Unit 5 Definitions - Financial Performance Flashcards
adverse variance
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
assets
are items of value e.g land, machinery, cash
balance sheet
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)
break even output
the quantity of output at which total revenue just equals total costs
budget
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
budgeting
making a budget, but also it could mean trying to keep within or below a certain level of spending
capital expenditure
spending on new non-current assets typically plant and machinery
capital structure
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
capital structure objectives
raising finance in a cheap way, that provides sufficient funds for survival and expansion
contribution
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
contribution per unit
the amount each unit sold contributes towards covering the fixed costs
the equation for contribution per unit
price - variable cost per unit
current assets
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.
current liability
debts scheduled for repayment within one year e.g. bank overdraft
current ratio
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
current ratio equation
current assets / current liabilities
debt factoring
a business sells its receivables to a third party at a discount. This may provide cash to meet its current needs.
direct cost
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
external source of finance
funding that comes from outside of the business e.g. new share issue, bank loan, overdraft and venture capital
favourable variance
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
financial decision making
strategies are chosen to help improve cash flow, gearing, profitability or profits
financial efficiency ratios
a way of measuring how well an organisation manages its working capital. It includes inventory turnover, payables days and receivable days
financial objectives
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
gearing
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.
gearing
non-current liabilities / capital employed x 100
what is the target for gearing
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
going into administration
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
gross profit
the excess of revenue over the cost of sales. This measurement of profit has not year deducted expenses
gross profit margin
shows the gross profit as a percentage of turnover
income statement
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
Insolvent
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
internal source of finance
funding that comes from the business owners e.g. personal funds, retained profit or sales of company assets.
inventory
stocks of raw materials, work-in-progress and finished goods
inventory turnover
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
inventory equation
cost of goods sold / average inventories held
liabilities
are debts owed e.g. trade credit, long term loans
liquidation
turning all the business assets into cash and usually paying off all liabilities when a business closes down
liquidity
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
loan
the sum of money that is borrowed and paid back with interest
long term funding
finance raised that does not have to be repaid in the next year
margin of safety
the quantity by which sales may fall before a firm incurs losses
the equation for margin of safety
demand - breakeven output
net assets
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
the equation for net assets
total assets - total liabilities
net current assets (working capital)
the amount of spare liquid assets once current liabilities have been taken into account
the equation for net current assets
current assets - current liabilities
operating profit
the profit generated by the ongoing business
the equation for operating profit
gross profit - indirect costs
operating profit margin
the percentage of sales revenue that is operating profit
overdraft
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.
overhead
costs not generated by the production process. It is also known as indirect costs e.g rent, heating
overtrading
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
payables
debts owed by a business. E.g. to suppliers. They are usually current liabilities
payable days
a measure of the average number of says taken to pay suppliers. The average for all FTSE firms is 44 days.
profit for the year
the total profit that the firm’s owners can do what they like with e.g. attributed to the shareholders
the equation for profit for the year
operating profit +interest received - interest paid - the tax on profits
profit for the year margin
the percentage of revenue that is profit for the year
profitability
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
receivables
the amount owing to a firm from debtors. Receivables are a current asset (along with cash and inventory)
receivable days
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
the equation for receivable days
receivables / revenue x 365
retained profits
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
return on capital employed
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
equation for ROCE
operating profit/capital employed x 100
return on investment
a measure of how profitable a particular project may be as a percentage of the original investment
the equation for return on investment
return on investment/cost of the investment x 100
share capital
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
total contribution
the difference between total revenue and total variable costs
the equation for a total contribution
total revenue - total variable costs
total equity
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
total equity equation
share capital + retained profit
variance
compares the actual outcome with the budgeted one.
venture capital
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
Window dressing
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
working capital
the day to day finance use in a business
the equation for working capital
current assets - current liabilities
