Business Finance Flashcards
Payback
How long it takes for an investment to pay for itself
Amount still to be paid back / next years cash inflow
Accounting rate of return
The profitability of the investment as % of the cost of the investment.
Total inflows - cost of investment = profit
Profit / life of asset (average annual profit)
Aap/ cost of investment
Net present value (NPV)
Considers the value of money changing over time
Net return x discount factor
Overdraft
When more money can be taken out of the account then is in it
Loan
A fixed amount borrowed from a lender on which interest is paid
Trade credit
Deferring a payment to a supplier until a later date
Factoring
Selling off debts to raise finance
Hire purchase
Paying for an item in instalments over a set period of time
Leasing
Paying for an asset in instalments but you don’t keep it at the end
Debentures
A bond sold by a business to raise capital. Interest is paid to the holder of the bond
Retained profit
Using profit kept by the business
Share issuing
Selling a part of the business
Sale and Leaseback
An asset is sold and rented back to the business
Venture capitalist
People lend money to a business in return for a part of it
Government assistance
Businesses that operate in certain areas can get money for doing so
Fixed costs
Do not change in relation to output
Variable costs
Costs that change in relation to output
Total costs
Fixed + variable costs
Direct costs
Costs that go directly into making the product
Indirect
Any other cost not going directly pay into production
Unit cost
The cost to produce, store and sell one unit
Average costs
Total costs divided by the number produced
Marginal cost
The cost of producing an extra unit
Opportunity cost
What is given up when a choice is made
Social cost
The cost to society when a transaction takes place. Can be negative or positive
Accounting principles:
Consistency Going concern Matching (accruals) Materiality Objectivity Prudence Realisation
Margin of safety
The difference between actual output and the break even output
Break even
The amount of products you have to sell to make money back
Cost centre
A specific part of a business where costs can be identified and allocated with reasonable ease
Profit centre
A separately identifiable part of a business for which it is possible to identify revenues and costs
Absorption costing
Treats al, costs of production as production costs regardless of whether they’re variable or fixed
Standard costs
Forecasted costs (what a business expects them to be)
Budget
A financial plan for the future concerning the revenues and costs of a business
Budgeting control
The process by which financial control is exercised within a business
Cashflow
The movement of cash in and out of the business
Cash inflows
Money coming into a business
Cash outflows
Money leaving a business
Net cash flow
Difference between totals inflows and outflows
Opening balance
Balance at start of period
Closing balance
Balance at end of period
Depreciation
The drop in value of an asset over time
Net book value
Cost - the amount written off
Accumulated depreciation
Depreciation added up
Residual value
Value at the end of an assets life
Straight line method
The value of the asset is reduced equally per year over its life time
Initial cost - residual value all divided by life of asset
Reducing balance method
Applies a constant percentage rate of depreciation each year
