Financial Terms & Calculations Flashcards
What are Costs?
Costs are all of the expenses that a business incurs (pays). This involves everything from wages paid to employees to the electricity bills at the business’ premises.
How do we calculate total costs?
Fixed costs + variable costs
What are fixed costs?
Fixed costs don’t vary as the company changes its output. e.g insurance, office rent, fixed employee salaries.
Note that fixed costs can increase as the company grows.
What are variable costs?
- Variable costs are the costs that change directly with output (they change as a company changes output).
- Examples include the wages paid for factory labour, raw materials and transport costs.
What is profit?
The amount of money that the business makes, when taking into account costs.
How calculate profit?
Profit = total revenue - total costs
How do we calculate average unit cost?
Average unit cost = total cost/output (total number of units produced)
What does the business need to ensure regarding average unit cost in order to make profit?
They need to charge a price that is more than the average unit cost.
How do we calculate interest?
Interest = interest rate x the size of the loan
What is Average rate of return (ARR)?
It is a way of measuring how good an investment project is for a business.
The higher the ARR is…
…the better a project is for a business.
What is the equation for ARR?
ARR = ((Total net profit ÷ Project length) ÷ Initial Investment) x 100
What is the break even point?
The amount of sales when a business’ revenue is equal to the total costs of a business. At this point, the business is not making a profit or a loss.
What is the margin of safety?
- How much output (or predicted output) would have to fall by until the business reached the break-even level of output..
- The margin of safety is the gap between the actual output and the break-even point.
