Important Definitions Financing Flashcards
Break-even output
The level of output at which the company is making no profit or loss; where total revenue = total costs
Business Angel
An affluent individual who is willing to invest in the business for a high return.
Capital expenditure
The spending on fixed/non-current assets, property equipment ect.
Cash flow forecast
The process of estimating the size and timing of cash inflows and outflows within a business
Contribution
The amount that each unit contributes towards covering fixed costs. Selling price - variable costs
Cost centre
Sectors of the business of which costs can be attributed to
Creditors
Suppliers who the business has brought goods from and whom the business has yet to pay.
Debt factoring
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.
Debtors
Customers of which have brought money on credit and are yet to pay.
Direct Costs
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.
Dividends
A percentage of the profits of a business which is paid to shareholders as a reward for their investment
Fixed costs
Costs which do not change in proportion to output in the short term.
Indirect costs
A cost not directly attributed to a cost centre or production line e.g administration.
Interest
The cost of borrowing funds and the return to savers
Limited Company
A form of ownership in which the owners have limited liability
Limited liability
An investors financial commitment is limited to the total amount invested int he business
Liquidity
The ability of a firm to meet its short term liabilities. Measured by comparing current assets with current liabilities.
Liabilities
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.
Margin of safety
The difference between actual output and breakeven output.
Opportunity cost
The value of the next bets alternative forgone when a decision is made.
Overtrading
The rapid growth of a business which places a significant burden on a firm to meet its debts
Profit centre
The part of a business of which costs and revenue can be allocated.
Sole trader
An individual who runs their own business.
Sensitivity analysis
The technique which is used to try and reduce the uncertainty in decision making.
Variable costs
These costs change as a result in the changes in output e.g raw materials.
Revenue
Selling Price x Quantity
Profit
Revenue - Costs
Contribution
Selling Price - Variable Costs
Break Even Output
Fixed Costs ÷ Contribution
Margin of Safety
Current Output - Breakeven Output
Gross Profit
Revenue - Variable Costs
Net Profit
Revenue - (Fixed Costs + Variable Costs)
Net Profit Margin
Net Profit ÷ Revenue x 100
Return on Capital Employed
Net Profit ÷ Capital Employed
Loan Capital (Overdraft)
Where a business can withdraw out more money than what is in their account to an agreed limit.
Loan Capital (Bank Loan)
A sum of money lent for a fixed period of time.
Share Capital
Where one asks for an investor into the business for a share of the business.
Venture Capitalist
Professional investor in return for shares of the business.
Total Profit
Total Contribution - Fixed costs
