Business Finance Key Terms Flashcards
accounting
involves the recording of financial transactions, planned or actual, and the use of these figures to produce financial information
income
the money coming into a business
capital income
the money invested by the owners or other investors, used to set up the business or buy additional equipment e.g. loan, mortgage, shares, owner’s capital, debentures
revenue income
the money that comes into the business from performing its day-to-day function- selling goods or providing a service e.g. sales, rent received, commission received, interest received, discount received
expenditure
the money spent by a business
capital expenditure
used to buy capital items, which are assets that will stay in the business for a long period of time
non-current assets
tangible items that will appear on the statement of financial position and include things like land, premises, equipment and vehicles
intangible assets
cannot be touched but add value to the business e.g. goodwill, patents, trademarks and brand names
revenue expenditure
spending on items on a day-to-day or regular basis. these expenses are shown on the statement of comprehensive income e.g. inventory, rent, rates, heating & lighting, water, insurance, salaries, wages, bank charges, interest paid, depreciation allowance, discount allowed
retained profit
profit= sales revenue - total cost (money kept in the business to fund future expenditure)
net current assets
current assets - current liabilities (shows the money available in the business to fund day-to-day expenditure)
sale of assets
selling an item of value in order to achieve a cash injection
owner’s capital
money invested in the business from the owner’s personal savings
loans
money borrowed from a financial institution normally for a set period of time and for a specific purpose
crowdfunding
attracting investment from a large number of speculative investors, many of whom may invest relatively small amounts
mortgages
long-term loans, normally around 25 years, that are secured against a specific asset e.g. a building
venture capital
investment from an experienced entrepreneur in return for a stake in the business
debt factoring
selling the debts of a business to a third party in order to receive a quick cash injection
hire purchase
paying to use an asset in instalments to spread the cost over its useful life
leasing
paying to use an asset in instalments, however the ownership of the asset remains with the supplier throughout the lease agreement
trade credit
a period of time, offered by suppliers, to allow the customer to purchase now and pay later
grants
a lump sum provided to a business by the government or another organisation to be used for a specific purpose
donations
sums of money given voluntarily to a charity or social enterprise
peer-to-peer lending
involves one business lending money to another business person in return for interest payments
invoice discounting
reductions offered to customers making a product or service cheaper. usually applied as a percentage of the total value
break-even analysis
the point at which a business is not making a profit or a loss. the money received from sales is the same as the money being spent on costs. total revenue = total costs
variable costs
costs that change with the level of output e.g. raw materials
semi-variable costs
part of the cost stays the same and part varies in relation to the degree of business activity e.g. a worker paid a fixed rate but in addition may receive variable amounts of overtime
fixed costs
costs that do not vary with output. they remain the same e.g. rent
total costs
total costs= fixed costs + total variable costs
total revenue
the total amount of money coming in from sales. total revenue= selling price x quantity sold
total sales
the amount of sales made in a set time period e.g. one year. it can be expressed as value (monetary) or volume (quantity)
selling price per unit
the amount a customer will pay for each unit purchased
sales in value
sales expressed as a monetary value e.g. £
sales in volume (units)
sales expressed as a quantity e.g. units
cash flow forecast
tries to predict the cash flowing into and out of a business. a healthy cash flow is crucial to the survival of a business.
cash inflows/receipts
money coming into the business e.g. cash sales, credit sales, loans, capital introduced, sale of assets and bank interest received
cash outflow/payments
money going out of a business e.g. cash purchases, credit purchases, rent, rates, salaries, wages, utilities, purchase of assets, VAT and bank interest paid
opening balance
the amount of cash available in a business at the end of the start of the month
closing balance
the amount of cash available in a business at the end of the month. to calculate= opening balance + net cash flow
liquidity
measures a firm’s ability to meet short-term cash payments
statement of comprehensive income
shows the trading position of the business which is used to calculate gross profit. it then takes into account all of the expenses to calculate the profit or loss for the year
accural
when an expense is paid after the period to which it relates
prepayment
when an expense is made in advance of the period to which it relates
statement of financial position
provides a snapshot of the net worth of a business at a particular moment in time, normally at the end of the financial year. it is a summary of everything a business owns (assets) and everything it owes (liabilities)
non-current assets
items of value that are owned by the business and likely to be held for more than one year e.g. premises and fixtures & fittings
current assets
items of value that are owned by the business whose value is likely to fluctuate on a regular basis e.g. inventories, trade receivables, prepayments, cash in the bank and cash in hand
current liabilities
things owned by the business that must be repaid within a 12-month period e.g. overdrafts accruals and trade payables
non-current liabilities
things that a business owes that will take longer than one year to repay e.g. mortgages and bank loans
depreciation
an accounting concept used to spread the cost of an asset over it’s useful life. assets appear on the statement of financial position at a realistic value (net book value) and the annual monthly amount by which the assets are depreciated is included as an expense on the statement of comprehensive income
straight-line depreciation
asset is depreciated by a set amount each year
reducing balance depreciation
asset is depreciated by a set % of its remaining value each year. the percentage will be set by a senior account and means that the asset will be depreciated by a lower percentage as it ages
gross profit margin
looks at gross profit as a percentage of sales turnover
mark-up
calculates gross profit as a percentage of the cost of sales
net profit margin
shows the net profit as a percentage of the sales
return on capital employed (ROCE)
shows the percentage return a business is achieving from the capital invested to generate the return
current ratio
this ratio shows a business the amount of current assets it owns in relation to the amount of current liabilities it owes
liquid capital ratio
this ratio gives a more accurate reflection of the true liquidity of a business as it removes the least liquid of all current assets from the equation i.e. inventories
trade receivable days
this ratio measures, on average, how long it takes for debtors to pay and is expressed as a number of days
trade payable days
this ratio shows, on average, how long it takes firm to pay for goods and services bought on credit and is expressed as a number of days
inventory turnover
this ratio shows the average amount of time an item of stock is held by a business and is expressed as a number of days
