IB Business Management Unit 3: Finance and accounting

Capital expenditure

The large amount of money a business spends on fixed assets and machinery that is a long-term investment, offering gains for the business.

Revenue expenditure

The money a business spends on a day to day basis that keeps the business operating

Internal sources of finance

Money that comes from within the business

Owner’s capital/personal funds

The entrepreneur’s own savings, usually to finance business startups. It is the main source for sole traders.

Retained profits

The value of profits a business keeps, after paying taxes to the governments and dividends to shareholders, to use within the organisation. Often used for capital expenditure.

Sale of assets

When a business sells their unused assets that has been recently replaced. They can raise finance through selling land and buildings if they are relocating.

Bank overdrafts

A financial service that allows a business to temporarily take out more money than their is in their bank account, commonly used when businesses have minor cash flow problems

Crowdfunding

A way of raising finance from a large number of individuals for a small amount of money to finance a new business. Usually relies on social media platforms, and depending on the cause, it can be used to raise money through donations.

Trade credit

Allows a business to postpone payments or to “buy now and pay later”. The sale would be made at the time of purchase, but the seller does not receive any cash from the buyer until a later date, usually between 30-60 days

Microfinance providers

It is aimed at entrepreneurs of small businesses, especially females and those with low incomes. They aim to enable disadvantaged members of society to gain access to essential financial services to help eradicate poverty

Leasing

A financial agreement where a business obtains a right to use an asset from a leasing company. It is basically renting, and is suitable for business customers who do not have initial capital to buy such assets

Bank loans

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

Business angels

Extremely wealthy individuals who choose to invest their own money in businesses that offer high growth potential.. They provide funding for firms that are unable to secure sufficient finance from commercial banks and/or are too small to attract the attention of shareholders or other investors

Mortgage

Long-term loans used by businesses to purchase property. If the borrower fails to repay, then the lender can repossess the property

Share capital

It is the money raised from selling shares in a limited liability company. It is the main source of finance for most limited liability companies.

Debentures

A long term debt used by businesses to raise capital from investors. Debentures do not grant ownership but represent a loan agreement where the business promises to repay the investor.

Fixed cost

Paying the same no matter the level of output (e.g. rent payments leasing costs, equipment costs)

Variable cost

Items of expenditure that change with the level of output (e.g. purchasing raw materials, commission pay to staff)

Direct costs

Costs that are specifically traceable to a specific cost object (e.g. salaries of specific staff, raw materials)

Indirect costs/overhead costs

Costs that are used in multiple areas or activities of a business, therefore not traceable to a specific cost object

Revenue

Income that a business earns from selling goods and services

Break-even point

It is when the total revenue = total costs

Statement of profit and loss

A statement that records sales revenues and costs of a business to determine the net profit and distribution of profit in a period of one year. (AKA income statement)

Statement of financial position (balance sheet)

A statement that shows what a business owns, is owed, and owes.

Current assets

Anything that can e turned into cash (or already is cash) in the coming 12 months

Non current assets

Anything that is not expected to be turned into cash in the next 12 months

Current liabilities

Debts that have to paid within 12 months (e.g. creditors, short term borrowing, overdrafts)

Non current liabilities

Any medium/long term debts (e.g. bank loans, debentures, mortgages)

Intangible assets

Non-physical items of value owned by a company that have a lifespan of more than a year

Goodwill

An intangible asset which exists when the value of a firm exceeds its book value (value of the firms net assets), e.g. brand reputation, customer loyalty,

Patents

Provides legal protection for investors, which prevents others from copying their creation for a fixed number of years

Copyright

Provides legal protection for the original artistic work of the creator, and anyone wishing to reproduce the work must seek permission from the copyright holders, usually for a fee

Registered trademarks

Distinctive signs that uniquely identifies a brad, product, or business entity (e.g. names, symbols, phrases, images)

Branding

Indefinite asset as brand recognition and brand loyalty that stays with the company for as long as they exist

Depreciation

The fall in the value of non-current assets

Ratio analysis

Analysis that helps to express the relationship between variables in the final accounts

Gross profit margin (GPM)

A profitability ratio that indicates how well a business manages its direct costs of production

Profit margin

A profitability ratio that shows how well managers can control their indirect costs (expenses). The higher the figures, the better the organisation’s control over its expenses

Return On Capital Employed (ROCE)

A profitability ratio that measures a firm’s efficiency and profitability in relation to its size

Liquidity

The ease in which a business can convert its assets into cash without affecting its market value

Liquidity ratios

Financial ratios that examines an organisations ability to pay its short term liabilities/debts

Efficiency ratios

Measures how well resources of a business are used in order to generate income from the firm’s capital

Stock turnover ratio

An efficiency ratio that measures the number of times an organisation sells its stock within a time period, indicating the speed the busines sis able to sell and replenish all its stock

Debtor days

An efficiency ratio that measures the number of days it takes a business, on average, to collect money from its debtors

Creditor days

An efficiency ratio that measures the number of days it takes, on average, for a business to pay its trade creditors

Gearing ratio

An efficiency ratio used to measure how much of the business’s capital has been raised through potentially costly/risky long-term debt

Insolvency

A financial state where a firm is unable to pay its debts to creditors. It is not a legal status and not permanent, it just means that the firm has run out of working capital

Bankruptcy

The legal state when a firm is unable to pay off debts. It is permanent and results in the business selling off its assets

Cash

Money that can be spent on a day-to-day running costs of a business

Working capital

It measures a firm’s short term liquidity, the ability for the business to pay its liabilities within the next 12 months

Cash flow forecasting

Used to see how much cash a business is expecting to come in/out in order to see working capital position

Cash inflow

Money entering the business, e.g. sales revenue, debtors, loans

Cash outflows

Money exiting the business, e.g. expenses, creditors

Payback Period (PBP)

An investment appraisal used to work out the number of years and months it will take for the investment of a business to pay for itself.

Average Rate of Return (ARR)

An investment appraisal that measures the profitability of an investment as a percentage.

Net Present Value (NPV)

Calculates the real value of an investment project by discounting the actual value of money received in the future. It is a unit of money that does not have the same value in the future as it does today due to inflation and interest rates in bank accounts

Cost centres

A part of a business where costs can be calculated and controlled (allows the business to be aware and accountable for their contribution towards costs)

Profit centres

A part of a business where costs and revenue can be calculated and controlled (allows the business to identify the areas that generate the most and least revenue)