Unit 3 SL - Business Finance and Accounting Lecture Notes

A comprehensive set of vocabulary flashcards covering basic business finance, accounting formulas, internal and external sources of capital, costing types, financial statements, and investment appraisal methods.

Capital expenditure

Money a business spends on fixed assets that have long term permanent use for the business, such as machinery, equipment, buildings, and vehicles.

Revenue expenditure

Money spent on the day-to-day operations of running the business, including wages, materials, and energy bills.

Loan capital

An external source of finance from a bank that can be repaid over time in installments, making it more affordable, though it requires interest payments and potentially security.

Overdraft

A bank service allowing a business to go below zero in their account; it is suitable for short-term cashflow problems but carries high interest payments.

Business Angel

A wealthy individual who invests in a business for a stake of ownership, providing capital along with skills, knowledge, and experience.

Share capital

Large capital raised by selling shares on the stock market or finding new shareholders for a private company, involving a loss of ownership and control.

Crowdfunding

Obtaining finance online from people who donate money; it is easy to set up with no debts, but unlikely to raise significant finance without giving up ownership.

Microfinance providers

Entrepreneurs who provide loans to disadvantaged members of society who may not get loans elsewhere, typically for sole traders in developing countries.

Personal funds

Internal source of finance for a sole trader using their own savings, requiring no debt or repayments but risking personal savings.

Retained profits

Profit made by a business that is not given to shareholders but used for reinvestment; it involves no debt but may cause conflict with partners.

Sale of Assets

A quick internal method to raise finance by selling fixed assets that are no longer required by the business.

Revenue

The income a business makes from selling its products, calculated as $\text{Price} \times \text{Quantity sold}$.

Cost of sales (COS)

The direct costs of production, such as the cost of raw materials.

Gross profit

The profit from a firm’s everyday trading activities, calculated using the formula: $\text{Sales revenue} - \text{Cost of sales}$.

Expenses

The indirect costs of production for a firm.

Dividends

Payments from a company’s profit, after interest and tax, paid to the owners (shareholders) of the company.

Leasing

Renting an item for a period of time without ever owning it, allowing access to the latest equipment but potentially becoming an expensive option over time.

Trade Credit

Receiving items immediately but paying the supplier at a later date, typically $30-60\,\text{days}$, to help manage short-term cashflow.

Fixed Cost

A cost that does not change based on output levels, such as rent, salaries, and insurance.

Variable Cost

A cost that changes directly with production output, such as wages, materials, and energy bills.

Direct cost

Expenditure items that can be explicitly associated with the output or sale of a specific good, such as materials and wages.

Indirect cost (overhead costs)

Costs not easily identifiable with the sale or output of a specific good, such as premises rent and energy bills.

Total costs formula

Calculated as $\text{Fixed costs} + (\text{variable costs} \times \text{output})$.

Non current asset (fixed asset)

An asset with monetary value and long-term permanent use for the business, such as machinery, buildings, or vehicles.

Current Asset

An asset with monetary value intended to be turned into cash (liquidated) within $12\,\text{months}$.

Current Liability

Short-term debt of the business, such as overdrafts or trade credit, which must be repaid within $12\,\text{months}$.

Non-current liability

Long-term debt of the business, such as long term bank loans, owed for longer than $12\,\text{months}$.

Equity

The value of the owners' stakes in the business, composed of share capital and retained earnings or profit.

Net assets formula

Calculated as $\text{Total assets} - \text{Total liabilities}$; this figure should always balance with total equity.

Gross Profit margin

A ratio showing efficiency in controlling production costs, calculated as $\frac{\text{Gross Profit}}{\text{Revenue}} \times 100$.

Profit Margin

A ratio showing efficiency in turning sales into profit, calculated as $\frac{\text{Profit before interest and tax}}{\text{Revenue}} \times 100$.

Current ratio

A short-term liquidity ratio used to measure the ability to meet short-term debts, calculated as $\frac{\text{Current assets}}{\text{Current liabilities}}$; ideally between $1.2$ and $1.5$.

Acid test ratio

A liquidity ratio measuring the ability to pay short-term debts without selling stock, calculated as $\frac{\text{Current Assets} - \text{Stock}}{\text{Current liabilities}}$.

Return on Capital Employed (ROCE)

Measures the return on investment for investors, calculated as $\frac{\text{Profit before interest and tax}}{\text{Capital employed}} \times 100$, where Capital employed is $\text{non current liabilities} + \text{equity}$.

Net cashflow

The difference calculated as $\text{Cash Inflows} - \text{Cash outflows}$.

Closing balance

The final cash position for a period, calculated as $\text{Opening balance} + \text{net cashflow}$.

Working capital

Cash or other liquid assets available for daily operations, calculated as $\text{Current assets} - \text{Current liabilities}$.

Liquidity

The extent to which an organization is able to convert its assets into cash, measured by the current and acid test ratios.

Cash flow forecast

A prediction of the inflows and outflows of cash in a business for a specific period of time.

Investment

The purchase of non-current or fixed assets with the intention of creating profit in the future, often categorized as capital expenditure.

Payback period (PBP)

The length of time it takes for the initial amount of money invested to be repaid using the gains from that investment.

Average rate of return (ARR)

An investment appraisal method calculating average annual profit as a percentage: $\frac{(\text{Total returns} - \text{Initial Cost}) / \text{Years}}{\text{Original Cost}} \times 100$.