B topic 3 definitions

Internal Sources of Finance

Money that is raised from the business’s or owner’s existing assets.

Personal Funds

Personal funds refer to money that is invested by the owner(s) of a business.

Retained Profit

Retained profit is the money left at the end of the trading year after paying all costs, expenses, dividends, and taxes.

An Asset

An asset is something a business owns.

Fixed Assets

Fixed assets are long-term property items (held for over one year) used in business operations.

External Sources of Finance

Money that is raised from outside the business.

Equity Finance

Type of funding where the provider receives part ownership of the business in exchange for the finance.

Business Angel

A successful, wealthy business person who invests their money into new businesses.

Share Capital

Share capital is money raised by selling shares to investors, via a stock market.

Debt Finance

Debt finance is money that is borrowed from a bank or other financial institution.

Loan Capital

A loan is a medium or long term source of finance commonly used to fund the purchase of fixed assets.

Overdraft

An overdraft is a short-term, high-cost loan linked to a bank account. It allows a business or individual to withdraw more money than is available in the account.

Microfinance

Microfinance provides financial services (e.g. savings accounts, loans, insurance) to individuals with very low income who are excluded from traditional banking.

Trade Credit

Trade credit allows a business to receive goods or services immediately but pay later, usually after 30, 60 or 90 days.

Leasing

Leasing is the process of renting a fixed asset (e.g. machinery, vehicles, equipment) for a set period instead of purchasing it.

Crowdfunding

Crowdfunding involves raising finance from many people who each contribute small amounts.

Variable Costs

Costs that vary with output and production.

Fixed Costs

Fixed costs are those that stay the same at different levels of output.

Semi Variable Costs

Some costs have both fixed and variable elements - these are called semi-variable costs.

Direct Costs

Cost that is precisely traceable to a specific cost object, which may be a product, a service, or a department.

Indirect Costs

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

Revenue

Revenue is the income that a business earns from selling goods and services. If a for-profit enterprise is going to survive, it needs to generate revenue.

Internal Stakeholders

People within the business who use final accounts to make decisions.

Shareholders

Individuals or groups that own shares in the company.

External Stakeholders

Groups outside the business that are interested in the final accounts.

The Income Statement

The income statement (also known as the profit or loss statement) is a financial report that shows how much money a business earned, spent, and ultimately kept or lost over a specific period.

Balance Sheet

A final account that indicates a business’s financial position at a specific point in time by showing what the business owns (assets), what it owes (liabilities), and the owner’s interest in the business (equity).

Current Assets

Current assets are assets that are expected to be converted into cash, sold, or consumed within 12 months from the reporting date.

Liquidity Order

Liquidity refers to how quickly an asset can be converted into cash without losing value. The standard liquidity order for current assets is:

Depreciation

Depreciation refers to the gradual loss in value of a non-current asset over time.

Liabilities

Liabilities are the financial obligations or debts a business owes to external parties.

Current Liabilities

Current liabilities are the amount the business is obligated to pay within 12 months of the reporting date.

Non-Current Liabilities

Non-current liabilities are obligations that the business will repay over a period longer than 12 months.

Intangible Assets

Intangible assets are non-physical items of value owned by a company that provide economic benefit and have a lifespan of more than one year.

Patents

Legal rights granted to an inventor or company that gives them exclusive rights to produce, use, or sell an invention for a specific period - usually around 20 years.

Copyright

Legal protection for original artistic and literary works. Typically last for 50-70 years after the death of the author.

Registered Trademark

A distinctive name, logo, symbol, or design registered to represent a brand or company.

Goodwill

Goodwill is the extra intangible value of a company that arises from:

• Strong customer relationships

• Brand reputation

• Skilled employees

• Efficient business practices

• Intellectual property or strong market position

Depreciation of Non-Current Assets

Depreciation is the process of allocating the cost of a non-current asset over its useful life.

Wear and Tear

As machines, vehicles, and equipment are used in production, their mechanical parts deteriorate. This natural decline in performance or physical condition is the most common cause of depreciation.

Obsolescence

Even if the asset still works, it may become technologically outdated. New models may be faster, more efficient, or offer new features. This reduces the asset’s value, as it may no longer be competitive or desirable.

Straight Line Method of Depreciation

A method used in accounting to calculate the fall in value of an asset evenly over its useful life. This method assumes the asset depreciates at a constant rate each year.

Units of Production Method

A method used in accounting to calculate the loss in value of an asset by estimating the units produced annually. It matches the cost of the asset to its productivity, not how many years you own it.

Profitability Ratios

Profitability ratios measure how effectively a business turns revenue or resources into profit.

Gross Profit Margin (GPM)

Gross Profit Margin is a profitability ratio that shows what percentage of a business’s sales revenue is left over as gross profit after covering the cost of sales.

Return on Capital Employed (ROCE)

ROCE is a profitability ratio that measures how efficiently a business uses its capital to generate profit.

Liquidity

Liquidity refers to a company’s ability to meet its short-term financial obligations using its short-term assets without needing to sell long-term assets. It ensures a business can pay suppliers, employees, and other short-term debts on time, prevents cash flow problems that could lead to insolvency, and helps maintain good relationships with creditors.

Current Ratio

The current ratio is a liquidity ratio that measures a business’s ability to pay short-term obligations using its short-term assets.

Acid Test (Quick) Ratio

The acid test ratio is a liquidity ratio that measures a company’s ability to meet its short-term obligations without relying on the sale of inventory.

Efficiency Ratios

Efficiency ratios assess how effectively a business manages its resources, especially within the working capital cycle.

Stock Turnover Ratio

The stock turnover ratio measures how many times a business sells and replaces its stock during a given period, reflecting the speed and efficiency with which a company converts its inventory into sales revenue.

Debtor Days Ratio

The debtor days ratio measures the average number of days it takes a business to collect payment from its customers after a credit sale, evaluating how effectively a business manages its credit sales and collection processes.

Creditor Days Ratio

The creditor days ratio measures the average number of days it takes a business to pay its suppliers for goods or services purchased on credit, reflecting how long the business holds onto cash before settling its payables.

Gearing Ratio

The gearing ratio measures how much of the business’s capital employed is financed by long-term debt, indicating how much the business is financed by borrowing.

Insolvency

Insolvency occurs when a business is unable to pay its debts on time, lacking enough cash or liquid assets to meet its obligations.

Bankruptcy

Bankruptcy is a formal legal process that occurs when a business cannot pay its debts and is insolvent.

Liquidation

Liquidation is the process of selling all the company’s assets (both short-term and long-term) to pay off creditors.

Contribution per Unit

Contribution per unit is the amount that each unit sold contributes toward covering the business’s fixed costs, and after that, generating profit.

Total Contribution

Total contribution is the total amount of all units sold that contributes to covering fixed costs and generating profit.

Break-even Quantity (BEQ)

The break-even quantity is the level of output at which total revenue equals total costs, resulting in zero profit and zero loss, where total contribution equals fixed costs.

Margin of Safety (MOS)

The margin of safety indicates how much actual output can fall before the business hits the break-even point.

Target Profit

A target profit is the specific amount of profit that a business aims to achieve over a defined period.

Target Output

Target output refers to the planned level of production or sales over a given period.

Target Price

A target price is a revised selling price that a business considers to remain competitive or meet strategic pricing goals.