3.5 Financial management Flashcards
Return on investment (ROI)
A measure of the profitability of an investment, calculated as the ratio of net profit generated
by the investment to the initial investment cost.
Gross profit
The difference between revenue and the cost of goods sold, representing the profit earned
from primary business activities before deducting other expenses
Operating profit
The profit earned from a company’s core business operations after deducting operating
expenses from gross profit.
Profit for the year
The net income or profit earned by a company over a specific accounting period, typically
calculated after deducting all expenses, taxes and dividends.
Adverse variance
A difference between actual performance and budgeted or expected performance that results
in a negative impact on a company’s financial results
Favorable variance
A difference between actual performance and budgeted or expected performance that results
in a positive impact on a company’s financial results.
Break even output
The level of output at which total revenue equals total costs, resulting in neither profit nor
loss.
Margin of safety
The difference between actual sales and the break-even point, representing the amount by
which sales can drop before a company incurs losses.
Contribution per unit
The amount of revenue remaining after deducting variable cost per unit from selling price,
representing the contribution of each unit sold towards covering fixed costs.
Total contribution
The total amount of revenue remaining after deducting variable costs from sales revenue,
available to cover fixed costs and contribute to profit.
Payables
Amounts owed by a business to its suppliers or creditors for goods or services purchased on
credit.
Receivables
Amounts owed to a business by its customers or debtors for goods or services provided on
credit.
Profit from operations
The profit earned from a company’s core business activities before deducting interest and
taxes.
Break even analysis
A financial technique used to determine the level of sales or output needed to cover total
costs and break even, helping businesses make informed decisions.
Debt factoring
A financing arrangement where a business sells its accounts receivable to a third party (factor)
at a discount to obtain immediate cash.
Overdrafts
Short-term loans provided by banks that allow businesses to withdraw more money from
their bank accounts than they have available, up to an agreed limit.
Retained profits
The portion of a company’s net income that is retained and reinvested in the business rather
than distributed to shareholders as dividends
Share capital
The total value of funds raised by a company through the issuance of shares to shareholders,
representing ownership in the company.
Loans
Funds borrowed by a company from external sources, typically financial institutions or
lenders, which must be repaid with interest over a specified period.
Venture capital
Equity financing provided to early-stage, high-potential startups or small businesses by
investors in exchange for ownership stakes, with the expectation of high returns.
Crowdfunding
A method of raising capital for a project or venture by soliciting small contributions from a
large number of individuals, often through online platforms.
Cash flow
The movement of money in and out of a business, reflecting its liquidity and ability to meet
financial obligations.
