Unit 5 - Financial Information and financial decisions

Trade Credit

Refers to an arrangement between a buyer and a seller where the seller allows the buyer to purchase goods or services on credit, with payment due at a later date

Debentures

Long term bonds issued by companies to raise debt finance, often with a fixed rate of interest.

Crowdfunding

The practice of funding a project or venture by raising many small amounts of money from a large number of people who each contribute a relatively small amount, typically via the internet

External Finance

Money obtained from sources of finance outside of and separate from the business.

Internal Finance

The money obtained from within the business itself.

Revenue Expenditure

Is the money spent on day to day expenses which do not involve the purchase of a long term asset, for example, wages or rent.

Capital Expenditure

The money spent on non-current (fixed) assets which will last for more than one year.

Working capital

The finance needed by a business to pay for its day tp day costs.

Start-Up Capital

The finance needed by a new business to pay for essential non-current (fixed) and current assets before it can begin trading

Equity

The value of the shares issued by a company

Debt

An amount of money borrowed by one party from another, often for making large purchases that they could not afford under normal circumstances

Retained Profit

Business profit that is kept back after paying all the dividends

Overdraft

A credit that a bank agrees can be borrowed by a business, up to an agreed limit as and when required.

Sale of existing assets

Assets that are no longer used by the business can be sold to gain money (revenue).

Issue of Shares

Permanent finance raised by companies through the sale of shares.

Microfinance

Is providing financial services - including small loans - to poor people not served by traditional banks.

Hire Purchase

A company purchases an asset and agrees to pay fixed repayments over an agreed time period. The purchasing company owns the asset after the final payment has been made.

Debt factoring

Selling of claims over trade receivables to a special organisation in exchange for immediate liquidity.

Leasing

Obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to raise long-term capital to buy the asset. The asset is owned by the leasing company.

Venture Capitalist

Investment from entrepreneurs who seek businesses in which to invest and get a return on their investment.

Grants

One-off payment from the government to support a business (new businesses)

Subsidies

Money given by government to producers to encourage them to produce more (money is based on output)

Owners Savings

Money belonging to the owner that they use to invest into the business

Sale of Inventories

Selling products to raise revenue (raw materials, components, WIP, finished products)

Bank Loan

Fixed amount of money borrowed by the business from a bank and it is paid back with interest.

Mortgage

Long-term loan used specifically to buy property

Cashflow

The cash inflows and outflows of a business over a period of time.

Cash Inflows

The sums of money received by a business during a period of time.

Cash Outflows

The sums of money paid out by a business during a period of time.

Cash Flow Cycle

This shows the stages between paying out cash for labour, materials, and so on, and receiving cash from the sales of goods.

Profit

The surplus after total costs have been subtracted from revenue.

Cash Flow Forecast

An estimate of future cash inflows and outflows of a business, usually on a month-by-month basis. This then shows the expected cash balance at the end of each month.

Net Cash Flow

The difference, each month, between inflows and outflows.

Closing Cash Balance (Or Bank Balance)

The amount of cash held by the business at the end of each month. This becomes next month's opening cash balance.

Opening Cash Balance (or Bank Balance)

The amount of cash held by a business at the start of each month.

Working Capital

The capital available to a business in the short term to pay for day-to-day expenses.

Forecast

This is an estimate of the future outcomes such as next years sales figures.

Overdraft

This is the facility which enables firms to borrow up to an agreed maximum for any period of time that it wishes. This is a very flexible way of raising credit in, which can fluctuate daily.

Income

This is the amount of money received by a person, group or company during a certain period of time.

Accounts

The financial records of a business's transactions.

Accountants

Professionally qualified people who have a responsibility for keeping accurate accounts and for producing final accounts.

Final Accounts

Produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.

Income Statement

A financial statement that records the income of a business and all costs incurred to earn that income over a period of time(for example, one year). It is also known as the statement of profit or loss.

Revenue

The income to a business during a period of time from the sale of goods or services.

Cost of Sales

The cost of producing or buying in the goods actually sold by the business during a time period.

Gross Profit

This is profit made when revenue is greater than the cost of sales.

Trading Account

This account shows how the gross profit is calculated.

Net Profit

The profit made by a business after all costs have been deducted from revenue. It is calculated by subtracting overhead costs from gross profits. Also referred to as 'operating profit'.

Depreciation

The fall in the value of a non-current asset over time.

Retained Profit

The net profit reinvested back into a company , after deducting tax and payments to owners, such as dividends.

Expenses

Expenses refer to the money spent or costs incurred in order to purchase goods or services or cover one's financial obligations.

Tax

This is the amount of money that a government requires people to pay according to their income, value of property etc.

Statement of Financial Position

This shows the value of a business's assets and liabilities at a particular time.

Assets

These are the items of value which are owned by the business.. They may be current assets or non current assets.

Liabilities

These are the debts owed by the business. They may be non-current (long-term) liabilities or (short-term) current liabilities.

Non-current assets

Items owned by the business for more than one year.

Current Assets

Items owned by the business and used within one year.

Non-Current Liabilities

Long-term debts owed by the business, repaid over more than one year.

Current Liabilities

Short-term debts owed by the business, repaid in less than one year.

Accounts Receivables

This is the term given to all the money owed to a business by its debtors.

Accounts payables

This is all of the money owed by a business to its creditors.

Equity

This is the value of the shares issued by a company. Total assets - total liabilities.

Capital Employed

This is shareholders' equity plus non-current liabilities and is the total long-term and permanent capital invested in a business.

Liquidity

The ability of a business to pay back its short-term debts.

Profitability

The measurement of the profit made relative to either the value of sales achieved or the capital invested in the business.

Illiquid

This means that assets are not easily convertible into cash.

Gross Profit Margin

This ratio compares gross profit with revenue = GP/revenue X 100

Profit Margin

This can be expressed as a total (The percentage of sales revenue which is profit.)

Current Ratio

The ratio given by current assets divided by current liabilities. It measures the a businesses ability to pay its short-terms debts

Acid-Test Ratio

It measures a businesses ability to pay its short-terms debts without selling inventories (current assets - inventories). Also known as the 'quick' or 'liquid' ratio.

RoCE

This is the percentage return a firm is able to generate on the long-term capital employed in the business.