Business topic 5 - Finance and Accounting

Start-up capital or finance

a business that is setting up for the first time requires funds, these may be used for several purchases or expenses including - premises, machines, technology, inventory, and wages

Expanding

physically getting bigger in size - the business is already established and potentially, it has been operating for several years

Takeover

involves one company buying shares via the stock exchange of another company.

Working capital

the finance available for the day to day running of the business. It answers the basic question if the firm had to pay off all its short-term debts could it do so out of its short-term cash resources i.e. inventories, payables, and cash

Trade receivables

the amount of money that a trade customer owes the business for the raw materials or products that they have purchased, but not yet paid for. It is classified as current assets on the balance sheet.

Trade payables

the amount of money that the business owes their supplier for the raw materials or products that they have purchased, but not yet paid for. Trade payables is a liability, which is a type of short-term debt

Revenue expenditure

spending by businesses for day-to-day activities e.g. wages and utilities

Capital expenditure

spending by businesses on fixed assets e.g. machinery and vehicles that will be used by the business on an ongoing basis

Internal finance

money that is raised from within or inside the company

External finance

money that is raised or obtained from outside the business

Cash flow forecast

a document that records a businesses anticipated inflows and outflows of cash over a period of time, usually twelve months

Fixed cost (indirect)

expenses that remain the same no matter how much a company produces, such as rent, property tax, insurance, and depreciation.

Variable costs (direct cost)

expenses that change based on how much a company produces and sells, such as labor, utility expenses, commissions, and raw materials.

Full Costing or Absorption Costing

when all of the direct and indirect costs of a business are absorbed into the costs of the products made. The cost will include a portion of the fixed (indirect) costs and the variable (direct) costs of the business

Marginal cost

the cost of producing an additional unit of output

Contribution Costing or Marginal Costing

the cost of a specific product is based on the variable or direct costs of production. Occurs when a business sets prices to cover the variable costs of making a product.

Contribution

shows the difference between the sales price and the variable costs for specific products

Profit

The surplus amount is left over after sales once costs have been paid. Shows the difference between sales and the costs for the whole business.

Cost plus pricing

occurs when a percentage markup is added to the cost of producing a good or service to calculate the selling price

Break-even

output is that level of output or production at which a businesses sales generate just enough revenue to cover all its costs of production

Revenue

the money coming in from the sale of goods and services

Total contribution

the difference between Total Sales Revenue (TSR) and Total Variable Costs (TVC)

• If I sell 100 t-shirts total sales revenue is (100 x £11.50) £1,150 and total variable cost is (100 x £4.00) £400

• Therefore total contribution is £1,150 - £400 = £750

Margin of safety

how much actual output is above the break-even level of output (Actual output level - break-even level of output)

Budgets

the forecasts or plans for the future finances of a business

Income budgets

A target set for the amount of revenue to be achieved in a set time period

Expenditure budgets

A limit placed on the amount to be spent in a given period of time

Profit budgets

A target set for the surplus between income and expenditure in a given period of time

Incremental budget

a budget that is prepared by taking the current period's budget or actual performance and using it as a base and then adjusting it by incremental amounts.

Zero based budget

budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending

Flexible budget

budgets that can be adjusted depending upon revenue and cost changes throughout the fiscal year, accounting for expected unpredictability

Variance

the difference between the actual income, expenditure or profit and the figure that had been budgeted

Adverse variance

one that is bad for the business

• Expenditure higher than budget

• Income lower than budget

• Profit lower than budget

Favourable variance

one that is good for the business

• Expenditure lower than budget

• Income higher than budget

• Profit higher than budget