Finance: IGCSE Business Section 5

Start-up capital

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

Working capital

is the finance needed by a business to pay for its day-to-day activities = Current assets - Current liabilities

Capital expenditure

is money spent on non-current assets which will last for more than one year

Revenue expenditure

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

Internal finance

Money generated by the business or its current owners

external finance

Money raised from sources outside the business (e.g. share issue, leasing, bank loan)

micro finance

provision of small loans and other financial services to individuals and small businesses in developing countries not by traditional banks.

Crowdfunding

project or venture byraising money from a large number of people whoeach contribute a relatively small amount, typically viathe internet

Cash Flows

the amount of money that is available to a business at any given time

Cash inflows

the sums of money received by a business during a period of time

Cash outflows

The flow of money out of a business

cash flow cycle

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

Profit

the difference between the amount earned and the amount spent in buying, operating, or producing something

cash flow forecast

forecast that predicts the cash inflows and outflows in future periods, usually months or quarters

net cash flow

is the difference, each month, between inflows and outflows.

closing cash

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

opening cash

is the amount of cash held by the business at the start of the month

working capital

is the finance needed by a business to pay for its day-to-day expenses

accountants

are the financial records of a firm's transactions

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.

Revenue

is the income to a business during a period of time from the sale of goods and services as well as from other sources of income such as from renting out equipment or property.

Cost of sales

is the cost of producing or buying the goods actually sold by the business during a timeperiod

Gross profit

sales - cost of sales : profit made after deducting manufacturing and selling products/services

trading accounts

shows how the gross profit of a business is calculated

net profit

Gross Profit - Expenses : any profit made after all expenses are deducted.

depreciation

A decrease or loss in value of fixed assets over time

Retained profit

Profit which is kept back in the business and used to pay for investment in the business.

statement of financial position or balance sheet

value of a businesses assets and liabilities at a particular time

assets

The values of the various items the business owns. They can be current or non-current assets.

Liabilities

debt that a company owes

non-current assets

Items owned by the business for more than one year

current assets

cash and other assets expected to be exchanged for cash or consumed within a year

non-current liabilities

value of debts of the business that will be payable after more than one year

current liabilities

liabilities due within a short time, usually within a year

capital employed

Total equity + non current liabilities : it is the long term and permanent capital invested in a business

liquidity

the ease with which an asset can be converted into cash and 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

describes an asset that cannot be quickly converted into cash without much loss of value.

Costs of Goods Sold (COGS)

Variable costs that the business has incurred for the production during the accounting period, such as raw materials, components and wages for employees.
___________ = Opening inventories + Purchases - Closing inventories

Sales Revenue

the amount of money a company earns from selling its products or services: no of units sold x avg price per unit

Depreciation

Fixed assets that lose their value over time. For example, buildings, machines and vehicles lose part of their value over time.

Gross Profit Margin

Shows gross profit as a percentage of total revenue earned. Gross profit/sales revenue x 100

Profit margin or net profit margin (NPM)

revenue- cost/ revenue : how much profit produced as a percentage of revenue

Return on Capital Employed (ROCE)

This ratio shows a business the percentage return of profits they have made from their investments. Profit before interest and taxes / capital employed x 100

Current Ratio

tells us how quickly a company can pay off it's short term loans. Calculated by taking current assets/current liabilities (liquidity). The recommended values are in the range of 1.5 to 2.0

Acid Test Ratio

a more immediate calculation of the company's ability to pay off its short-term debt and excludes inventory (stock) since inventory cannot easily be turned into cash. Current Assets - inventories / Current Liabilities. The recommended value for this ratio is 1.0, although some businesses with very fast movement of inventory, such as supermarkets, can operate with a lower value.