Business Unit 3 Flashcards
Capital expenditure:
Capital expenditure: is the finance spent on fixed assets
Revenue expenditure:
Renvue expendtuire: refers to payments for the daily running of a business
Internal Sources (definiton and types)
Interal sources of finnace comes from withinthe business
Includes: Personal funds, sales of assets, retained proifts
Personal funds is the peronsla money owners put it
Sales of assets; business can sell their dormant assets
External sources of finnace (what is IPO, deinfiton + types of external sources of finance)
External sources of finance: is finance that comes from outside of the business
it includes things such as share cpaita, loan, overdrafts, trade credit, grants, debt factoring,
Share capital:
Business can raise money by selling shares
Loan capita: Business can obtain loans from commercial lenders such as banks
Overdrafts: When business tem;ortarly overdraft on its bank balance (taking more money than they have)
Trade credit: Allows customers to buy now and pay laters
Gransts: are governmental financial gifts
Business angles:
are wealthy individuals who choose to invest their own money to business that offer high growth potienal
Venture capital:
Refer to a high risk loan given small-medium size business that have high growth poiteinal
IPO: when business sell their share son a. stock exchange for the first time
Types of costs (8)
running costs: are the onoging costs of operation the business
Set up costs: are the items of expenditure needed to start a business
Fixed costs: are cost of production that a business has to pay regardless of how much it products or sells (stays the same)
Variable costs: Are the costs of productthat change in proportion with the level of production or sales
Semi-variable costs:
Contain both variable and fixed costs, so it costs a certain amount of money b ut once exeneed a certain level of output then the costs change
Direct costs:
Are costs specifically related to the individual project or product, example employees who create it, raw materials etc)
Indirect costs:
Are costs that cannot be traced to the product or sale of any product but are necessary, example rent, light etc adveritinsg
Formulas:
For total cost, Average cost (2 ways) , Total variable cost, Average revenue.
Total costs = Total variable cost + Total fixed costs
Average cost = Fixed cost + variable cost / Unit sold
Total Variable Costs = Cost Per Unit x Total Number of Units.
Average revenue = Total revenue /Quantity
(AVC)= VC/Q
Formulas + Defintion)
Contribution per unit
Total contribution
Profit
Break even
Margin of safety
Mos perctenge
Output (2 ways)
Total costs
Sales revenue
Contrinubtion refers to the sum of money that remains after all direct and variable costs have been taken way from sales revenue
Contribution per unit = price - average variable cost (average cost)
Total contrinubtion = (p-AVC) x Q
BREAK EVEN:
Breaking even refers to the position in the graph when total costs = total revenue
OR
BEQ= FIxed cost / Unit contribution.
Therefore we can use the formula TR=TC, to find the quantity needed
example, price = 30. VC = 10, fixed = 3500
TR = TC
P*Q = TFC + TVC
30Q = 3500 + 10Q
20Q = 3500
Q=175
2) way
BEQ= TFC / Price - AVC
IMPORtant steps for Break even chart:
1) Y axis = Cost and revenue
2) X axis = Output
3) Must be Break even point
4) Must be Fixed Cost
5) There must be Margin of Safety
6) Must be Total profit and Total Costs
7) Must be Loss before Break even and Profit after
Profit = Total contribution -TFC
Break even = fixed cost / contrinubtion per unit
Margin of saefty = Level of demand - BEQ
OR Margin of safety = output - BEQ
Margin of safety = output - BEQ
Output = Divide the total cost (TC) by the quantity of goods produced by the firm (Q) to find it
Total costs = Total variable cost + Total fixed costs
Sales revenue = price quantity sold
Profit and loss account. And balance sheet
How to find equity
Profit and loss account: is a finanical statement of a firms trading activities over a period of tiem
The balance sheet: shows the assets and liabilities of a business at a paricpluar point of time.
Equity = Share capital + retained profit
The profit and loss account, trading account, profit and loss account (profit statement), approaption account
The profit and loss account is a financial statement of a firms trading activities over a period of time
Trading account:
Trading account is the first section of the profit and loss account and shows the gross profit
Gross profit = Sales revenue = COGS
COGS = Openting stock + purchases - closing stock
Profit statement
Which shows the net profit before tax and interest
Profit statement = Gross Profit - Less expenses
Approation account: dividends and retained profitn
Net current assets vs net asset. Net asset (formula)
Net current assets vs net assets.
Net asset = Net assets are the value of a company’s assets minus its liabilities. It is calculated ((Total Fixed Assets + Total Current Assets) – (Total Current Liabilities + Total Long Term Liabilities)).
What is equity:
What is asset, and fixed asset, and current asset
Equity represents the shareholders’ stake in the company
Assets: are items of monterey value owned by the business
A fixed asset: is any asset used for
busness operations
A current asset: refers to any asset thats likely to be turned into cash within 12 mont
What is libabilites
What is total assets (formula)
Long term libalites:
Libalities: Are legal oblgiions of abusiness
Total asset = fixed asset + working capital
Long term libalities = must be dealt within 12 months
Share capital: refers to the money raised though sales of shares
Intaignel assets: Are non physics-assets that have the ability to earn revenue for a business (ex. Brand names, Goowdill, patens, copyright tradmarks)
Brands recongiiction: help drive global sales for companies
Patens: produce legal protection fr invetnros, prevening other from copying their creating for a ficed number of nears
CopyrightL provides legal protectio for ht eorignal arctic work of the creator
Goodwill: w=value of the orgnaizations name
Tradmersl: Distinctive signs that unqitly identify a brand.
GPM (gross profit margin) , NPM (net profit margin) deinfitnnon + formukwhlat type of ratio are they
ROCE
They are both profability ratio
Gross prfoti margins hows the value of gross profit as a perctange of sales revenue
GPM = (Gross profit / Sales revenue ) * 100
So if gross profit was 5 million and sales revenue was 10 million then GPM is 50%, and therefore for every 100$ in sales 50$ is gross profit
NPM:
Net profit shows the net profit shows as percentage of sales revenue
NPM= (Net profit / Sales revenue ) *100
ROCE is a effeicny ratio that measures how well firs financial resources are being used: the roce ratio measures the financial peromfmace of a firm compared with the amount of capital invested
ROCE = Net profit before tax and interest / Capital employed * 100
Capital employed: is the value of all long term sources of finance
Capital employed = loan capital + share capital + retained profit
Share capital:
Intagienal assets (there are 4)
Share capital: refers to the money raised though sales of shares
Intaignel assets: Are non physics-assets that have the ability to earn revenue for a business (ex. Brand names, Goowdill, patens, copyright tradmarks)
Brands recongiiction: help drive global sales for companies
Patens: produce legal protection fr invetnros, prevening other from copying their creating for a ficed number of nears
CopyrightL provides legal protectio for ht eorignal arctic work of the creator
Goodwill: w=value of the orgnaizations name
Tradmersl: Distinctive signs that unqitly identify a brand.
Types of Ratio ANalysis:Liquity ratio, defintinon + types
Profabibility: NPM and GPM
Liquidty: Current ratio and Acid test ratio
Effiency: ROCE
Liquity ratio looks at the ability of a firm to pays its short term liabilities, such as comparing working capital to short term debts
Current ratio = current assets / current liabilities
Acid test ratio = current assets - stock / current liabilities
What is ratio analyis : and what are some effeincy ratios (4)
Ratio analysis is a management tool for analyzing and judging the financial performance of a business. This is done by calculating fincaical ratios from a firms final accounts and to see whether thier financial performance has improved
Profitabilityratio: examine profit in relation to other figures , such as the ratio of profit to sales revenue
Efficiency ratio: shows how well a firms resources have been used
Liquidity ratio: looks at the ability of the firm to pay its short term liabilites
Current ratio: deals with the firms liquid asset and short term liabilities. It reveals whether a firm is able to use its liquid asstes to pay its short term liabilities.
Acid test ratio ( quick ratio): is similar to the current ratio except it ignores stock
Stock turnover: measures the number of times an organization sells its stock within a certain period
Creditors vs debtors:
Debtor days: measures the number of days it takes the business to collect money from its debetors. Debaters are customers who owe money to the business
Creditors: number of days it takes for a business to pay its creditors
Gearing ratio:
Gearing ratio: is used to asses an organization long term liquidity position. So example if a business has 5M in long term libaility while it’s capital employed is 15M then it hs a 33.33 gearing ratio, so that means that one third of the organzation source of finance comes from external-interest bearing sources. So the higher the gearing ratio, the higher the dependance of borrowing
Formula:
Gross profit margin:
Net profit margin
Effeicny ratio
Capital employed
Current ratio
Acid test
Gross profit margin: gross profit/sales revenue x100
Net profit margin: net profit/ sales revenue x 100
Efficiency ratio: net profit before tax and interest/capital employed x100
Capital employed:= loan capital +share capital +accumulated retained profit
Current ratio: current asstes/ current livabilities
Acid test: current asset-stock/current libalities
The five effinecy ratios are:
The five effinecy ratios are:
Stock turnover: cost of goods sold/ average stock
Debtor days: debtors/cost of goods sold x 365
Creditor days: creditors/cost of goods sold x 365
Gearing ratio; long term libalities/ capital employed x 100
Gearing ratio 2: loan capital /capital employed x 100
Net asset = Equity
Gearing ratios are a group of financial metrics that compare shareholders’ equity to company debt in various ways to assess the company’s amount of leverage and financial stability.
Liquidity:
Three types of current asstes:
Three types of cutrent libailites:
What is working capital (formula)
What is closing balance (formula)
Liquidity: refers to how easily an asset can be turned into cash
Three types of current asstes:Cash, debtors, stock
Three types of cutrent libailites: overdrafts,creditors and tax
Formulas:
working capital = current asstes- current libailites
Closing balance =opening balance +net chad flow
cash flow forecasrt:
Cash inflow
Cash outflow
Net cash flow
Operating balance
Clsoing balance
Cash flow forecast: is a financial document that shows the expected movemnet of cash and out of a business
Cash inflow: refers to the cash that comes into the business
Cash outflow: refers to the cash that leaves the business
Net cash flow; refers to the difference between inflow and outflow
Operating balance: is the amount of cash at the beginning oda trading period
Closing balance: is the amount of money at the end of the trading period
Problems of cash flow; overborring, poor credit
What is an invesmtnet
What is invesmtent appraisal
What is payback period
Average rate of return
What is discounting
Investments refer to the purchase of an asste
Investment appraisal: refers to the techniques used to calculate the financial cost and benefits of an investment desicion
Payback period(PBP): refers to the amount of time needed for the investment project to earn enough money to pay back the initial cost
Average rate of return: calauctes the average profit on an investment project as a percentage of the amount invested
For instance, suppose an investment returns the following annually over a period of five full years: 10%, 15%, 10%, 0%, and 5%. To calculate the average return for the investment over this five-year period, the five annual returns are added together and then divided by 5. This produces an annual average return of 8%
Discounting: is a tool used to convert the future net cash flow to its present value toda, discount factor can represent inflation or interest rates
Liquity ratio, defintinon + types
Liquity ratio looks at the ability of a firm to pays its short term liabilities, such as comparing working capital to short term debts
Current ratio = current assets / current liabilities
Acid test ratio = current assets - stock / current liabilities
Liquity ratio, defintinon + types
Liquity ratio looks at the ability of a firm to pays its short term liabilities, such as comparing working capital to short term debts
Current ratio = current assets / current liabilities
Acid test ratio = current assets - stock / current liabilities
Stock turnover, debtor days, creditor days, gearing ratio,
Stock turnover measures the number of times an organizations sells its stock within a time period
Stock turnover: cost of goods sold/ average stock
Stock turnover (number of days): (cost of goods sold/ average stock ). * 360
Debtors days refer to number of takes it takes a business to collect money from its debtors
Debtor days: debtors/cost of goods sold x 365
Creditor days: creditors/cost of goods sold x 365
Gearing ratio; long term libalities/ capital employed x 100
Gearing ratio 2: loan capital /capital employed x 100
Working capital
Working capital refers to the cash or liquid assets available for the daily running of a business
Working capital = current assets - current libailites
Cash flow forecast
Cash inflow: Refer to the cash that comes into a buseonss
Cash outlfow: refers to the money going out of the bus8ness
Net cash flow: refers to the different between cash inflow and cash outflow
Cash flow forecast:
First row is the dates (janaury feb, etc)
Second row: Opening Balance (Amount of cash at the beginning of a trading period
Third Row: Inflows
4 row - 5 row-6 etc of inflows however much u need
AFter its Total Cash Inflows: Adding all of them:
After its total cash outflows:
Then: Net Cash Flow (don’t put negative sign)
Lastly: Closing balance
Closing balance = Opening balance + net cash flow)
Paypback period:
Refers to the amount of time eneded for an investment to earn enough profit to repay the initial cost of the investment
Formula:
(Inital investment cost / Contriubtion per month )
Example
Inital cost of car = 10000
It brings back 6000 every year, so we divide by 12 to find the amount of contribution it makes per month
10,000 / 6000 (/12) = 20
