Business (Unit 3: Finance and Accounts)

Revenue expenditure

Payments for daily running to keep business operational

Capital expenditure

Money spent on fixed assets, for long-term investments to assist businesses to succeed and growth

Loan capital

Medium to long term source of finance obtained from commercial lenders such as banks. Interest is charged as a payment to lenders

Mortgage

Long-term finance to purchase fixed assets, such as land, where the property itself acts as collateral. If borrower defaults on the loan, lender can repossess property

Debenture

Long term loan issued by business. Holders receive interest payments even if business makes a loss and before shareholders are paid any dividend. Holders do not have voting rights, business don’t loss any control

Overdrafts

Allow business to temporarily overdraw on its bank account. High interest rate. Provides flexibility for business when sudden large cash outflow

Trade credit

Supplier allows a buyer to receive goods or services immediately but pay at a later date.

Leasing

Lessee pays rental income to hire assets from the lessor. Suitable if the business does not have the initial capital to purphase the assets

Business angels

Extremely wealthy individuals who choose to invest their own money in small to medium businesses with high growth potential, typically in exchange for equity (ownership) or a share of future profits

Crowdfunding

Rising finance from a large number of individuals. No need to pay back donations. May be heavily regulated to protect donors.

Microfinance providers

Aimed at entrepreneurs of small businesses, typically female or low-income who lack access to traditional banking services. Limited amount of finance provided.

Fixed cost

Cost of production that a business must pay regardless of how much it produces or sells. Must pay even no output.

Variable cost

Cost of production that change in proportion to the level of output. If output is zero, then total variable cost is zero.

Direct cost

Cost specifically related to an individual project or the output of a particular product

Indirect costs

Costs cannot be clearly traced to the production or sale of any single product. Difficult to identify in business activties

Break even

The level of sales needed in order to cover all the costs associated with the output of a particular good or services

Margin of safety (MOS)

Difference between a firm’s sales volume and the quantity needed to break even

Target profit output

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

Profit and loss account

Financial statement of a firm’s trading activities over a period of time, usually one year

Balance Sheet

Financial position of a business on a specific day, normally the last day of accounting year.

Current assets

Cash or any other liquid asset that is likely to be turned into cash within 12 months of balance sheet date

Non-current asset

Any assets used for business operations rather than selling and is likely to last for more than 12 months from balance sheet date.

Current liabilities

Debt that must be settled within one year of balance sheet date

Intangible assets

Non-physical fixed assets that have the ability to earn revenue for a business. Valuable to long term success or failure of a business

Copyrights

Provide legal protection to artists and authors by preventing others from using or plagiarising their published works without permission. Lasts until after the creator dies.

Patents

Provide legal protection to the registered producer or user of a newly invented product/processes for a finite period of time. Prevent others from manufacturing, using, selling or importing the patented invention.

Trademarks

A sign or logo that distinguishes the goods and services of one business/brand/product to others. Registered trademarks can be sold, transfered.

Branding

How much a brand is worth as determined by brand recognition and brand loyalty.

Depreciation

Value of fixed assets decrease over time

Insolvency

A financial state when working capital is insufficient to meet current and non-current liabilities. Lead to voluntary or compulsory closure of business and liquidation

Bankruptcy

Formal and legal declaration of an individual’s or organisations’s inability to settle its debts. Business owes too much that selling its assets will not be able to cover debts owed.

Cash flow forecasts

Financial document that shows the expected movement of cash into and out of a business, per time period

Working capital cycle

Interval between cash payments for the cost of production and cash receipts from customers.

Investment

Purchase of an asset with the potential to yield future financial benefits

Budget

Financial plan of expected revenue and expenditure for an organisation or a department, for a given time period. Prepared in advance. Prepared by managers or budget holders. Set in line with business objectives

Cost centres

Department, unit or function of a business that incurs costs but not involved in any profit making. Managers accountable for tack and control costs.

Profit centres

Department or unit of a business that incurs both costs and revenues, used by large diversified businesses that have a broad product mix. A manager is responsible of the financial performance for each profit centre.