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BUSINESS > Unit 5 Definitions - Financial Performance > Flashcards

Unit 5 Definitions - Financial Performance Flashcards

1
Q

adverse variance

A

the actual profit turns out to be lower than the budgeted profit. This is due to costs being higher than targeted or revenue is lower than the target

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2
Q

assets

A

are items of value e.g land, machinery, cash

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3
Q

balance sheet

A

a statement of an organisation’s assets and liabilities at one point in time and shows the value of the company. Net assets must balance total equity. The balance sheet also shows where the finance came from (liabilities) must equal where it is now (in what form of the asset)

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4
Q

break even output

A

the quantity of output at which total revenue just equals total costs

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5
Q

budget

A

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

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6
Q

budgeting

A

making a budget, but also it could mean trying to keep within or below a certain level of spending

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7
Q

capital expenditure

A

spending on new non-current assets typically plant and machinery

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8
Q

capital structure

A

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

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9
Q

capital structure objectives

A

raising finance in a cheap way, that provides sufficient funds for survival and expansion

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10
Q

contribution

A

how much money is leftover from the sale of a product after variable costs have been deducted that can be used to pay off the fixed costs

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11
Q

contribution per unit

A

the amount each unit sold contributes towards covering the fixed costs

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12
Q

the equation for contribution per unit

A

price - variable cost per unit

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13
Q

current assets

A

items of value owned by a business that is likely to be turned into cash within one year. these are typically cash, inventories and receivables.

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14
Q

current liability

A

debts scheduled for repayment within one year e.g. bank overdraft

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15
Q

current ratio

A

a measurement of the level of liquidity in particular as to whether there are enough liquid assets to pay for imminent bills. Should be from 1.5:1 to 2.5:1

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16
Q

current ratio equation

A

current assets / current liabilities

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17
Q

debt factoring

A

a business sells its receivables to a third party at a discount. This may provide cash to meet its current needs.

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18
Q

direct cost

A

include raw materials, direct labour and all expenses directly involved with the production. Direct sales are expenditures that can be clearly allocated to a particular product or area of the business

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19
Q

external source of finance

A

funding that comes from outside of the business e.g. new share issue, bank loan, overdraft and venture capital

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20
Q

favourable variance

A

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

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21
Q

financial decision making

A

strategies are chosen to help improve cash flow, gearing, profitability or profits

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22
Q

financial efficiency ratios

A

a way of measuring how well an organisation manages its working capital. It includes inventory turnover, payables days and receivable days

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23
Q

financial objectives

A

are monetary goals that a business sets itself usually a set target in a certain time. These include cost minimisation, levels if profit - measured in pounds or the local currency, levels of profitability - measured as a %, cash flow, safe levels of gearing, sound capital structure and return on investment

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24
Q

gearing

A

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.

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25
Q

gearing

A

non-current liabilities / capital employed x 100

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26
Q

what is the target for gearing

A

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

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27
Q

going into administration

A

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

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28
Q

gross profit

A

the excess of revenue over the cost of sales. This measurement of profit has not year deducted expenses

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29
Q

gross profit margin

A

shows the gross profit as a percentage of turnover

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30
Q

income statement

A

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

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31
Q

Insolvent

A

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

32
Q

internal source of finance

A

funding that comes from the business owners e.g. personal funds, retained profit or sales of company assets.

33
Q

inventory

A

stocks of raw materials, work-in-progress and finished goods

34
Q

inventory turnover

A

a ratio that shows how many times a business sells its stock in a year. A higher number is better as it means the stock is sold quicker and income is brought into the company faster. The number varies from industry to industry

35
Q

inventory equation

A

cost of goods sold / average inventories held

36
Q

liabilities

A

are debts owed e.g. trade credit, long term loans

37
Q

liquidation

A

turning all the business assets into cash and usually paying off all liabilities when a business closes down

38
Q

liquidity

A

the 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

39
Q

loan

A

the sum of money that is borrowed and paid back with interest

40
Q

long term funding

A

finance raised that does not have to be repaid in the next year

41
Q

margin of safety

A

the quantity by which sales may fall before a firm incurs losses

42
Q

the equation for margin of safety

A

demand - breakeven output

43
Q

net assets

A

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 of a company after all debts have been paid

44
Q

the equation for net assets

A

total assets - total liabilities

45
Q

net current assets (working capital)

A

the amount of spare liquid assets once current liabilities have been taken into account

46
Q

the equation for net current assets

A

current assets - current liabilities

47
Q

operating profit

A

the profit generated by the ongoing business

48
Q

the equation for operating profit

A

gross profit - indirect costs

49
Q

operating profit margin

A

the percentage of sales revenue that is operating profit

50
Q

overdraft

A

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.

51
Q

overhead

A

costs not generated by the production process. It is also known as indirect costs e.g rent, heating

52
Q

overtrading

A

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

53
Q

payables

A

debts owed by a business. E.g. to suppliers. They are usually current liabilities

54
Q

payable days

A

a measure of the average number of says taken to pay suppliers. The average for all FTSE firms is 44 days.

55
Q

profit for the year

A

the total profit that the firm’s owners can do what they like with e.g. attributed to the shareholders

56
Q

the equation for profit for the year

A

operating profit +interest received - interest paid - the tax on profits

57
Q

profit for the year margin

A

the percentage of revenue that is profit for the year

58
Q

profitability

A

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

59
Q

receivables

A

the amount owing to a firm from debtors. Receivables are a current asset (along with cash and inventory)

60
Q

receivable days

A

the number of days it takes to convert receivables into cash i.e. to get debtors to pay up. The lower the number the better. 60 days is typical for the UK manufacturing sector so less than this is good

61
Q

the equation for receivable days

A

receivables / revenue x 365

62
Q

retained profits

A

the value of all the profit over all the years that have not been given out to shareholders in the form of dividends but kept for use by the company

63
Q

return on capital employed

A

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

64
Q

equation for ROCE

A

operating profit/capital employed x 100

65
Q

return on investment

A

a measure of how profitable a particular project may be as a percentage of the original investment

66
Q

the equation for return on investment

A

return on investment/cost of the investment x 100

67
Q

share capital

A

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

68
Q

total contribution

A

the difference between total revenue and total variable costs

69
Q

the equation for a total contribution

A

total revenue - total variable costs

70
Q

total equity

A

the money belonging to the shareholders which come from the original share purchase plus retained profit occurring as a result of the firm’s activities

71
Q

total equity equation

A

share capital + retained profit

72
Q

variance

A

compares the actual outcome with the budgeted one.

73
Q

venture capital

A

investment funding for small or medium-sized businesses which is taking risks. The capital is often in the form of loans or shares investments from institutions or business angels

74
Q

Window dressing

A

presenting the accounts in a way that makes 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

75
Q

working capital

A

the day to day finance use in a business

76
Q

the equation for working capital

A

current assets - current liabilities

BUSINESS (25 decks)

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