ALL of Unit 3

capital expenditure (CAPEX)

one-time, large purchases of fixed assets that will be used for revenue generation over a longer period

revenue expenditure

payments for the daily running of a business (wages, raw materials, rent, electricity)

internal finance

A source of money generated from within the company
Ex. retained profits, sale of assets, and personal funds of owners

retained profits

value of profits that the business keeps (after being taxes to the government and dividends to its shareholders) to use within the business

the sale of assets

the selling of dormant assets (unused assets) such as selling old machinery and computer equipment that have been replaced

external finance

A source of money generated from outside of the company
Ex. Equity finance
Financial aid
Debt finance
Other sources

share capital (equity)

the money raised from selling shares in the company (specifically initial public offerings)

venture capital (equity)

a form of high-risk capital, in the form of loans or shares, invested by venture capital firms, usually at the start of a business idea

business angels (equity)

wealthy individuals who choose to invest their own money in business that offer high growth potential (high risk, high return)

retained profit formula

gross profit - total expenses - interest - taxes - dividends

net profit BIT formula

gross profit - total expenses

balance sheet

An annual financial statement that all companies are legally required to produce. It is used to display a firm's sources of finance (equity) and where that money has been used (net assets). The balance sheet helps to ensure that all money within the organization has been properly accounted for.

fixed asset

any asset used for business operations, likely to last for more than 12 months from the balance sheet date

current asset

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

liability

a legal obligation of a business to repay its lenders or suppliers at a later date

long-term liabilities

debts that are due to be repaid after 12 months

current liabilities

debts that must be settled within 1 year of the balance sheet date

net assets calculation

fixed assets + working capital - long-term liabilities

shareholders' or owners' equity

the value of the business belonging to the owners

limitations of balance sheets

The position of a business might be very different in subsequent periods than from the date of the static balance sheet
The figures are accurate estimates at best of the value of assets and liabilities
Formats vary
Not all assets are included in the balance sheet

intangible assets

non-physical fixed assets that have the ability to earn revenue for a business such as patents/protected by intellectual property rights

equity formula

total assets - total liabilities

purpose of final accounts

it is a legal requirement in most countries for companies to have their final accounts audited by independent and chartered accountants who certify the final statements

stakeholder

a person or group of people with a direct interest in the performance and activities of a business

gross profit formula

sales revenue - COGS

costs of goods sold (COGS)

the direct costs of the goods that are actually sold

COGS formula

opening stock (inventory value at first) + purchases (costs to make more) - closing stock (inventory value left)

profit and loss account

shows the net profit (or loss) of a business at the end of a trading period

net profit

the money left after all expenses are accounted for

net profit formula

gross profit - expenses

expenses

the indirect or fixed costs of production

appropriation account

shows net profit after interest and shows taxes

contribution formula

sales price - variable costs

break-even point formula

fixed costs/contribution

margin of safety formula

current sales - break-even point

loan capital

medium to long-term sources of finance obtained from commercial lenders such as banks

debentures

long-term loans issued by a business

business development loan

a loan catered to meet the specific development needs of the borrower

overdrafts

allow a business to temporarily overdraw on its bank account

trade credit

allows a business to "buy now and pay later"

grants

one-off payments from governments to businesses and do not need to be repaid

subsidies

provide extended benefits to society and reduces costs of production

debtors

people or organizations that owe money to the business

bad debt

debtors who are unable to repay money owed

debt factoring

a financial service that allows a business to raise funds based on the value owed by its debtors

leasing

a form of hiring whereby a contract is agreed between a leasing company and the customer

sale-and-lease back

involves a business selling a particular fixed asset and immediately leasing the property back

hire purchase

allows a business to pay its creditors in installments

return on investment

investors demand a return on their capital

the business plan

outlines the long-term aim and purpose of a business venture

track record

investors will assess the past track record of a business and its management before investing any capital

business angels

extremely wealthy individuals who choose to invest their own money in businesses that offer high growth potential

short-term finance

refers to the current fiscal (tax) year/anything that has to be repaid to creditors within the next 12 months

long-term finance

refers to any period of 5 years or longer/sources include long-term loans (mortgages or debentures)

medium-term finance

refers to the time period of more than one year but less than 5 years/sources include commercial loans or hire purchase agreements longer than 1 year

initial public offering (IPO)

refers to a business converting its legal status to a public limited company by floating (selling) its shares on a stock exchange for the first time

share issue/share placement

exists when an existing public limited company raises further finance by selling more of its shares

fixed costs

costs that do not vary with the quantity of output produced

indirect costs (overheads)

costs which do not directly link to the production or sale of a specific product

price

refers to the amount of money a product is sold for

revenue

the money that a business collects from the sale of its goods and services

revenue stream

refers to the money coming into a business from its various business activities

running costs

the ongoing costs of operating the business, e.g. wages and salaries, insurance premiums, and the cost purchasing stocks.

semi-variable costs

those that have an element of both fixed costs and variable costs, e.g. power and electricity or salaried staff who also earn commission

set-up costs

the items of expenditure needed to start a business, e.g. obtaining premises, purchase of machinery and equipment, and deposits to utilities companies (gas, water, electricity and telephone)

total costs

the sum of all fixed and variable costs of production

total revenue

the sum of all revenue streams of a business

variable costs

costs that vary with the quantity of output produced

cost

refers to the sum of money incurred by a business in the production process

dividends

a share of net profit distributed to shareholders

break-even analysis

A management tool used to calculate the level of sales needed to cover all costs of production. Thereafter, further sales generate a positive safety margin, and hence profit for the business.

break-even chart

the name given to the graph that shows a firm's costs, revenues and profits (or loss) at various levels of output

break-even point

refers to the position on a break-even chart where the total cost line intersects the total revenue line, i.e. where TC = TR

break-even quantity

Refers to the level of output that generates neither profit nor loss. It is shown on the x-axis on a break-even chart.

contribution per unit

the difference between the selling price per unit and variable cost per unit

margin of safety (MOS)

The difference between a firm's level of demand and its break-even quantity. A positive MOS means the firm can decrease output (sales volume) by that amount without making a loss. A negative MOS means the firm is making a loss.

profit

a positive difference between total sales and total costs

special order decision

occurs when a customer places an order at a price that differs from the normal price charged by the business

target price

the price set by a firm in order to reach a certain profit target

target profit

The amount of surplus a firm intends to achieve, based on price and cost data. It can be calculated by taking estimated total costs from expected sales revenues. It can also be identified from a break-even chart.

book value

the value of an asset as shown on a balance sheet

cost of goods sold (COGS)

represents the direct costs of producing or purchasing stock that has been sold

creditors

suppliers who allow a business to purchase goods and/or services on trade credit

current assets

the short-term assets that belong to a firm

depreciation

the fall in the value of fixed assets over time

final accounts

the published annual financial statements that all limited liability companies are legally obliged to report, i.e. the balance sheet and the P&L accounts

goodwill

an intangible asset which exists when the value of a firm exceeds its book value

gross profit

the difference between the sales revenue of a business and its direct costs

acid test ratio

a liquidity ratio that measures a firm's ability to meet its short-term debts. Doesn't include stock because all inventories can be easily turned into cash in a short time frame.

capital employed

the total value of all long-term finance invested in the business

current ratio

a short-term liquidity ratio that calculates the ability of a firm to meet its debts within the next 12 months

gross profit margin (GPM)

a profitability ratio that shows the percentage of sales revenue that turns into gross profit

liquid assets

the possessions of a business that can be turned into cash quickly without losing their value, i.e. cash, stock and debtors

liquidity crisis

refers to a situation where a firm is unable to pay its short-term debts, i.e. current liabilities exceed current assets.

liquidity ratios

look at the ability of a firm to pay its short- term liabilities, such as by comparing working capital to short- term debts

net profit margin (NPM)

shows the percentage of sales revenue that turns into net profit, i.e. the proportion of sales revenue left over after all direct and indirect costs have been paid

profitability ratios

examine profit in relation to other figures

ratio analysis

a quantitative management tool that compares different financial figures to examine and judge the financial performance of a business. It requires the application of figures found in the final accounts (the balance sheet and the profit and loss account)

credit control

refers to the ability of a business to collect its debts within a suitable timeframe

gearing ratios

measures the percentage of an organization's capital employed that comes from external sources