Business Finance, Accounts, and Ratios

Comprehensive vocabulary flashcards covering Business Finance (internal and external sources), Cash Flow Forecasting, Costs and Break-Even Analysis, Financial Statements, and Accounting Ratios.

Finance

The money required in the business to set it up, expand it, and provide working capital to pay day-to-day operating expenses.

Start-up Capital

Finance used to purchase fixed and current assets before a business begins trading.

Short-term Finance

Finance that covers day-to-day running costs such as wages, bills, and supplier payments.

Longer-term Finance

Finance used for large purchases, such as buying property, upgrading machinery, or acquiring other businesses.

Internal Sources of Finance

Money that originates from within the business itself, such as owner's capital (personal savings), retained profit, and the sale of assets.

External Sources of Finance

Money that comes from outside the business, including bank loans, venture capital, share capital, and crowdfunding.

Owner's Capital

Personal savings invested directly into the business by the owner, retaining full control with no repayments or interest charges.

Retained Profit

Profit kept within the business to fund future activities instead of being distributed to shareholders as dividends.

Sale of Assets

Raising cash without taking on debt by selling unused or surplus items, such as obsolete machinery or vehicles.

Bank Loan

A fixed amount of money borrowed from a bank that is repaid with interest over an agreed duration (typically $3$ to $5\text{ years}$) via monthly installments.

Bank Overdraft

A flexible banking facility that allows a business account balance to fall below $£0$, used to handle short-term cash flow emergencies.

Trade Payables

Short-term debts owed to suppliers who provided goods or services on credit (e.g., $30$ to $60\text{ days}$) to be paid at a later date.

Share Issue

The process of raising large sums of capital by selling shares of the company to investors without needing to repay them

Venture Capital

External capital provided by specialist individuals or firms to high-growth potential businesses in exchange for an equity shareholding and advice.

Crowdfunding

Raising funds from large numbers of people online via specialised crowdfunding platforms.

Cash

The actual liquid money a business has immediately available to pay for current obligations like wages, bills, rent, and stock.

Profit

The financial surplus remaining after all business costs have been deducted from sales revenue, calculated as: $\text{Profit} = \text{Total Revenue} - \text{Total Costs}$

Insolvency

The state where a business does not have enough cash to settle its short-term debts and pay day-to-day bills, which can cause business failure even if profitable on paper.

Cash Flow

The continuous movement of cash inflows and cash outflows through a business over a given period of time.

Cash Inflows

The sums of money received by a business over a period of time, including sales revenue, payments from debtors, bank loans, and asset sales.

Debtors

Customers who have bought products or services on trade credit and owe payment to the business at a future date.

Cash Outflows

The sums of money paid out by a business over a period of time, such as purchases of materials, employee wages, rent, loan repayments, and payments to creditors.

Creditors

Suppliers who have delivered items or services to the business on credit terms and are awaiting payment.

Net Cash Flow

The difference between total cash received and total cash spent in a specific period, calculated as: $\text{Net Cash Flow} = \text{Cash Inflows} - \text{Cash Outflows}$

Closing Cash Balance

The amount of cash remaining at the end of a trading period, calculated as: $\text{Closing Cash Balance} = \text{Opening Cash Balance} + \text{Net Cash Flow}$

Cash Deficit

A condition in a cash flow forecast where the closing cash balance is negative, predicting that cash reserves will not cover operating expenses.

Revenue

Income generated by a business from selling goods and services, calculated as: $\text{Revenue} = \text{Selling Price per Unit} \times \text{Output / Quantity Sold}$

Fixed Costs

Operating costs that remain constant regardless of the quantity of output produced, such as rent, business rates, insurance, and interest on bank loans.

Variable Costs

Operating costs that fluctuate directly in proportion to changes in production output, calculated as: $\text{Total Variable Costs} = \text{Variable Cost per Unit} \times \text{Output}$

Total Costs

The sum of all fixed and variable expenses incurred by a firm, calculated as: $\text{Total Costs} = \text{Fixed Costs} + \text{Total Variable Costs}$

Break-even Point

The level of output where total costs equal total revenue ($\text{Total Revenue} = \text{Total Costs}$), resulting in neither profit nor loss.

Break-even Output Formula

The calculation used to identify the sales volume required to break even: $\text{Break-Even Point} = \frac{\text{Fixed Costs}}{\text{Selling Price} - \text{Variable Cost per Unit}}$

Contribution Per Unit

The portion of selling price left over after paying variable costs that contributes toward paying fixed costs: $\text{Contribution per Unit} = \text{Selling Price} - \text{Variable Cost per Unit}$

Margin of Safety

The difference by which actual output exceeds the break-even output level: $\text{Margin of Safety} = \text{Actual Output Level} - \text{Break-Even Level of Output}$

Statement of Comprehensive Income

A formal financial document that records the revenue, direct costs, and overhead expenses incurred over a trading year to show profit or loss.

Cost of Sales

The direct expenditure on materials and labour used to produce or purchase the units sold during a time period: $\text{Cost of Sales} = \text{Variable Cost per Unit} \times \text{Quantity Sold}$

Gross Profit

The profit made purely from trading activities before subtracting indirect operating expenses, calculated as: $\text{Gross Profit} = \text{Revenue} - \text{Cost of Sales}$

Operating Profit

The surplus earned from core trading activities after deducting all operating expenses from gross profit: $\text{Operating Profit} = \text{Gross Profit} - \text{Expenses}$

Expenses

Indirect operational costs not tied directly to the manufacture or acquisition of inventory, such as managerial salaries, rent, and utility bills.

Statement of Financial Position

An accounting statement (balance sheet) summarising the financial value of a business at a specific date by showing its assets, liabilities, and equity.

Non-Current Assets

Long-term resources owned by a business intended for continued use over more than $12\text{ months}$, such as land, buildings, and plant machinery.

Current Assets

Short-term assets owned by a business that can be converted into cash within $12\text{ months}$, comprising cash, trade receivables, and inventory.

Current Liabilities

Debts and obligations that must be repaid within $12\text{ months}$, such as overdraft balances, trade payables, and short-term payables.

Non-Current Liabilities

Long-term debts that do not need to be settled within one year, such as long-term bank loans and commercial mortgages.

Net Assets

The overall net worth of the business's asset base, calculated as: $\text{Net Assets} = \text{Total Assets} - \text{Total Liabilities}$

Working Capital

The net liquid resources available to fund day-to-day operations and settle immediate debts: $\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$

Capital Employed

The total long-term finance committed into a business, calculated as: $\text{Capital Employed} = \text{Non-Current Liabilities} + \text{Total Equity}$

Gross Profit Margin

A profitability ratio expressing gross profit as a percentage of sales revenue: $\text{Gross Profit Margin} = \frac{\text{Gross Profit}}{\text{Sales Revenue}} \times 100$

Operating Profit Margin

A profitability ratio expressing operating profit as a percentage of sales revenue: $\text{Operating Profit Margin} = \frac{\text{Operating Profit}}{\text{Sales Revenue}} \times 100$

Return on Capital Employed (ROCE)

A ratio assessing the efficiency with which a firm generates operating profits from all internal and external invested capital: $\text{ROCE} = \frac{\text{Operating Profit}}{\text{Capital Employed}} \times 100$

Mark-up

The percentage added to the production cost of an item to secure a profit margin and establish selling price: $\text{Mark-up} = \frac{\text{Profit per Item}}{\text{Cost per Item}} \times 100$

Liquidity

The ease and speed with which a business can convert its assets into cash to satisfy short-term liabilities.

Current Ratio

A standard liquidity measure that compares all current assets with current liabilities: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$

Acid Test Ratio

A strict liquidity assessment that evaluates the ability to satisfy short-term debts without having to sell inventory: $\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$

Benefits of Cash Flow Forecasts

-identify the cash needed for upcoming expenses

-support bank loan applications with repayment evidence

-allow advance planning for overdrafts or loan repayments.

Drawbacks of Cash Flow Forecasts

-They rely on estimates 

-vulnerable to external changes

- demand specialised skills and time to prepare

- can be distorted when customers fail to pay on time.

Overdraft as a Cash Flow Remedy: Advantage and Disadvantage

Advantage: provides quick, flexible cash to handle unexpected short-term deficits.

Disadvantage: high interest charges make it very costly if used beyond brief emergencies.

Delaying Supplier Payments: Advantage and Disadvantage

Advantage: decreases short-term cash outflows immediately. Disadvantage: suppliers may refuse future trade credit or cancel discounts offered for prompt payment.

Demanding Quicker Debtor Payments: Advantage and Disadvantage

Advantage: speeds up cash inflows in the short run. Disadvantage: credit customers may take their business to competitors that continue offering generous credit periods.

Postponing Capital Equipment Purchases: Advantage and Disadvantage

Advantage: preserves cash reserves by preventing large cash outflows. Disadvantage: harms operational efficiency and competitiveness due to continued reliance on old technology.

Benefits of Accounting Ratio Analysis

Enables performance comparisons over time and against competitors, highlights financial weaknesses such as poor liquidity, and guides strategic management decisions.

Drawbacks of Accounting Ratio Analysis

Represents only a single-day snapshot from the balance sheet, can be manipulated via window dressing, and lacks contextual meaning without historical trend data.

Limitation of the Current Ratio

It assumes all inventory can be sold for cash, overlooking that stock may be perishable, obsolete, or difficult to sell quickly.

Advantage of the Acid Test Ratio

It provides a more rigorous measure of short-term liquidity by excluding inventory, revealing whether obligations can be met without selling stock.

Owner's Capital: Key Advantages

The business owner maintains complete ownership and decision-making control without incurring interest charges or mandatory repayment obligations.

Bank Loan: Advantage and Disadvantage

Advantage: provides a guaranteed lump sum for investment without diluting company ownership. Disadvantage: incurs interest expenses and requires compulsory repayments regardless of cash flow.