Unit 6: Finance (Key Terms)

Fixed costs

Costs that do not change with output (e.g., rent, salaries).

Variable cost example

Raw materials, packaging, or fuel.

Total Revenue formula

Price * Quantity Sold.

Gross Profit

Revenue minus Cost of Sales.

Net Profit

Gross Profit minus Expenses (or Revenue minus Total Costs).

Break-even formula

Fixed Costs / Contribution (Price - Variable Cost).

Margin of Safety

The amount by which current sales exceed the break-even point.

Internal source of finance

Retained profit or selling assets.

External source of finance

Bank loan, overdraft, or venture capital.

Retained profit

Profit kept back in the business to be reinvested.

Overdraft

A facility allowing a business to spend more money than is in its bank account.

Advantage of bank loan

Fixed interest rates make it easier to budget/plan.

Trade credit

Buying goods now and paying for them later (e.g., 30 days).

Venture capital

Investment from professionals in return for a share of the business (equity).

Cash flow forecast

A prediction of the money coming in and going out of a business over time.

Net cash flow

Total Inflow minus Total Outflow for a specific period.

Cash vs Profit

Cash is the physical money available; Profit is what's left after all costs are deducted.

ARR

The average yearly profit of an investment expressed as a percentage of the initial cost.

Crowdfunding

Raising small amounts of money from a large number of people, usually via the internet.

Improve cash flow

Delaying payments to suppliers or offering discounts for early customer payments.