ib business management unit 3

Capital expenditure

spending on fixed assets that will last more than a year.

Revenue expenditure

spending on daily operational costs like wages or utilities.

Internal finance

finance obtained from within the business (e.g. retained profit, sale of assets).

Retained profit

profit kept in the business instead of distributed to shareholders.

Sale of assets

raising finance by selling off business assets no longer in use.

External finance

finance sourced from outside the business.

Share capital

money raised from selling shares of the company.

Loan capital

borrowed funds from banks or other lenders that must be repaid with interest.

Overdraft

short-term borrowing where a business spends more than it has in its bank account.

Trade credit

buying goods and paying the supplier at a later date.

Grants

financial support given by the government or other organizations that does not need to be repaid.

Subsidies

financial aid given to reduce business costs, often from the government.

Debt factoring

selling unpaid customer invoices to a third party (factor) for immediate cash.

Leasing

renting assets rather than buying them.

Venture capital

investment from individuals or firms in exchange for equity in high-risk businesses.

Business angel

an affluent individual who provides capital and expertise to start-ups in exchange for equity.

Cost

the total expenditure incurred by a business to produce goods or services.

Fixed costs

costs that do not change with output (e.g. rent, salaries).

Variable costs

costs that vary with output (e.g. raw materials).

Semi-variable costs

costs that have both fixed and variable components.

Direct costs

costs that can be directly linked to the production of a specific product.

Indirect costs (overheads)

costs not directly related to a specific product (e.g. administration).

Revenue

income from sales of goods and services.

Revenue stream

the various ways a business earns money (e.g. product sales, subscriptions).

Total revenue

price × quantity sold.

Total cost

fixed cost + variable cost.

Profit

total revenue − total cost.

Break-even point

the level of output where total revenue equals total cost.

Contribution per unit

price − variable cost per unit.

Total contribution

contribution per unit × number of units sold.

Break-even quantity

fixed costs ÷ contribution per unit.

Margin of safety

actual output − break-even output.

Break-even chart

a graphical representation showing costs, revenue, and break-even point.

Target profit output

(fixed costs + target profit) ÷ contribution per unit.

Break-even analysis

a tool to determine the minimum sales needed to avoid losses.

Final accounts

formal financial statements at the end of an accounting period.

Income statement

shows a business's revenues, expenses, and profits over a period.

Gross profit

revenue − cost of goods sold (COGS).

Net profit (profit before tax)

gross profit − expenses.

Cost of goods sold (COGS)

direct costs of producing the goods sold.

Balance sheet

a snapshot of a firm's financial position on a specific date.

Assets

things the business owns.

Liabilities

what the business owes.

Equity

shareholders' claims after all liabilities are subtracted from assets.

Current assets

assets likely to be turned into cash within a year (e.g. inventory, accounts receivable, cash).

Fixed assets (non-current assets)

long-term assets used repeatedly in production.

Current liabilities

debts due within a year (e.g. overdrafts, creditors).

Non-current liabilities

long-term debts (e.g. loans).

Working capital (net current assets)

current assets − current liabilities.

Intangible assets

non-physical assets like brand names and patents.

Depreciation

the reduction in value of a fixed asset over time.

Profitability ratios

assess a firm's ability to generate profit.

Gross profit margin

(gross profit ÷ revenue) × 100.

Net profit margin

(net profit ÷ revenue) × 100.

Return on capital employed (ROCE)

(net profit ÷ capital employed) × 100.

Capital employed

total assets − current liabilities OR equity + non-current liabilities.

Efficiency ratios

measure how well a firm uses its resources.

Stock turnover

cost of goods sold ÷ average stock.

Debtor days

(debtors ÷ revenue) × 365.

Creditor days

(creditors ÷ cost of goods sold) × 365.

Gearing ratio

(loan capital ÷ capital employed) × 100.

Cash flow

the movement of money into and out of a business.

Cash inflows

money coming into the business (e.g. from sales, loans).

Cash outflows

money going out of the business (e.g. for wages, rent).

Cash flow forecast

a financial document estimating future cash inflows and outflows.

Net cash flow

cash inflow − cash outflow.

Opening balance

cash at the start of the month.

Closing balance

cash at the end of the month (net cash flow + opening balance).

Liquidity

the ability to meet short-term financial obligations.

Overdraft

a short-term source of finance where more money is withdrawn than is available.

Investment appraisal

evaluating the profitability of an investment.

Payback period

the time taken to recover the cost of an investment.

Average rate of return (ARR)

(average annual profit ÷ initial investment) × 100.

Net present value (NPV)

the difference between the present value of inflows and outflows.

Discount rate

the rate used to convert future cash flows into present value.

Qualitative investment appraisal

considers non-numerical factors like impact on employees or environment.