Business Unit 3 (copy)

Capital Expenditure

Capital Expenditure

Money spent to acquire items in a business that will last for more than a year and can be used over and over again

Fixed Assets

Ex. Machinery, land, equipment, and buildings. Overtime they provide income for the business

Revenue Expenditure

money spent on the day to day running of a business. Ex. Wages, insurance, rent, and raw materials. (Should make sure it does not get high)

Personal Funds

A source of finance for sole traders that comes mostly from their own personal savings

Retained Profit

Profit which remains after a business paid corporation tax to the government and dividends to shareholders

Sale of Assets

When a business sells off its unwanted/unused assets to raise funds.

Share Capital (Equity Capital)

Money raised from the sale of shares of a limited company on the stock exchange.

Loan Capital (Debit Loan)

Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid.

Interest

Cost of borrowing or the reward for saving money in the bank

Overdrafts

When a lending institution allows a firm to withdraw more money than it currently has in its account

Trade Credit

An agreement between businesses that allows the buyer of the goods/services to pay the seller at a later date.

Grants

Funds usually provided by a government, foundation, trust, or other agency to businesses which does not need to be repaid.

Subsidies

Financial Assistance granted by a government, NGO, or an individual to support businesses that are in the public interest

Debt Factoring

a financial agreement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the owed debt in cash

Leasing

A source of finance that allows a firm to use an asset without having to purchase it by cash

Venture Capital

Financial capital proved by investors to high-risk, high potential start ups or small businesses.

Business Angels

Highly affluent individuals who provide financial capital to small startups in return for ownership in their business.

Cost

The total expenditure incurred by a business in order to run its operations

Revenue

Measure of the money generated from the sale of goods/services

Revenue Streams

The income an organization gets from a particular activity

Fixed Cost

Costs that do not change with the amount of goods/services sold. Ex: Rent, insurance, salaries, interest payments

Variable Costs

Costs that change with the amount of goods/services produced. Volume related since they are paid per quantity produced. Ex: Raw materials, packaging, sales commissions, advertisements

Semi-Variable Costs

Costs comprising of both fixed and variable components. They remain fixed for a given level of production and after which they become variable once that level is exceeded.

Direct Cost

Costs that can be identified with the production of specific goods or services

Indirect Costs (Overheads)

Costs that are not clearly identified with the production of specific goods/services, not directly traceable.

Contribution

Amount each unit contributes towards the fixed costs and profits

Total Contribution

Calculated when more than one unit is sold.

Contribution per unit =

Price per unit - variable costs

Profit

The financial gain made by the business

Profit =

TR - TC

Break-even point

When the total costs = the total revenue. This is when the business will not make a profit or a loss.

Margin of Safety

Amount of output by which the output level exceeds the break-even level of output.

Margin of Safety =

current output - breakeven output

Total Revenue

TR = Price x quantity

Target Profit Output (TPO)

The level of output that is needed to earn a specified amount of profit

TPO =

(Fixed costs + Target profit) / CPU

Profit and Loss Account

Second part of the income statement that shows the net profit before interest and tax, net profit before tax, and net profit after interest

Appropriation Account

final part of the profit/loss account that shows how the company's net profit after interest and tax is distributed

Gross Profit

profit made by a company (sales revenue - cost of goods sold)

net profit

he positive difference between a company's gross profit and its expense (gross profit - expenses)

Cost of Goods Sold (COGS)

Cost of producing or purchasing the goods that were sold during that period

Dividends

A sum of the money paid to shareholders which is decided by the board of directors

Stock

unsold goods, raw materials or work-in-progress that the company has in hand at the end of the trading period

Balance Sheet

a statement of the financial position of a business in terms of assets, liabilities and owner's equity at a particular point in time

Assets

all items of value that are owned by the firm, such as cash or buildings

Fixed Assets

Long-term assets that last in a business for more than 12 months (Ex. vehicles, buildings, and machinery)

Current Assets

Short-term assets that last in a business for up to 12 months (Ex. Cash, debtors, stock)

Liabilities

all funds owed by the company to financial and other institutions, such as banks and suppliers

Long-term liabilities

Long-term debts payable after 12 months by the business (Ex. Mortgages)

Current Liabilities

Short-term debts that are payable within 12 months (Ex. creditors, tax, overdraft)

Working Capital

(Net current assets) Helps establish whether a firm can pay its day-to-day running costs

Equity

Shows how the net assets are financed using shareholders' capital and retained profit

Debtors

people who owe money

Creditors

People who lend money

Intangible Assets

assets that do not have physical substance

Depreciation

A decrease or loss in value

Obsolescence

state of being no longer useful or in fashion

Straight-line method

Spreads out the cost of an asset equally over its lifetime by deducting a given constant amount of depreciation

Reducing Balance Method

A method where a predetermine percentage depreciation rate is used and subtracted from the net book value of the previous year

Residual Value

the estimated value of a fixed asset at the end of its useful life

Ratio Analysis

Financial tool used in the interpretation and assessment of a firms financial statements

Profitability Ratios

show a company's overall efficiency and performance

Gross profit margin

(Gross profit) / (sales revenue) x 100

Net profit margin

(Net profit before interest and tax) / (Sales Revenue) *100

Return on Capital Employed (ROCE)

Measures efficiency and profitability of a firms invested capital

Capital Employed

long term liabilities + share capital + retained profit

Liquidity Ratios

the firm's ability to convert its short-term assets into cash

Current Ratio

current assets/current liabilities

Acid Test Ratio

Current Assets - Stock / Current Liabilities

Cash Flow

Money that flows in and out of a business over a given time period

Insolvency

A business can be profitable but have little or no cash

Liquidation

occurs when a business closes and sells its assets to pay creditors

Working Capital Cycle

the period of time between payment for goods supplied to a business and the business receiving cash from their sale

Cash-flow forecasts

Future predictions of a firms cash inflows and outflows over a given period of time

Opening Balance

The amount of money in a business at the start of the month

Closing Balance

The amount of money in a business at the end of the month

Net cash flow

The difference between total cash inflows and total cash outflows

Total Cash Inflows

Summation of all cash inflows during a particular month.

Total Cash outflows

summation of all cash outflows during a particular month

Investment Appraisal

The evaluation of an investment project to determine whether or not it is likely to be worthwhile

Payback Period

Estimates the length of time required for an investment project to pay back its initial cost outlay

Average Rate of Return

Measures the annual net return on an investment as a percentage of its capital cost

Budget

A plan for making and spending money

Break Even Revenue

Amount of revenue needed to cover both fixed and variable costs so that business breaks even

Break even revenue =

FC / (1-(Direct cost/price))

Target price

what price items should be if a company wants B.E. point at a specific number of sales

Target Price

(Total fixed cost/Production unit volume) + Variable Cost per unit.

Final Accounts

Financial records of business transactions, which are needed to provide essential information to groups both within and outside the organization about the financial position and performance of it

Window Dressing

Presenting accounts of a business in the best possible, or most flattering, way which could potentially mislead users of accounts