Finance and Accounting

acid-test ratio

= liquid assets/current liabilities

accounts payable (creditors)

value of debts for goods bought on credit payable to suppliers. Also known as 'trade payables'.

accounts receivable (debtors)

the value of payments to be received from customers who have bought goods on credit. Also known as 'trade receivables'.

annual forecast net cash flow

= forecasted cash inflow - forecasted cash outflows

Articles of Association

this document covers the internal workings and control of the business - for example, the names of directors and the procedures to be followed at meetings will be detailed.

Asset

an item of monetary value that is owned by a business.

bad debt

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

Statemen of Financial Position

an accounting statement that records the values of a business's assets, liabilities and shareholders' equity at one point in time.

break-even point of production

the level of output at which total costs equal total revenue.

business investment

expenditure by businesses on capital equipment, new technology and research and development.

capital employed

the total value of all long-term finance invested in the business. This = (non-current assets + current assets) - current liabilities or non-current liabilities + shareholders' equity.

capital expenditure

any item bought by a business and retained for more than one year, that is the purchase of fixed or non-current assets.

cash flow

the sum of cash payments to a business (inflows) less the sum of cash payments (outflows).

cash inflows

payments in cash received by a business, such as those from customers (debtors) or from the bank, e.g. receiving a loan.

cash-flow forecast

estimate of a firm's future cash inflows and outflows.

cash-flow statement

record of the cash received by a business over a period of time and the cash outflows from the business.

closing cash balance

cash held at the end of the month - becomes next month's opening balance.

contribution per unit

price less direct cost per unit.

cost centre

a section of a business, such as a department, to which costs can be allocated or charged.

cost of sales (or cost of goods sold)

the direct cost of purchasing the goods that were sold during the financial year.

credit control

monitoring of debts to ensure that credit periods are not exceeded.

creditors

suppliers who have agreed to supply products on credit and who have not yet been paid.

current assets

assets that are likely to be turned into cash before the next balance-sheet date.

current liabilities

debts of the business that will usually have to be paid within one year.

current ratio

= current assets / current liabilities

debtors

customers who have bought products on credit and will pay cash at an agreed date in the future.

depreciation

the decline in the estimated value of a non-current asset over time.

direct costs

these costs can be clearly identified with each unit of production and can be allocated to a cost centre.

dividends

the share of the profits paid to shareholders as a return for investing in the company.

equity finance

permanent finance raised by companies through the sale of shares.

Debt factoring

selling of claims over debtors to a debt factor in exchange for immediate liquidity - only a proportion of the value of the debts will be received as cash.

fixed costs

costs that do not vary with output in the short run.

gross profit

equal to sales revenue less cost of sales.

gross profit margin

(%) = gross profit / sales revenue x100

high-quality profit

profit that can be repeated and sustained.

hire purchase

an asset is sold to a company which agrees to pay fixed repayments over an agreed time period - the asset belongs to the company.

holding company

a business organization that owns and controls a number of separate businesses, but does not unite them into one unified company.

income statement

records the revenue, costs and profit (or loss) of a business over a given period of time.

indirect costs

costs that cannot be identified with a unit of production or allocated accurately to a cost centre.

insolvent

when a business cannot meet its short-term debts.

intangible assets

items of value that do not have a physical presence, such as patents and trademarks.

leasing

obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. This avoids the need for the business to raise long-term capital to buy the asset. Ownership remains with the leasing company.

liabilities

a financial obligation of a business that it is required to pay in the future.

liquid assets

current assets - inventories (stocks)

liquidation

when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.

liquidity

the ability of a firm to be able to pay its short-term debts.

long-term bonds

bonds issued by companies to raise debt finance, oft en with a fixed rate of interest.

long-term loans

loans that do not have to be repaid for at least one year.

low-quality profit

one-off profit that cannot easily be repeated or sustained.

margin of safety

the amount by which the sales level exceeds the break-even level of output.

marginal costs

the extra cost of producing one more unit of output.

marginal or contribution costing

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

net monthly cash flow

estimated difference between monthly cash inflows and outflows.

net profit

= gross profit - expenses (overheads)

net profit margin (%)

= net profit / sales revenue x100

sales revenue (or sales turnover)

the total value of sales made during the trading period = selling price minus quantity sold.

sales turnover

total value of sales made by a business in a given time period.

non-current assets

assets to be kept and used by the business for more than one year. Used to be referred to as fixed assets.

non-current liabilities

value of debts of the business that will be payable aft er more than one year

opening cash balance

cash held by the business at the start of the month.

operating profit (net profit)

gross profit minus overhead expenses.

outflows

payments in cash made by a business, such as those to suppliers and workers.

overdraft

bank agrees to a business borrowing up to an agreed limit as and when required.

overtrading

expanding a business rapidly without obtaining all of the necessary finance, so that a cash-flow shortage develops.

profit after tax

operating profit minus interest costs and corporation tax.

profit centre

a section of a business to which both costs and revenues can be allocated.

profit sharing

a bonus for staff based on the profits of the business - usually paid as a proportion of basic salary.

retained profit

the profit left after all deductions, including dividends, have been made. This is 'ploughed back' into the company as a source of finance.

revenue expenditure

any expenditure on costs other than non-current asset expenditure.

rights issue

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

sales forecasting

predicting future sales levels and sales trends.

share a certificate

confirming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights.

share capital

the total value of capital raised from shareholders by the issue of shares.

share price

the quoted price of one share on the stock exchange.

shareholders' equity

total value of assets - total value of liabilities.

variable costs

costs that vary with output.

window dressing

presenting the company accounts in a favourable light - to flatter the business's performance.

intellectual capital

intangible capital of the business that includes human capital( well trained and knowledgeable employees), structural capital (database and information system) and relational capital ( goods links with supplier and customers).

venture capital

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

crowd funding

the use of small amounts of capital from a large number of individuals to finance a new business venture

micro finance

providing financial services for poor and low income customer who don't have access to banking services, such as loans and overdrafts offered by traditional businesses.

good will

arises when abusiness is valued at or sold for more than the balance sheet value of its assets.