financial performance definitions Flashcards
adverse variance
actual profit turns out to be lower than the budgeted profit (due to costs higher than target or revenue lower than target)
assets
items of value eg. land machinery, cash
balance sheet
statement of an organisations assets and liabilities at one point in time, shows the value of the company.
- net assets must balance with total equity
break-even output
the quantity of output at which total revenue just equals total costs
budget
financial plan which states future expected costs and revenue.
budgets = targets rather than forecasts
budgeting
try to keep within or below a certain level of spending
capital expenditure
spending on new non-current assets typically machinery
capital structure
the way in which a business raises finance to purchase assets, how much from shares an how much from loans
(gearing show proportion)
contribution definition
how much money is left over from the sale of a product, after variable costs have been deducted, that can be used to pay off the fixed costs
contribution per unit
definition
the amount each unit sold contributes towards covering the fixed costs
contribution per unit equation
contribution per unit = price - variable cost per unit
current assets
items of value owned by a business that are likely to be turned into cash within one year. eg cash, inventories and recievables
current liability
debts scheduled for repayment within one year eg oak overdraft
current ratio definition
measurement of the level of liquidity
wether there are enough liquid assets to pay for imminent bills. should be 1.5:1
current ratio equation
current assets (cash + inventories + receivables) / current liabilities (trade payables and other current liabilities)
debt factoring
a business sells its receivables (invoices) to a third party at a discount. may solve cash flow issues
direct costs
includes raw materials direct labour and all expenses directly involved with production
external source of finance
funding that comes from outside the business eg new share issue, bank loan / overdraft and venture capital
favourable variance
when the actual profit is higher than the budgeted profit. due to lower costs than budgeted or more revenue than budget
financial decision making
strategies chosen to help improve cash flow, gearing, profitability or profits
financial efficiency ratios
way of measuring how well an organisation manages its working capital
- inventory turnover
- payables days
- receivables days
financial objectives
monetary goals that a business sets itself usually a set target in a certain time
gearing definition
measure of the extent to which a firms capital is financed using long term loans. 25% - 50% is best
gearing equation
gearing (%) = non current liabilities / total equity + non current liabilities (or capital employed)
X100
going into administration
court appoints accountants to run a business after being declared insolvent + unable to pay its liabilities
gross profit definition & equation
excess of revenue over the cost of sales, expenses have not yet been deducted
gross profit = revenue - direct costs
gross profit margin definition & equation
shows gross profit as a percentage of turnover
gross profit margin = gross profit / turnover X100
income statement
an account that shows the income and expenditure (profit and loss) of a firm over a set time span, usually 1 year
insolvent
a company with little hope of being able to pay its debts, will be taken over by an official receiver who’s purpose is to pay as many of the creditors as possible
internal source of finance
funding that comes from the business owners eg personal funds, retained profit or sales of company assets
inventory
stocks of raw materials, work in progress and finished goods
inventory turnover definition
a ratio that shows how many times a business sells its stock in a year. higher number = better, stock sold quicker
inventory turnover equation
inventory turnover = cost of goods sold / average inventory held
liabilities
debts owed eg trade credit, long term loans
liquidation
turning all the business assets into cash and usually paying off all liabilities when a business closes down
liquidity
ability of a firm to meet its short term debts, cash or assets that can be quickly turned into cash needed
loan
sum of money that is borrowed and payed back with interest
long term funding
finance raised the does not have to be paid within the next year
margin of safety definition & equation
the quantity by which sales may fall before a firm incurs losses
safety margin = demand - break even output
net assets definition
shows the value of a company, also amount of money that belongs to shareholders after all the debts are paid
- remaining value in a company after all debts are paid
net assets equation
net assets = total assets - total liabilities
net current assets definition
amount of spare liquid assets once current liabilities have been taken into account
net current assets equation
net current assets = current assets - current liabilities
operating profit definition
profit generated by the ongoing business
operation profit equation
operating profit = gross profit - indirect costs
operating profit margin definition & equation
percentage of sales revenue that is operating profit
= operating profit / sales X100
overdraft
borrowing facility in which any amount up to an agreed limit can be used
bank allow individual / business to spend more than is in there account up to an agreed limit for a set time, often a fee and high interest rates
overhead
aka direct costs, costs not generated by the production process eg rent, heating
overtrading
expanding beyond the level at which here is a safe level of cash. tends to cause cash outflow before cash from revenue returns
risk that this will lead to liquidation despite strong sales
payables
debts owed to a business, usually current liabilities eg suppliers
payables (creditors) days definition & equation
measure of the average number of days taken to pay suppliers
= payables / cost of sales X365
profit for the year definition and equation
total profit that the firms owners can do what they like with
= operating profit + interest received - interest paid - tax on profits
profit for the year definition & equation
the percentage of revenue tat is profit for the year
= profit for the year / turnover X100
profitability
measure of financial performance that compares a businesses profits to other factors eg revenue or capital employed
- more helpful measure than profit, measures against rivals
receivables
the amount owing to a firm from debtors (a current asset)
receivables (debtor) days definition & equation
number of days it takes to convert receivables into cash, ie get debtors to pay. lower number = better
receivables / revenue X365
retained profits
value of all the profit over all the years that has been kept for use by the company and not given as dividends
return on capital employed definition & equation
shows the return on investment and how efficiently management uses capital to generate profits
higher the better
= operating profit / total equity + non current liabilities X100
return on investment definition & equation
a measure f how profitable a particular project may be as a percentage of the individual investment
= return on investment / cost of investment X100
share capital
amount of money invested into the business by the shareholders
total contribution definition & equation
the difference between total revenue and total variable costs
= total revenue - total variable costs
total equity (total shareholders funds) definition & equation
the money belonging to hr shareholders which comes from the original share purchase plus retained profit occurring as a result of the firms activities
= share capital + retained profit
variance definition & equation
compares the actual outcome with the budgeted one
= actual figure - budgeted figure
venture capital
investment funding for small or medium sized businesses taking risks often in the form of loans / share investment from institutions or business angels
window dressing
presenting accounts in a way that makes the accounts look healthier than they actually are
working capital (net current assets) definition & equation
day to day finance used in a business
= current assets - current liabilities
