Business A level theme 2

Capital

Capital

The money provided by the owners in a business

Capital expenditure

Spending on business resources that can be used repeatedly over a period of time

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

Sale and leaseback

The practice of selling assets, such as property or machinery, and leasing them back from the buyer

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

Debenture

A long-term loan to a business

Equities

Another name for an ordinary share

External finance

Money raised from outside the business

Issued share capital

Amount of current share capital arising from the sale of shares

Lease

A contract to acquire the use of resources such as property or equipment

Peer-to-peer lending (P2PL)

Where individuals lend to other individuals without prior knowledge of them, on the internet

Permanent capital

Share capital that is never repaid by the company

Secured loans

A loan where the lender requires security, such as property, to provide protection in case the borrower defaults

Share capital

Money introduced into the business through the sale of shares

Unsecured loans

Where the lender has no protection if the borrower fails to repay the money owed

Venture capitalism

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

Collateral

An asset that might be sold to pay a lender when a loan cannot be repaid

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

Rights issue

Issuing new shares to existing shareholders at a discount

Short-term borrowing

Money borrowed for 12 months or less

Undercapitalised

A business not raising enough capital when setting up

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

Solvency

The degree to which a business is able to meet its debts when they fall due

Consumer income

The amount of income remaining after taxes and expenses have been deducted from wages

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

Economic variables

Measures within the economy which have effects on business and consumers. Examples include unemployment, inflation and exchange rates

Extrapolation

Forecasting future trends based on past data

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

Time series data

A method that allows a business to predict future levels from past figures

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

Long run

The time period where all the factors of production are variable

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

Semi-variable cost

A cost that consists of both fixed and variable elements

Short run

The time period where at least one factor of production is fixed

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

Production cost budget

A firm's planned production costs for a future period of time

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).

Amortisation

The writing off of an intangible asset

Cost of sales

The direct costs of a business

Exceptional costs

A one off cost, such as a large bad debt

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

Statement of comprehensive income

A financial document showing a company's income and expenditure over a particular time period, usually one year

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.

Intangible assets

Non-physical assets, such as brand names, patents and customer lists

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

Shareholders' equity

The amount of money owed by the business to the shareholders

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

Trade and other payables

Money owed by the business to suppliers and utilities, for example. Sometimes called trade creditors

Trade and other receivables

Money owed to the business by customers and any prepayments made by the business

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

Administration

A failing business appoints a specialist to rescue the business or wind it up

External factors

Factors beyond the control of businesses cause it to collapse