Glossary Unit 5 Flashcards
Adverse Variance
The actual profit turns out to be lower than the budgeted profit. This is due to costs being higher than targeted or revenue being lower than target.
Assets
are items of value e.g. land, machinery, cash
Balance Sheets
A statement of an organisations assets and liabilities at one point in time and shows the value of the company. Net assets must balance with total equity. The balance sheet also shows where the finance came from (liabilities) must equal where it is now (in what form of asset).
Break Even Output
The quantity of output at which total revenue just equals total costs.
Budget
A financial plan, which states future expected costs and revenue. It may be used by management to keep control of business profitability. Budgets are targets rather than forecasts.
Budgeting
making a budget, but also it could mean try to keep within or below a certain level of spending
Capital expenditure
Spending on new non-current assets typically plant and machinery.
Capital Structure
The way in which a business raises finance to purchase assets; notably how much from shares and how much from loans. Gearing shows the proportion of each. A business is highly geared when over half of its borrowing comes from external loans.
Capital structure objectives
Raising finance in a cheap way, that provides sufficient funds for survival and expansion.
Contribution
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
the amount each unit sold contributes towards covering the fixed costs.
Contribution per unit = Price - Variable cost per unit
Current Asset
Items of value owned by a business that are likely to be turned into cash within one year. These are typically cash, inventories and receivables.
Current Liability
debts scheduled for repayment within one year e.g. bank overdraft,
Current Ratio
A measurement of the level of liquidity in particular as to whether there are enough liquid assets to pay for imminent bills. Should be around 1.5:1
Current ratio = Current assets (cash + inventories + receivables) /
Current liabilities (trade payables and other current liabilities)
Debt Factoring
a business sells its receivables (i.e. invoices) to a third party (called a factor) at a discount. This may provide cash to meet its current needs
Direct Costs
(aka Cost of sales) includes raw materials, direct labour and all expenses directly involved with production. Direct sales are expenditures that can be clearly allocated to a particular product or area of the business.
External Source of Finance
Funding that comes from outside of the business e.g. new share issue, bank loan, overdraft and venture capital.
Favourable Variance
describes the situation where the financial outcome is better than budgeted for. This may be due to lower cost than budget or more revenue than budget.
Financial Decision Making
Strategies chosen to help improve cash flow, gearing, profitability or profits.
Financial Efficiency Ratios
A way of measuring how well an organisation manages its working capital. It includes inventory turnover, payables days and receivable days.
Financial objectives
are monetary goals that a business sets itself usually a set target in a certain time. These include cost minimisation, levels of profit – measured in £ (or the local currency), levels of profitability -measured as a % , cash flow, safe levels of gearing and sound capital structure, return on investment
Gearing
a measure of the extent to which a firm’s capital is financed using long-term loans. Long-term loans may include debentures, compulsory interest bearing sources or simply bank loans.
GEARING (%) = NON-CURRENT LIABILITIES X 100 /
TOTAL EQUITY + NON-CURRENT LIABILITIES (OR CAPITAL EMPLOYED)
Between 25% and 50% is best. If this ratio is above 50% it is highly geared. If the ratio is below 25% the firm has low capital gearing.
Going into administration
A court appoints accountants to run a business after it has been declared insolvent and unable to pay its liabilities. There is hope that the business can be turned around and have a future as a going concern.
Gross Profit
is the excess of revenue over the cost of sales. This measurement of profit has not yet deducted expenses. GROSS PROFIT = REVENUE – DIRECT COSTS
Gross Profit Margin
shows the gross profit as a percentage of turnover.
GROSS PROFIT MARGIN= Gross profit x100 Turnover
Income Statement
an account that shows the income and expenditure (and thus the profit and loss) of a firm over a set time span usually one year.
Insolvent
A company with little hope of ever being able to pay its debts. An insolvent company will be taken over by an Official Receiver whose purpose is to pay as many of the creditors as possible.
Internal Source of Finance
Funding that comes from the business owners e.g. personal funds, retained profit or sales of company assets.
Inventory
stocks of raw materials, work-in-progress and finished goods
Inventory Turnover
a ratio that shows how many times a business sell its stock in a year. A higher number is better as it means stock is sold quicker and income is brought into the company faster. The number varies from industry to industry.
INVENTORY TURNOVER (STOCK TURNOVER) = COST OF GOODS SOLD / AVERAGE INVENTORIES HELD
Liabilities
debts owed e.g. 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. This involves the availability of cash or assets that can quickly be turned into cash.
Loan
sum of money that are borrowed and paid back with interest.
Long Term Funding
Finance raised that does not have to be repaid in the next year
Margin of Safety
Finance raised that does not have to be repaid in the next year
Net Assets
shows the value of the company, which is also the amount of money that belongs to the shareholders after all the debts are paid. It is all the fixed and current assets minus all the current liabilities and non-current liabilities so shows the remaining value in a company after all debts have been paid.
NET ASSETS = TOTAL ASSETS – TOTAL LIABILITIES
NET CURRENT ASSETS (Working capital)
The amount of spare liquid assets once current liabilities have been taken into account.
NET CURRENT ASSETS = CURRENT ASSETS – CURRENT LIABILITIES
Operating Profit
(trading profit) is the profit generated by the ongoing business.
Operating profit = gross profit – indirect costs
Operating Profit Margin
The percentage of sales revenue that is operating profit.
OPERATING PROFIT MARGIN = OPERATING PROFIT X 100 / SALES (I.E. REVENUE)
Overdraft
a borrowing facility in which any amount up to an agreed limit can be used. A bank allows an individual or business to spend more than is in their account up to an agreed limit for a set time and cost Often there is a fee and high interest rates.
Overhead
Costs not generated by the production process. It is also known as indirect costs e.g. rent, heating.
Overtrading
Expanding beyond the level at which there is a safe level of cash. Growing tends to cause cash outflow for materials and wages before cash from revenue returns. There is a risk this will lead to liquidation despite strong sales.
Payables
debts owed by a business. E.g. to suppliers They are usually current liabilities
Payables Days (Creditor Days)
a measure of the average number of days taken to pay suppliers. The average for all FTSE firms is 44 days.
PAYABLES DAYS = PAYABLES X 365 / REVENUE
Profit for the year
the total profit that the firm’s owners can do what they like with. i.e. attributed to the shareholders.
PROFIT FOR THE YEAR = OPERATING PROFIT + INTEREST RECEIVED – INTEREST PAID – TAX ON PROFITS
Profit for the year margin
The percentage of revenue that is profit for the year.
Profit for the year margin = Profit for the year x 100 / Turnover
Profitability
is a measure of financial performance that compares a business’s profits to some other factors such as revenue or capital employed so profitability is usually measured as a %. Profitability is usually a more helpful measure than profit when trying to assess how well the business has done against its rivals.
Receivables
The amount owing to a firm from debtors. Receivables is a current asset (along with cash and inventory) .
RECEIVABLES DAYS (DEBTOR DAYS)
The amount owing to a firm from debtors. Receivables is a current asset (along with cash and inventory) .
RECEIVABLES DAYS = RECEIVABLES X 365 / REVENUE
Retained profit
the value of all the profit over all the years that has not been given out to shareholders in the form of dividends but kept for use by the company
Return on capital employed
shows the return on an investment and how efficiently management uses capital to generate profits. The higher the ROCE figure the better. A ROCE of 20% means that for every pound invested a profit of 20p is earned. The % ROCE should be higher than that of current interest rates which is a safer investment.
Return on Capital Employed % (ROCE) = Operating profit x 100 / Total equity + non-current liabilities
Alternatively ROCE = Operating profit x 100 / Capital employed
Return on investment
A measure of how profitable a particular project may be as a percentage of the original investment.
Return on Investment (%) = Return on investment (£) x100 / Cost of the investment (£)
Share Capital
the amount of money invested into the business by the shareholders. The shareholders cannot reclaim their money from the firm, but can sell their shares to another party.
Total contribution
the difference between total revenue and total variable costs.
TOTAL CONTRIBUTION = TOTAL REVENUE - TOTAL VARIABLE COSTS
Total Equity (total shareholder funds)
the money belonging to the shareholders which comes from the original share purchase plus retained profit occurring as a result of the firm’s activities.
TOTAL EQUITY = SHARE CAPITAL + RETAINED PROFIT.
Variance
compares the actual outcome with the budgeted one. The term “favourable variance” describes outcomes that produce a better than planned profit e.g. negative cost variance (less cost than planned) or a positive revenue variance (more sales than planned.)
VARIANCE = ACTUAL FIGURE - BUDGETED FIGURE
Venture Capital
compares the actual outcome with the budgeted one. The term “favourable variance” describes outcomes that produce a better than planned profit e.g. negative cost variance (less cost than planned) or a positive revenue variance (more sales than planned.)
VARIANCE = ACTUAL FIGURE - BUDGETED FIGURE
Window Dressing (Creative accounting)
presenting the accounts in a way that make the accounts look healthier than they really are. Window dressing puts the facts in the best light and in some cases may be legal, but it can also fraudulently deceive
Working Capital (Net current assets)
the day to day finance used in a business.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
