IB Business Management: Unit 3

Capital Expenditure

Money spent to acquire fixed assets in a business, often used as collateral for long-term investments to aid business growth.

Revenue Expenditure

Money used for day-to-day business operations.

Personal Funds

Source of finance for sole traders from personal savings, providing control and independence but risking personal savings.

Retained Profit

Profit remaining after dividends, a cheap, permanent, and flexible source of finance for businesses.

Sale of Assets

Selling unused assets to raise funds, advantageous for cash flow but time-consuming and limited to established businesses.

Share Capital

Money raised from selling shares, a permanent source without interest payments but requiring dividend payments.

Loan Capital

Money borrowed from financial institutions with interest, providing quick access but requiring repayment and collateral.

Overdraft

Allowing a firm to withdraw more money than in the account, flexible for short-term debts but with high interest rates and short repayment notices.

Trade Credit

Agreement to pay a seller at a later date, improving cash flow but risking supplier relations if payments are delayed.

Crowdfunding

Funding a project with contributions from many people, providing access to investors but facing competition, fees, and potential failure.

Leasing

Using an asset without purchasing it, useful for low initial capital but may be more expensive in the long run.

Microfinance Providers

Institutions offering banking services to low-income individuals, providing quick loans without collateral but with high interest rates.

Business Angels

Affluent individuals investing in start-ups for ownership equity, offering flexibility and expertise but expecting substantial returns.

Short-term Finance

Money for daily business operations, repaid within 12 months, including bank overdrafts and trade credit.

Long-term Finance

Funding for long-term assets or business expansion, repaid over more than one financial year, including long-term bank loans and share capital.

Gearing

Relationship between share capital and loan capital, influencing risk perception by financial institutions and the need for alternative finance sources.

Cost

Expenditure or amount paid to produce or sell a good or service, including acquiring business resources.

Revenue

Income earned or money generated from the sale of goods or services.

Profit

Calculated by subtracting costs from revenue, indicating business success with a positive difference.

Fixed Costs

Costs that remain constant regardless of goods or services produced in the short run.

Variable Costs

Costs changing with the quantity of goods or services produced.

Direct Costs

Costs identifiable with the production of specific goods or services.

Indirect Costs

Costs not clearly linked to specific goods or services, also known as overheads.

Total Revenue

Amount received from selling goods or services, calculated as price per unit multiplied by quantity sold.

Absorption Costing

Method capturing all costs related to producing a product, including direct and indirect costs.

Descriptive Statistics

Use of statistical data to simplify and manage large amounts of data.

Final Accounts

Financial statements compiled at the end of an accounting period, informing stakeholders about the organization's financial position and performance.

Shareholders

Interested in the business's value, profitability, and efficiency in investing capital.

Managers

Use final accounts to set targets, budgets, and monitor expenditure for effective decision-making.

Employees

Profitable business signals job security and potential pay rises for employees.

Customers

Concerned about the business's reliability in supplying products.

Suppliers

Use final accounts to negotiate better cash or credit terms with businesses.

Government

Checks if the business follows accounting regulations and pays taxes.

Competitors

Compare financial statements to assess performance against other firms.

Financiers

Assess the creditworthiness of a business to determine lending capacity.

Local Community

Interested in business profitability, job opportunities, and environmental impact.

Profit and Loss Account

Records income and expenditure flows, showing profit or loss distribution.

Balance Sheet

Financial statement outlining a firm's assets, liabilities, and equity at a specific time.

Intangible Assets

Non-physical assets like patents, copyrights, trademarks, and goodwill.

Depreciation

Decrease in the value of non-current assets over time, recorded in the profit and loss account.

Straight-line Method

Depreciation method allocating equal depreciation expense over the asset's useful life.

Straight-Line Depreciation

A method that evenly spreads out the cost of an asset over its lifetime by deducting a constant amount each year, calculated using the original cost, expected useful life, and residual value of the asset.

Residual Value

An estimate of an asset's worth at the end of its useful life, also known as scrap or salvage value.

Units of Production Method

A depreciation method based on asset usage, calculating depreciation by the number of units produced, requiring information like cost basis, salvage value, estimated total units, and useful life.

Stock Turnover Ratio

Measures how quickly a firm's stock is sold and replaced, calculated as cost of sales divided by average stock, or as average stock divided by cost of goods sold multiplied by 365.

Debtor Days

Measures the average number of days it takes for a firm to collect debts from customers, calculated as debtors total divided by sales revenue multiplied by 365.

Creditor Days

Measures how quickly a firm pays its creditors, calculated as creditors divided by cost of sales multiplied by 365.

Gearing Ratio

Measures the extent to which a firm's capital is financed from loan capital, calculated as loan capital divided by capital employed multiplied by 100.

Cash Flow

The money flowing in and out of a business over a period, crucial for meeting financial obligations and ensuring business continuity.

Cash Flow Forecasts

Predictions of a firm's future cash inflows and outflows, aiding in planning, funding applications, and cash management.

Investment

Spending money on assets with the expectation of future earnings, involving risks and wealth creation.

Negotiating with Suppliers

Businesses can negotiate with suppliers to delay payment, helping to maintain working capital for short-term needs. However, this may lead to time-consuming negotiations and strain future supplier relationships.

Delaying Asset Purchases

Postponing the purchase of fixed assets like machinery can free up cash, but it may result in decreased efficiency and higher costs if the equipment becomes outdated.

Decreasing Specific Expenses

Cutting expenses like advertising can save money, but it might reduce future demand for the business's products.

Sourcing Cheaper Suppliers

Finding cheaper suppliers can lower costs, but compromising on quality may impact future customer relationships.

Payback Period

The time taken for an investment project to recoup its initial cost outlay. It helps in quick decision-making but overlooks post-payback cash flows and overall profitability.

Average Rate of Return

Measures annual net return as a percentage of capital cost, aiding in comparing projects but may have forecasting errors and ignore cash inflow timing.

Net Present Value

Compares present value of future cash inflows with the initial investment cost, considering time value of money but being complex to calculate and sensitive to discount rate changes.

BCG Matrix

A tool for decision-making that categorizes products into high and low growth categories, aiding in resource allocation and portfolio balance assessment.