section 5 finance and accounting terms

Start up capital

the capital needed by an entrepreneur to set up a business

Working capital

the capital needed to pay for raw materials, day-to-day running costs + credit offered to customers

Short-term finance

money required for short periods of time of up to 1 year

Long-term finance

money required for >1 year

Profit

the value of goods sold (revenue) less costs

Liquidity

the ability of a business to pay its short-term debts

Administration

when administrators manage a business that is unable to pay its debts with the intention of selling it as a going concern

Bankruptcy

the legal procedure for liquidating a business (/property owned by a sole trader) which can’t fully pay its debts out of its current assets

Liquidation

when a business cease trading + its assets are sold for cash to pay suppliers + other creditors

Current assets

assets that either are cash/likely to be turned into cash within 12 months (inventory + trade receivables/debtors)

Current liabilities

debts that usually have to be paid within 1 year

Capital expenditure

the purchase of non-current assets that are expected to last for more than 1 year, eg. buildings/machinery

Revenue expenditure

spending on all costs + assets other than non-current assets, which includes wages, salaries + inventory of materials

Internal sources

raising finance from the business’s own assets/from profits left in the business (retained profits)

External sources

raising finance from sources outside the business (eg. banks)

Retained earnings

profit after tax retained in a company rather than paid out to shareholders as dividends

Non-current assets

assets kept + used by the business for >1 year

Overdraft

a credit that a bank agrees can be bored by a business up to an agreed limit as + when required

Factoring

selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in exchange for immediate liquidity

Hire purchase

a company purchases an asset + agrees to pay fixed repayments over an agreed time period. The asset belongs to the purchasing company once the final payment has been made.

Leasing

obtaining the use of an asset + paying a leasing charge over a fixed period, avoiding the need to raise long-term finance to buy the asset. The asset is owned by the leasing company.

Long-term loans

loans that don’t have to be repaid for >1 year

Debentures

long term bonds issued by companies to raise debt finance, often w/a fixed rate of interest

Share (/equity) capital

permanent finance raised by companies through the sale of shares

Business mortgages

long-term loans to companies purchasing a property for business premises, w/the property acting as collateral security on the loan

Venture capital

risk capital invested in business start-ups/expanding small businesses that have good profit potential but don’t find it easy to gain finance from other sources

Collateral security

an asset which a business pledges to a lender + which must be sold off to pay a debt if the loan is not repaid

Rights issue

existing shareholders are given the right to buy additional shares @ a discounted price

Microfinance

providing financial services for poor + low-income customer who don’t have access to the banking services (loans/overdrafts) offered by traditional commercial banks

Crowd funding

the use of small amounts of capital from a large no. of individuals to finance a new business venture

Cash flow

sum of cash payments to a business less the sum of cash payments from the business

Cash flow forecast

an estimate of the future cash inflows + outflows of a business

Insolvent

when a business can’t meet its short-term debts

Cash inflow

cash payments into a business

Cash outflow

cash payments out of a business

Net cash flow

estimated difference b/w cash inflows + outflows for the period (eg. 1 month)

Opening cash balance

cash held by the business @ the start of the month

Closing cash balance

cash held by the business @ the end of the month, which becomes next month’s opening balance

Credit control

monitoring of debts to ensure that credit periods aren’t exceeded

Bad debt

unpaid customers’ bills that are now very unlikely to ever be paid

Overtrading

expanding a business rapidly w/out obtaining all of the necessary finance, resulting in a cash flow shortage

Cost centre

the section of a business (eg. department/product) that incurs the costs

Direct costs

costs can be clearly identified w/each unit of production + can be allocated to a cost centre

Indirect costs

costs that can’t be identified w/a unit of production/allocated accurately to a costs centre

Fixed costs

costs that don’t vary w/output in the short run

Variable costs

costs that vary w/output

Total cost

variable cost plus fixed cost

Profit centre

a section of a business to which both costs + revenues can be allocated, so profit can be calculated

Average cost

total cost divided by the no. of united produced

Full costing

a method of costing in which all indirect + direct costs are allocated to the products, services/divisions of a business

Contribution costing

costing method that allocates only direct costs to cost centres + profit centres, not overhead costs

Marginal costs

the additional cost of producing 1 more unit of output

Break-even point

the level of output @ which total costs = total revenue, when neither a profit nor loss is made

Break-even analysis

uses costs + revenue data to determine the break-even point of production

Margin of safety

the amount by which the current output exceeds the break-even level of output

Contribution per unit

the price of a product less the direct (variable) costs of producing it

Budgeting

planning future activities by establishing performance targets, especially financial 1s

Budget holder

the individual responsible for the initial setting + achievement of a budget

Delegated budgets

budgets for which junior managers have been given some authority for setting + achieving

Incremental budgeting

uses last year’s budget as a basis + an adjustment is made for the coming year

Zero budgeting

sets budgets to 0 each year + budget holders have to argue their case for target levels + to receive any finance

Flexible budgeting

cost budgets for each expense are allowed to vary if sales/output vary from budgeted levels

Variance analysis

calc of the differences b/w budgets + actual figures, + analysis of the reasons for such differences

Favorable variance

a change from the budget that leads to higher than planned profit

Adverse variance

a change from the budget that leads to lower than planned profit