unit 3 finance Flashcards
start-up capital
capital needed by an entrepreneur to set up a business
working capital
the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers
management buy-out
the existing managers of a business purchase it from the owners to take full control
internal finance
raised from the business’s own assets or from profits left in the business (retained profits)
external finance
raised from sources outside the business
internal sources of finance
- retained profit
- owner’s savings
- managing working capital
- sale of unwanted or non-current assets
external sources of finance
short term: to be repaid within 12 months
- bank overdraft
- trade credit
medium term: to be repaid within 5 years
- medium term bank loan
- hire purchase
- leasing
long term: to be repaid after 5 years
- long term bank loan
- share capital
- debentures
- business mortgage
- grants
- venture capital
- business angel
- crowd funding
- microfinance
retained profit
the profit left after all deductions, including dividends, have been paid this is reinvested back into the business as a source of finance
liquidity
the ability of a business to pay its short-term debts
bank overdraft
an arrangement with a bank that their customer can withdraw up to an agreed limit from their account as and when required, this is a form of borrowing
trade credit
delaying the payment of bills to suppliers or creditors for goods or services in order to improve the business’s liquidity position
bank loan
a fixed sum of money lent by a bank to a business or individual, which must be repaid over an agreed time period with interest
hire purchase
an asset is sold to a company which agrees to make fixed repayments over an agreed time period, the asset belongs to the company once the final payment is made
leasing
obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. this avoids the need for the business to raise long-term capital to buy the asset, ownership remains with the leasing company
equity finance/share capital
permanent finance raised by the company through sale of shares
debentures
bonds issued by companies to raise debt finance, often with a fixed rate of interest
grants
financial assistance provided by the government or other organizations to businesses or individuals, typically without the requirement of repayment.
venture capital
a source of finance provided by individuals or firms to small or medium-sized businesses with high risk and high growth potential, often in exchange for equity or significant returns.
business angel
an individual, usually with business experience, who directly invests part of their wealth in new and growing businesses
crowdfunding
usually small sums of capital from a large number of individuals to finance a new business venture
microfinance
the provision of very small loans by specialist finance businesses, usually not traditional commercial banks
variable costs
costs that vary with output
fixed costs
costs that do not vary with output or sales in the short term
direct costs
costs that can be clearly identified with each unit of production and can be traced back or allocated to a cost centre
indirect costs
costs which cannot be identified with a unit of production or allocated accurately to a cost centre, also known as overhead costs
revenue stream
a source of income received over time from the sale of a product
total revenue
total income from the sale of all units of a product during a given time period
examples of revenue streams
- advertising
- sponsorships
- merchandise
- franchise costs and royalties
- dividends from other companies
final accounts
the end of year financial accounts produced by a business
creditors
suppliers to a business who have not yet been paid
window dressing
presenting the accounts of a business in the best possible way which could potentially mislead users of accounts
dividends
the share of the profits paid to shareholders as a return for investing in the company
balance sheet
an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time
shareholders’ equity formula
total value of assets minus total value of liabilities
current assets
the value of assets that could reasonably be expected to be converted into cash within one year
debtors
customers who have bought goods on credit and will pay cash at an agreed date in the future
current liabilities
debts of the business that will usually have to be paid within one year
shareholders’ equity
total value of capital invested in the business by shareholders either in the form of share capital or retained profits
intangible asset
an identifiable non-monetary asset without physical substance
non-physical, non-current assets that can earn revenue for the business
goodwill
arises when a business is valued at or sold for more than the balance sheet value of its assets
intellectual property
an intangible asset that has been developed from human ideas and knowledge
liquidity
the ability of a business to pay back its short term debts
profitability
a relative measure of a business’s ability to make a profit from sales or a capital investment
profit margin
this ratio compares operating profit with revenue
gross profit margin
this ratio compares gross profit (profit before deduction of expenses) with revenue
gross profit margin formula
gross profit/sales revenue x100
profit margin formula
profit before interest and tax/sales revenue x100
return on capital employed
compares operating profit and the capital employed in the business
return on capital employed formula
profit before interest and tax/ capital employed x100
capital employed
the total value of all long-term finance invested in the business= non-current liabilities + equity
current ratio
compares current assets to current liabilities of a business
current ratio formula
current assets/current liabilities
acid test ratio
compares liquid assets of a business with its current liabilities
acid test ratio formula
current assets-stock/current liabilities
cash flow
the sum of cash payments to a business less the sum of cash payments from the business
cash outflow
payments in cash made by a business, such as those to suppliers and workers
cash inflows
payments in cash received by a business, such as those from customers (debtors) or from the bank
net cash flow
the sum of cash payments to a business minus the sum of cash payments from the business
credit control
monitoring of debts to ensure that credit periods are not exceeded
bad debt
unpaid customers’ bills that are now very unlikely ever to be paid
overtrading
expanding a business rapidly without obtaining all the necessary finance so that a cash flow shortage develops
investment appraisal
evaluating the profitability and desirability of an investment project
accounting rate of return/average rate of return
measures the annual profitability of an investment as a percentage of capital cost
average rate of return formula
average annual profit/capital cost x100
average annual profit
(total returns-capital cost)/number of years
criterion rate
the minimum accounting rate of return that a business would accept before approving an investment
payback period
the time it takes for an investment project to earn enough profit to repay the inital cost of the investment
payback period formula
capital cost/contribution per month
