UNIT 3 BM VOCAB

capital needed by an entrepreneur to set up a business

The capital needed to pay for raw materials, day-to-day running costs and credit offered to customers.

In accounting terms: working capital = current assets - current liabilities

purchase of assets that are expected to last for more than one year (buildings, machinery, etc.)

spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock

the ability of a firm to pay its short-term debts

From where or how businesses obtain their funds

Raised from the business’s own assets or from profits left in the business

• Retained profit

• Personal finds (for sole traders)

• Sales of assets

• Reductions in working capital/managing working capital more efficiently

Raised from sources outside the business, e.g. through debt (overdrafts, loans and debentures), share capital and the government.

permanent finance raised by companies through sale of shares

existing shareholders are given the right to buy additional shares at a discounted price

bonds issued by companies to raise debt finance, often with a fixed rate of interest

loans that do not have to be repaid for at least one year

awards given by one entity to a company to facilitate a goal or incentivize performance

Risk capital invested in business start-ups of expanding small businesses, which have good profit potential, but do not find it easy to gain finance from other sources

individual investors who put in their own money in a variety of businesses and are seeking a better return than they would obtain from conventional investments

financial benefits given by the government to a business to reduce costs and encourage increased production

the provision of very small loans by specialist finance businesses, usually not traditional commercial banks

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

an asset is sold to a company which agrees to make fixed repayments over an agreed time period; the asset belongs to the company Medium-term loan

bank agrees to a business borrowing up to an agreed limit as and when required

selling of claims over debtors to a debt factor in exchange for immediate liquidity; only a proportion of the value of the debts will be received in cash

Delaying the payment of bills for goods or services received, “buy now, pay later”.

A business sells a fixed asset but immediately leases the asset back. The lesee transfers ownership to the lessor but the assets does not physically leave the business.

Sum of money incurred by a business in the production process

costs that can be clearly identified with each unit of production and can be allocated to a cost center

costs which cannot be identified with a unit of production or allocated accurately to a cost center

• Production overheads: factory rent and rates, depreciation of equipment and power

• Selling and distribution overheads: warehouse, packing and distribution costs and salaries of sales staff

• Administration overheads: office rent and rates, clerical and executive salaries

• Finance overheads: interest on loans

costs that do not vary with output in the short run

costs that vary with output

costs that have both a fixed and a variable cost element

the income received from the sale of a product

total income from the sale of all units of the product

Total revenue = quantity x price

the income that an organization gets from a particular activity

The level of output at which total costs equal total revenue

• When Total costs = total revenue

• No profit or loss is made

• Formula: fixed costs/contribution per unit

Management tool used to calculate the level of sales needed to cover all costs of production.

The amount by which the output level exceeds the break-even level of output

Contribution per unit = selling price of a product- (direct) variable costs per unit

Contribution per unit x output (units sold)

Target profit of output = (Fixed costs+Target profit)/Contribution per unit

• Expresed in units

The amount of revenue needed to cover both fixed and variable costs so that the business breaks even

• Break-even revenue = (Fixed costs)/[1-(direct costs/price)]

  • Expressed in $ per unit

Break even target price = (fixed costs/production level)+direct cost

• Expressed in $ per unit

The positive difference between a firm’s sales revenue and its costs.

• Low quality profit: One-off profit that cannot easily be repeated or sustained

• High quality profit: Profit that can be repeated and sustained

Published annual financial statements that all limited liability companies are legally obliged to report (e.g. P&L accounts and balance sheets)

an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time

total value of assets minus total values of liabilities

the total value of capital raised from shareholders by the issue of share

Presenting the accounts in the best possible or most flattering way which could potentially mislead users of accounts

Records the revenue, costs and profit (or loss) of a business over a given period of time

a financial obligation of a business that it is required to pay in the future

Trading account

• Sales revenue or sales turnover

• Gross profit

Profit and loss sections

• Operating profit (profit before interest and tax)

• Profit after tax

• Dividends

Appropriation account

• Retained profits

The total value of sales made during the trading period

Sales revenue = selling price x quantity (volume) sold

Equal to sales revenue less cost of sales

Gross profit minus overhead expenses (costs of business not directly related to the number of items made or sold)

Operating profit minus interest costs and operating tax

The share of the profits paid to shareholders as a return for investing in the company

The profit left after all deductions, including dividends, have been made; this is later sent back into the company as a source of finance

Surplus that a business makes after all expenses have been paid for out of gross profit

Shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold.

Fixed assets that do not exist in physical form, e.g. goodwill, copyrights, brand names and registered trademarks

arises when a business is valued at or sold for more than the balance sheet values of its assets

Show the value of a business by calculating the value of all its assets minus its liabilities.

Value of an asset as shown on the balance sheet

Purchase cost of a particular fixed asset

An estimate of the scrap or disposal value of the asset at the end of its useful life

The fall in the value of fixed assets over time, from wear and tear or obsolescence

a constant amount of depreciation is subtracted from the value of the asset each year

Calculates depreciation by subtracting a fixed percentage from the previous year’s net book value

An intangible asset that has been developed from human ideas and knowledge

the estimated total value of a company if it were taken over

Quantitative measurement tool that compares different financial figures to examine and judge the financial performance of a business. It requires the information from final accounts.

Examine the profit in relation to other figures, e.g. the GPM and NPM ratios. These ratios tend to be important to profit-seeking businesses rather than for not-for-profit organizations.

• Gross profit margin

• Net profit margin

• Return on capital employed

Gross profit margin (%) = (gross profit/sales revenue) x 100

Net profit margin (%) = (net profit/sales revenue) x 100

Return on capital employed (%) = (net profit/capital employed) x 100

Capital employed = (non-current assets + current assets) - current liabilities or non-current liabilities + shareholders’ equity

Assess the ability of a firm to pay its short-term debts.

• Current ratio

• Acid test ratio

Current ratio = current assets/current liabilities

Acid test ratio = liquid assets/current liabilities

Indicate how well a firm’s resources have been used, such as the amount of profit generated from the available capital used in the business.

• Inventory (stock) turnover ratio

• Debtor days ratio

• Creditor days ratio

• Gearing ratio

Measures the number of times a business sells its stocks within a year.

• Inventory stock ratio = cost of goods sold/inventory level

Can also be expressed as the average number of days it takes for a business to sell all of its inventories

• Inventory turnover ratio (in days) = (value of inventories/cost of goods sold)/365

Measures the average number of days it takes for a business to collect the money owed from debtors

• Debtor days ratio = (debtors x 365)/revenue

• Debtors turnover ratio = revenue/debtors

Measures how quickly a business pays its suppliers during the year. The higher this result, the longer the business is taking to pay its suppliers.

• Creditor days ratio = (trade creditors/credit purchases or cost of goods sold) x 365

Measures the degree to which the capital of the business is financed from long-term loans.

• A result of over 50% would indicate a highly geared business

• Gearing ratio = (long term loans/capital employed) x 100

A current asset and represents the actual money a business has. It can exist in the form of cash-in-hand or cash at bank.

Movement of money into and out of an organization. Cash inflows mainly come from sales revenue whereas cash outflows are for items of expenditure.

the sum of cash payments to a business (inflows) less the sum of cash payments made by it (outflows).

payments in cash made by a business, such as those to suppliers and workers.

• Lease payments for premises

• Annual rent payment

• Electricity, gas, etc.

• Labour cost payments

• Variable cost payments

payments in cash received by a business, such those from customers (debtors) or from the bank (loans).

• Owner’s capital injection

• Bank loan payments

• Customer’s cash purchases

• Debtor’s payments

when a firm ceases trading and its assets are sold for cash.

when a business cannot meet its short-term debts.

Customers who have bought products on credit and will pay cash at an agreed date in the future.

Businesses that have sold goods or services on trade credit, so will collect this money from the debtors at a future date.

the period of time between spending cash on the production process and receiving cash payments from customers.

Financial document that records the actual cash inflows and outflows of a business during a specific trading period, usually twelve months.

a financial document estimating future cash inflows and cash outflows, usually on a month-by-month basis.

• Cash inflows

• Cash outflows

• Net monthly cash flow and opening and closing balance

estimated difference between monthly cash inflows and outflows.

cash held by the business at the start of the month

cash held by the business at the end of the month becomes next month´s opening balance.

Items with a monetary value that belong to a business, they can be fixed or current assets.

Liquid resources owned by a business (cash, debtors and stock)

Iliquid resources owned by a business, not intended for sale within the next twelve months, yet continuously used to generate revenue (land, vehicles, trademarks)