Key Terms Flashcards
Economic variables
Features of an economist which have effects on business and consumers eg unemployment, inflation and exchange rates
Internal finance
The raising of capital from within the business eg business/owner’s capital, personal savings, retained profit
Owner’s capital
A source of (internal) finance provided by the owner of a business
Retained profit
Profit is re-invested back into the business which is not paid as a dividend. It is an internal source of finance.
Sale of assets
A type of internal finance, involves selling resources that belong to the business
Bank loan
An external method of finance borrowed from a bank paid back, with interest (over a period of time)
Business angels
Individuals who invest in a business in exchange for a stake in the business (shares)
Crowd funding
An external source of finance where a large number of individuals provide funding for a business or project in return for shares
External finance
Money raised from outside the business
Grant
A sum of money given by a government or other organisation. It does not need to be repaid and no interest is charged.
Leasing
A contract to acquire the use of resources such as property or equipment
Loan
An external source; amount of money borrowed, usually repayable after a fixed term of more than 12 months
Overdraft
When a business has a negative balance in their bank account because the amount withdrawn is greater than the current balance
Peer-to-peer funding
When a person lends money to other individuals or businesses via online transactions
Share capital
The finance raised a business selling of new shares
Trade credit
Where a firm receives stock from a supplier, which it does not have to pay for until later
Venture capital
External source of finance when the business issues shares to a small number of investors in return for a capital injection into the company
Liability
A liability is an obligation to pay another person
Limited liability
The obligation of a shareholder for the debts of a business is limited to the value of their investment
Unlimited liability
The obligation of a business owner to cover all the debts of the business
Business plan
A document giving details of a variety of aspects about the business in order to provide a strategic look at the business and to attract investors. It contains details such as the product, costs, revenues, cashflow forecasts
Cash flow
The movement of cash into and out of a business over a period of time
Cash inflow
The flow of cash into a business over
Cash outflow
The flow of cash out of a business over
Cash-flow forecasts
The predicted flow of cash into and out of a business over a period of time
Closing balance
Cash left in the account at the end of the month. Net Cash Flow + Opening Balance
Net cashflow
The difference between cash flowing in and out of a business over a period of time. Cash Inflow - Cash Outflow
Opening balance
Cash in the bank on the first day of the month
Consumer trends
Habits or behaviour of those involved in the use of goods and services
Economic uncertainty
Where consumers are unable to predict their future sales and costs
Sales forecast
A prediction of the expected level of sales volume for a business for a future period
Average cost
The cost of producing one unit. Total Costs / Output
Fixed costs
Costs that do not change when output changes
Revenue
The amount of income for a business generated from its sales. Selling Price x Quantity
Sales revenue
Selling Price x Sales Volume
Total costs
Total fixed costs plus total variable costs
Variable costs
Costs that vary according to the level of outout
Break-even
The level of output where the total revenue is equal to the total cost. Fixed Costs / Unit Contribution
Unit contribution
Selling Price - Variable Cost Per Unit
Margin of safety
The difference between the current or planned level of output and the break-even level of output
Adverse variance
Negative variance eg higher costs than budget
Budget
A financial plan of income and expenditure prepared in advance
Favourable variance
Positive variance eg lower costs than budget
Historical budgeting
A budget based upon previous financial figures
Variance analysis
Shows the difference between budgeted and actual figures and can be calculated at the end of a financial period, once actual figures are known
Zero based budget
A type of budget where no money is allocated for spending unless it has firstly been justified
Cash
An asset of a business which can come from investors, lenders or customers
Cost of sales
The cost of inventory bought or produced
Gross profit
Revenue - cost of sales
Gross profit margin
Gross profit/Sales revenue x100
Operating profit
Gross profit - other operating expenses
Operating profit margin
Operating profit/Sales revenue x100
Profit
Is recorded straight away after sales. Total revenue - total costs
Profit for the year margin
Net profit/Sales revenue x100
Profit for the year / net profit
Operating profit - interest
Profitability
Profit as a proportion of sales
Statement of comprehensive income
A document to show income and expenditure of a business over a financial year
Tax
A charge made by governments on activities, earnings and income of individuals and businesses
Acid test ratio
Current assets-Inventory/Current liabilities
Assets
Valuable things that a business can use
Capital
Cash put into the business by the owner
Current assets
Liquid assets, those assets that will be converted into cash within 12 months e.g. inventories, trade receivables and cash
Current liabilities
Debts owed by a business that must be repaid within one year
Current ratio
Current assets/Current liabilities
Liabilities
Debts owed by a business to lenders and suppliers
Liquidity
The ability to pay bills in cash when they fall due or The ability to meet current liabilities with current assets
Net assets
Total assets - Total liabilities
Non current assets
Long term resources that will be used by the business for more than one year e.g. Property and equipment
Non current liabilities
Debts owed by the business for more than one year e.g. Loans
Shareholders equity
The value of the shareholders’ investment in a business
Statement of financial position / balance sheet
A summary at a particular point in time of the value of a firm’s assets, liabilities and equity
Total equity
Share capital + Retained profit or, owner’s capital + retained profit less drawings
Working capital
Working capital is the difference between the current assets and current liabilities of the business. It gives some indication of the
liquidity level within the business.
External causes for business failure
The factors outside the control of a business which might cause it to fail, e.g. competition, legislation, customer tastes and economic conditions
Financial factors for business failure
Factors which may contribute to a business running out of cash, e.g. late payments, inability to borrow
Internal causes for business failure
Factors which a business can control e.g. poor decision-making, loss of key staff
Non financial factors for business failure
Can come from inside or outside the business e.g. poor management, external shocks
Overtrading
The situation where a business does not have enough cash to support its production and sales, usually because it is growing too fast
