business theme 2

key terms

Capital

The money provided by the owners in a business

Internal finance

Money generated by the business or its current owners

Retained profit

Profit after tax that is 'ploughed back' into the business

Revenue expenditure

Spending on business resources that have already been consumed or will be very shortly

Authorised share capital

The maximum amount that can be legally raised

Bank overdraft

An agreement between a business and a bank that means a business can spend more money that it has in its account (going 'overdrawn'). The overdraft limit is agreed and interest is only charged when the business goes overdrawn

Capital gain

The profit made from selling a share for more than it was bought

Crowd funding

Where a large number of individuals invest in a business or project on the internet, avoiding the use of a bank

Equities

Another name for an ordinary share

External finance

Money raised from outside the business

Share capital

Money introduced into the business through the sale of shares

Venture capitalism

Providers of funds for small or medium-sized companies that may be considered too risky for other investors

Incorporated business

A business model in which the business and the owner(s) have separate legal identities

Limited liability

A legal status that means shareholders can only lose the original amount they invested in a business

Long-term finance

Money borrowed for more than one year

Unincorporated businesses

A business model in which there is no legal difference between the owner(s) and the business

Unlimited liability

A legal status which means that business owners are liable for all business debts

Business plan

A plan for the development of a business, giving details such as the products to be made, resources needed, and forecasts such as costs, revenues and cash flow

Cash-flow forecast

The prediction of all expected receipts and expenses of a business over a future time period which shows the expected cash balance at the end of each month

Cash inflows

The flow of money into a business

Cash outflows

The flow of money out of a business

Net cash flow

The difference between the cash flowing in and the cash flowing out of a business in a given time period

Consumer trends

The habits or behaviours of consumers that determine the goods and services they buy

Economic growth

The rise in output of an economy as measured by the growth in GDP usually as a percentage

Forecasting

A business process, assessing the probable outcome using assumptions about the future

Sales forecast

Projection of future sales revenue, often based on previous sales data

Average cost or unit cost

The cost of producing one unit, calculated by dividing the total cost by the output

Fixed cost

A cost that does not change as a result of a change in output in the short run

Profit

The difference between total costs and total revenue. It can be negative.

Sales revenue

The value of output sold in a particular time period. It is calculated by price x quantity of output

Sales volume

The quantity of output sold in a particular time period

Total cost

The entire cost of producing a given level of output

Total revenue

The amount of money the business receives from selling output

Variable cost

A cost that rises as output rises

Break-even

When a business generates just enough revenue to cover its total costs

Break-even chart

A graph containing the total cost and total revenue lines, illustrating the break-even output

Break-even output

The output a business needs to produce so that its total revenue and total costs are the same

Break-even point

The point at which total revenue and total costs are the same

Contribution

The amount of money left over after variable costs have been subtracted from revenue. The money contributes towards fixed costs and profit.

Margin of safety

The range of output between the break-even level and the current level of output, over which a profit is made

Budget

A quantitative economic plan prepared and agreed in advance

Budgetary control

A business system that involves making future plans, comparing the actual results with the planned results and then investigating the causes of any differences

Historical figures

Quantitative information based on past trading records

Sales budget

A firm's planned sales for a future period of time - can be measured in terms of volume or revenue

Variance

The difference between actual financial outcomes and those budgeted

Variance analysis

The process of calculating variance and attempting to identify their causes

Zero-based budgeting or zero budgeting

A system of budgeting where no money is allocated for costs or spending unless they can be justified by the fund holder (they are given a zero value).

Cost of sales

The direct costs of a business

Gross profit

The difference between revenue/turnover and cost of sales

Gross profit margin

Gross profit expressed as a percentage of revenue/turnover

Operating profit

The difference between gross profit and business overheads, such as selling and administrative expences

Operating profit margin

Operating profit expressed a percentage of revenue/turnover

Profit for the year or net profit

The difference between operating profit and interest and exceptional items

Profit for the year margin or net profit margin

Net profit after tax, expressed as a percentage of revenue/turnover

Revenue or turnover

The total income of a business resulting from sales of goods or services

Acid test ratio

Similar to the current ratio but excludes stocks for current assets. A more severe test of liquidity.

Assets

Resources that belong to a business

Capital

Money put into the business by the owners

Current assets

Liquid assets ie those assets that will be converted into cash within one year

Current liabilities

Money owed by the business that must be repaid within one year

Current ratio

Assesses whether or not a business has enough resources to meet any debts that arise in the next 12 months. It is found by dividing current liabilities into current assets.

Inventories

Stocks, such as raw materials and finished goods held by a business

Liabilities

Money owed by the business to banks and suppliers, for example

Liquidity

The ease with which assets can be converted into cash

Net assets

Total assets - total liabilities

Non-current assets

Long-term resources that will be used by the business repeatedly over a period of time

Non-current liabilities

Money owed by the business for more than one year, sometimes called long-term liabilities

Statement of financial position (balance sheet)

A summary at a particular point in time of the value of a firm's assets, liabilities and capital

Working capital

The funds left over to meet day-to-day expenses after current debts have been paid. It is calculated by subtracting current liabilities from current assets

External factors

Factors beyond the control of businesses cause it to collapse

Internal factors

Factors that business are able to control cause it to collapse

Overtrading

The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast

Batch production

A method that involves completing one operation at a time on all units before performing the next

Capital intensive

Production methods that make more use of machinery relative to labour

Capital productivity

The amount of output each unit of capital (one machine) produces

Cell production

Involves producing a family of products in a small self-contained unit (a cell) within a factory

Efficiency

Producing a level of output where average cost is minimised

Flow production

Large-scale production of a standard product, where each operation on a unit is performed continuously one after the other, usually on a production line

Job production

A method of production that involves employing all factors to complete one unit of output at a time

Kaizen

A Japanese term that means continuous improvement

Labour intensive

Production methods that make more use of labour relative to machinery

Labour productivity

The amount of output each unit of labour (one worker) produces

Lean production

An approach to operations that focuses on the reduction of resource use

Outsourcing

Giving work to sub-contractors to reduce costs

Production

The transformation of resources into goods or services

Productivity

The output per unit of input per time period

Specialisation

In business, the production of a limited range of goods

Capacity utilisation

The use that a business makes of its resources

Over-utilisation

The position where a business is running at full capacity and 'straining' resources

Under-utilisation

The position where a business is producing at less than full capacity

Buffer stocks

Stocks held as a precaution to cope with unforeseen demand

Lead time

The time between placing the order and the delivery of goods

Re-order level

The level of current stock when new orders are placed

Re-order quantity

The amount of stock ordered when an order is placed

Stock rotation

The flow of stock into and out of storage

Quality

Features of a product that allow it to satisfy customers' needs. It may refer to some standard of excellence.

Quality assurance

A method of working for businesses that takes into account customers' wants when standardising quality. It often involves guaranteeing that quality standards are met.

Quality chains

When employees form a series of links between customers and suppliers in business, both internally and externally

Quality control

Making sure that the quality of a product meets specified quality performance criteria

Statistical process control

The collection of data about the performance of a particular process in a business