Financial Terms Used To Check The Financial Health Of A Business Flashcards
What is a opportunity cost?
A benefit, profit or other advantages that must be given up to acquire or achieve something else.
What are costs?
The expenses a business incurs when producing and supplying products and services to customers.
What is Depreciation?
The cost of an asset consumed over its useful life
What are fixed costs?
These are costs that have to be paid even if the business produces or sells nothing
Give 5 examples of fixed costs
1 - Rent 2 - Office Salaries 3 - Advertising 4 - Insurance 5 - Depreciation
What are variable costs?
These are costs that vary directly with the level of output. If output doubles, the variable costs double. If the output halves, the variable costs halve.
Give 4 examples of a variable cost?
1 - Direct Labour (cost of paying employees involved in production)
2 - Raw Materials
3 - Packaging costs
4 - Royalties paid
What is revenue?
Revenue (also called sales, total revenue or turnover) is the money earned from selling manufactured output, goods purchased or services offered; the total revenue of a business is based on both the level of output and the selling price per unit.
How do you work out revenue?
Selling price X Quantity sold
What is cash flow?
The money going in and out of the business
Give 4 examples of cash inflow
1 - Cash received from selling products/services
2 - Loan receipts
3 - Commission received
4 - Rent received
Give 4 examples of cash outflow
1 - Wages
2 - Insurance
3 - Payments to suppliers
4 - Loan interest
What is net cash flow?
Net cash flow is the difference between cash inflow and cash outflow
What is profit?
The main objective for most businesses- the money left over from revenue after paying total costs
What is a loss?
The deficit of revenue after paying total costs
What does insolvent mean?
When a business is unable to pay its debts
What is break even?
Break even is the point at which the level of sales allows total costs to equal a total revenue; at the break even point a business makes no profit or loss
How do you work out profit?
total revenue - total costs
How do you work out the break even point?
Total fixed costs /contribution per point
What is the margin of safety?
The amount a business sells in excess of its break-even point.
How do you work out the margin of safety (in units)?
Actual output in units - break-even output in units
What is an income statement?
An income statement is produced by a business for a specific period of time. This is usually 12 months and produced at the end of the business’ financial year.
What is gross profit?
Revenue - cost of sales
What is cost of sales?
The total amount the business has paid to create or make available a product or service that has been sold
What is net profit?
Gross profit - expenses
What is an asset?
Resources owned by a business e.g. cash, motor vehicles, premises, machinery
What is a statement of financial position?
resources that are owned by a business. They are used to help the business survive and function
What are the five main assets for a current asset?
1 - Cash in the bank? 2 - Cash in hand 3 - Trade receivables 4 - Inventory 5 - Prepayments
What is a current asset?
Part of a business’ operating cycle and are likely to be converted into cash within a 12 month period.
What are Liabilities?
Liabilities represent the debts owed by an organisation
What are current liabilities?
Amounts falling due within one year that arise through day to day trading.
What are non-current liabilities?
Amounts falling due after one year and will exist for more than 12 months
What is equity?
Equity, or capital, is the term used to describe how much a business is worth.
What is a cash flow forecast?
a management accounting document and a form of budget. The forecast will show when cash is expected to come in to and go out of a business. It is made out of receipts, payments and net cash flow.
What is a cash flow statement?
A financial accounting statement that shows the actual cash inflows and outflows for a business over the previous 12 months.
How does accurate cash flow forecasting help a business?
1 - They can identify problems before they happen
2 - They can plan how to use excess cash
3 - Plan a project with minimal borrowing
4 - support for application for finance
How can cash flow problems be resolved?
1 - Holding less inventory within the business 2 - Improving credit control 3 - Increasing sales levels 4 - Selling non-current assets 5 - Reducing costs
