Important Definitions Financing

Question 1

Break-even output

Answer 1

The level of output at which the company is making no profit or loss; where total revenue = total costs

Question 2

Business Angel

Answer 2

An affluent individual who is willing to invest in the business for a high return.

Question 3

Capital expenditure

Answer 3

The spending on fixed/non-current assets, property equipment ect.

Question 4

Cash flow forecast

Answer 4

The process of estimating the size and timing of cash inflows and outflows within a business

Question 5

Contribution

Answer 5

The amount that each unit contributes towards covering fixed costs. Selling price - variable costs

Question 6

Cost centre

Answer 6

Sectors of the business of which costs can be attributed to

Question 7

Creditors

Answer 7

Suppliers who the business has brought goods from and whom the business has yet to pay.

Question 8

Debt factoring

Answer 8

The sale of a businesses invoices to a third party. Business is charged for processing the invoices and the business selling the invoices receives 80-90% of the invoice value.

Question 9

Debtors

Answer 9

Customers of which have brought money on credit and are yet to pay.

Question 10

Direct Costs

Answer 10

Any cost which can be directly attributed to a cost centre or production of any good/service of a particular good e.g raw materials.

Question 11

Dividends

Answer 11

A percentage of the profits of a business which is paid to shareholders as a reward for their investment

Question 12

Fixed costs

Answer 12

Costs which do not change in proportion to output in the short term.

Question 13

Indirect costs

Answer 13

A cost not directly attributed to a cost centre or production line e.g administration.

Question 14

Interest

Answer 14

The cost of borrowing funds and the return to savers

Question 15

Limited Company

Answer 15

A form of ownership in which the owners have limited liability

Question 16

Limited liability

Answer 16

An investors financial commitment is limited to the total amount invested int he business

Question 17

Liquidity

Answer 17

The ability of a firm to meet its short term liabilities. Measured by comparing current assets with current liabilities.

Question 18

Liabilities

Answer 18

A company’s legal debts/obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services.

Question 19

Margin of safety

Answer 19

The difference between actual output and breakeven output.

Question 20

Opportunity cost

Answer 20

The value of the next bets alternative forgone when a decision is made.

Question 21

Overtrading

Answer 21

The rapid growth of a business which places a significant burden on a firm to meet its debts

Question 22

Profit centre

Answer 22

The part of a business of which costs and revenue can be allocated.

Question 23

Sole trader

Answer 23

An individual who runs their own business.

Question 24

Sensitivity analysis

Answer 24

The technique which is used to try and reduce the uncertainty in decision making.

Question 25

Variable costs

Answer 25

These costs change as a result in the changes in output e.g raw materials.

Question 26

Revenue

Answer 26

Selling Price x Quantity

Question 27

Profit

Answer 27

Revenue - Costs

Question 28

Contribution

Answer 28

Selling Price - Variable Costs

Question 29

Break Even Output

Answer 29

Fixed Costs ÷ Contribution

Question 30

Margin of Safety

Answer 30

Current Output - Breakeven Output

Question 31

Gross Profit

Answer 31

Revenue - Variable Costs

Question 32

Net Profit

Answer 32

Revenue - (Fixed Costs + Variable Costs)

Question 33

Net Profit Margin

Answer 33

Net Profit ÷ Revenue x 100

Question 34

Return on Capital Employed

Answer 34

Net Profit ÷ Capital Employed

Question 35

Loan Capital (Overdraft)

Answer 35

Where a business can withdraw out more money than what is in their account to an agreed limit.

Question 36

Loan Capital (Bank Loan)

Answer 36

A sum of money lent for a fixed period of time.

Question 37

Share Capital

Answer 37

Where one asks for an investor into the business for a share of the business.

Question 38

Venture Capitalist

Answer 38

Professional investor in return for shares of the business.

Question 39

Total Profit

Answer 39

Total Contribution - Fixed costs