Finance Flashcards
Start-up capital
Capital needed by an entrepreneur to set up a business
Working capital
Capital needed to pay for raw materials, day-to-day running costs and credit offer to customers
Working capital = current assets - current liabilities
Capital expenditure
Purchase of assets that are expected to last for more than one year. Used to bring income into the business
Revenue expenditure
Spending on all costs and assets other than fixed assets and includes wages, salaries and materials for the stock
Liquidity
The ability of a firm to be able to pay its short-term debts
Liquidation
When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
Overdraft
Bank agrees to a business borrowing up to an agreed limit as and when required
Factoring
Selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – a proportion of the value of debts will be received as cash
Hire purchase
An asset is sold to a company that agrees to pay fixed repayments over an agreed time period
Leasing
Obtaining the use of equipment and paying a rental/leasing charge over a fixed period
Avoids the need for the business to raise long-term capital to buy an asset
Equity finance
Permanent finance raised by companies through the sale of shares
Long-term loans
Loans which do not need to be re-paid for at least one year
Long-term loans/bonds/debentures
Bonds issued by companies to raise debt finance, often with a fixed rate of interest
Rights issue
Existing shareholders are given the right to buy additional shares at a discounted price
Venture capital
Risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to guide finance from other sources
Micro finance
Providing financial services for poor and low income customers who do not have access to banking services such as loans/overdraft
Crowdfunding
Use of small amounts of capital from large numbers of individuals to finance a new business venture
Business plan
Detail document giving evidence about a new/existing business that aims to convince external lenders and investors to extend finance
Direct cost
Costs which can clearly be identified with each unit of production and can be allocated to a cost centre
Indirect costs
Costs that cannot be identified with a unit of production/allocated accurately to a cost centre
Fixed cost
Costs that do not vary with output in the short run
Variable cost
Costs that vary with output
Marginal cost
Extra cost of producing one more unit of output
Break even point
Level of output at which total costs equal to total revenue – neither a profit or a loss is made
Margin of safety
Amount by which the sales level exceeds the breakeven level of output
Contribution per unit
Selling price – variable cost per unit
Income statement
Records the revenue, costs and profit/loss of a business over a given period of time
Gross profit
Sales revenue – cost of sales
Revenue
Total value of sales made during the trading period
Cost of sales
Direct costs of goods that are sold during the financial year
Operating profit/Net profit
Gross profit – overhead expenses
Profit for the year
Net profit – interest costs and corporation tax
Dividends
The share of the profits paid to shareholders as a return for investing in the company
Retained earnings
Profit left after all deductions, including dividends
Low quality profit
Once off profit that cannot easily be repeated or sustained
High quality profit
Profit that can be repeated and sustained
Statement of financial position
Accounting statement that records the values of a business assets, liabilities and shareholders equity at one point in time
Shareholders equity
Total value of assets – total value of liabilities
Share capital
Value of capital raise from shareholders by the issue of shares
Intangible asset
An assets value that do not have physical presence
Goodwill
Arises when a business is valued at or sold for more than the balance sheet value of its assets
Cash flow statement
Record of the cash received and outflow over a period of time
Gross profit margin
Gross profit
Sales revenue. X100
High margin = high gross profit
Profit margin
Net profit
Sales revenue. X100
High margin = high net profit
Operating/net profit margin
Net profit
Sales revenue. X100
Liquidity
The ability of a firm to pay short-term debts
Current ratio
Current assets. : Current liabilities
Current liabilities. Current liabilities
Should be 1.5/2:1
Acid test ratio
Current assets – inventory. : Current liabilities
Current liabilities. Current liabilities
Should be 0.5/1:1
Window dressing
Presenting the company accounts in a favourable light – to flatter the business performance
~ selling assets right before releasing account
~ reducing depreciation
Cash flow
Sum of cash payments to business – sum of cash payments
Insolvent
Business is unable to meet its short-term debts
Cash flow forecast
Estimate of a firms future cash inflows and outflows
Net monthly cash flow
Estimation of a firms future from its inflows and outflows
Opening cash balance
Closing cash balance
Cash held by the business at the start of the month
Cash held by the business at the end of the month; to become the next months opening balance
Credit control
Monitoring of debts to ensure that credit period are not exceeded
Bad debt
Unpaid customers bills which are unlikely to ever be paid
Overtrading
Expanding a business rapidly without obtaining all of the necessary finance so that a cash flow shortage develops
Return on capital employed – ROCE
Measures efficiency of capital to generate profit
Net profit
Capital employed. X100
Semi variable cost
Includes elements of both fixed and variable costs
Trade credit
Delaying payments of bills for goods/services received
