Studied by 11 peoplestart-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 in accounting terms; working capital= current assets- current liabilities
internal finance
raised from the business's own assets or from profits left in the business
external finance
raised from sources outside the business
retained profit
the profit left after all deductions, including dividends have been made this is ploughed back into the company as a source of finance
liquidity
the ability of a firm to pay its short-term debts
overdraft
bank agrees to a business borrowing up to an agreed limit as and when required
debt-factoring
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 as cash
hire purchase
an asset is sold t a company which agrees to make fixed repayments over an agreed time period
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
equity finance
permanent finance raised by companies through the sale of shares
long-terms loans
loans that do not have to be repaid for at least one year
debentures or long-term bonds
bonds issued by companies to raise debt finance, often with a fixed rate of interest
right issue
existing shareholders are given the right to buy additional shares at a discounted price
venture capital
risk capital invested in business start-ups or expanding small businesses which have good profit potential but do not find it easy to gain finance from other sources
business angels
individual investors who put in their won money in a variety of businesses and are seeking a better return than they would obtain from conventional investments
subsidies
financial benefits given by the government to a business to reduce costs and encourage increased production
microfinance
the provision of very small loans by specialist finance businesses usually not traditional commercial banks
direct costs
these costs can be clearly identified with each unit of production and can be 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)
fixed costs
costs that do not vary with output in the short run
variable costs
costs that vary with output
semi-variable costs
costs that have both a fixed and a variable cost element
revenue
the income received from the sale of a product
total revenue
total income from the sale of all units of the product (product= quantity x price)
revenue stream
the income that an organisation gets from a particular activity
break-even
the level of output at which total costs equal total revenue
margin of safety
the amount by which the output level exceeds the break-even level of output
contribution per unit
selling price of a product minus direct costs per unit
total contribution
unit contribution x output
break-even revenue
the amount of revenue needed to cover both fixed and variable costs so that the business breaks even
window dressing
presenting the accounts of a a business in the best possible or most flattering ways which could potentially mislead users of accounts
depreciation
the decline in the estimated value of a fixed asset over time
assets
items of monetary value that are owned by a business
low-quality profit
one-off profit that cannot easily be repeated or sustained
high-quality profit
profit that can be repeated and sustained
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
total value of assets less total value of liabilities
share capital
the total value of capital raşsed from shareholders by the issue of shares
debtors
customers who have bought products 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
goodwill
arises when a business is valued at or sold for more than the balance sheet values of its assets
intellectual property
an intangible asset that has been developed from human ideas and knowledge
market value
the estimated total value of a company if it were taken over
straight-line depreciation
a constant amount of depreciation is subtracted from the value of the asset each year
reducing balance method
calculated depreciation by subtracting a fixed percentage from the previous year's net book value
net book value
the current balance sheet value of a non-current asset= original cost - cumulated depreciation
liquidity
the ability of a firm to pay its short-term debts
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. the total capital invested in a business
current ratio
current assets/current liabilities
acid test ratio
liquid assets/current liabilities
liquid assets
current assets - inventories
inventory stock turnover ratio
cost of goods sold/inventory level OR average stock/cost of goods sold x 100
debtor days
debtors (accounts receivable) x 365 / revenue
creditor days
trade creditors/credit purchases x 365
liquidation
when a firm ceases trading and its assets are sold for cash
insolvent
when a business cannot meet its short-term debts
net cash flow
the sum of cash payments to a business less the sum of cash payments made by it
cash outflows
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 or from the bank
current liabilities
debts of the business that will usually have to be paid within one year
debtors
customers who have bought products on credit and will pay cash at an agreed date in the future
working capital cycle
the period of time between spending cash on the production process and receiving cash payments from customers
cash flow forecast
estimate of a firm'S future cash inflows and outflows
net monthly cash flow
estimated difference between monthly cash inflows and outflows
opening cash balance
cash held by the business at the start of the month
closing cash balance
cash held at the end of the month becomes next months's opening balance
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 or desirability of an investment project
annual forecasted net cash flow
forecasted cash inflow miss forecasted cash outflows
payback period
length of time it takes for the new cash inflows to pay back the original cost of the investment
average rate of return
measures the annual profitability of an investment as a percentage of the initial investment
criterion rate or level
the minimum level set by management for investment appraisal results for a project to be accepted
net present value
today's value of the estimated cash flows resulting from an investment
budget
a detailed financial plan for the future
budget holder
individual responsible for the initial setting and achievement of a budget
delegated budget
control over budgets is given to less senior management
incremental budgeting
uses last year's budget as a basis and an adjustment is made for the coming year
zero budgeting
setting budgets to zero each year and budget holders have to argue their case to receive any finance
cost centre
a section of a business such as a department to which costs can be allocated or charged
profit centre
a section of a business to which both costs and revenues can be allocated
variance analysis
the process of investigating any differences between budgeted figures and actual figures
favourable variance
exists when the difference between the budgeted and actual figures leads to a higher than expected profit
adverse variance
exists when the difference between the budgeted and actual figures leads to a lower than expected profit
investment appraisal
Techniques for determining whether an investment is likely to be profitable
gearing
compares some form of owner's equity (or capital) to funds borrowed by the company
Note
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