cell production
A method of manufacturing where employees are organised into multiskilled teams, with each team responsible for a particular part of the production process.
Efficiency
The ability to minimise waste therefore reducing the cost of production. Making the best use of its resources.
Flow production
The manufacture of an item/product in a continuous process.
Job production
A method of production where the production of a single good/service is carried out one at a time that involves producing this good/service to the specific requirements of the customer.
Labour-intensive production
A production method that requires a higher proportion of labour than capital.
Productivity
Output per person/machine per period of time.
Standardisation
Using uniform resources and activities or producing a uniform product.
Capacity utilisation
The current output of a factory measured as a percentage of the total maximum potential output. Current output/maximum possible output x100.
Downsizing
Involves reducing capacity, such as making employees redundant. This would reduce costs, such as wages.
Full capacity
The point where a business cannot produce any more output.
Over utilisation
The position where a business is running at full capacity and straining resources.
Under utilisation
The position where a business is producing at less than full capacity.
Buffer stocks
Stock held as protection in case of reduction in supply. Buffer stock is the minimum level of stock held by a business.
Inventory
The raw materials/work-in-progress held by a business.
Just in time (JIT)
A stock control system that organises operations so that items of stock arrive immediately before they are needed for production or sale.
Lean production
A production method that involves using as few resources as possible in the production of a good or service. It can include concepts such as waste minimisation, Just in Time (JIT) and TQM.
Re order level
The level of current stock when new orders are placed
Re order quantity
The amount of stock ordered when an order is placed
Stock
Items held by the business for future sale/processing such as raw materials/work in progress (WIP)/finished products
Stock control
The optimum quantity of goods/components a business holds for the purpose of resale/production
Stock control diagram
Shows details of inventory movements such as minimum and maximum inventory levels, reorder level and quantity and lead times
Stock rotation
The flow of stock into and out of storage
Waste minimisation
Producing goods and services at a given quality using as few resources as possible/identification of an impact of waste minimisation.
Work in progress
Partially finished goods
Kaizen/continuous improvement
A Japanese practice which places emphasis on making small improvements in all business processes as it tries to achieve a culture of continuous improvement; good processes bring good results
Quality
A positive feature of a product that has no defects
