A LEVEL BUSINESS STUDIES

UNIT 5: FINANCE

List of Keywords

Financial objectives
Are the specific, focused aims or goals of the financial and accounting function or
department within an organisation.

Financial accounting
Keeping records of previous financial performance for the purposes of reviews and
adherence to legal regulations.

Management accounting
The use of financial tools to enable better decision-making.

Revenue objectives
Businesses commonly set themselves objectives of earning a certain amount of
revenue over a period of time. Relating to the level of income from sales.

Cost objectives
Business objectives in order to maximize profit, by reducing costs. Business should
be mindful that cost saving should not affect the customer opinion of their product or
service. Relating to expenditure for production.

Cash-flow objectives
Cash flow is crucial to the survival of a business. Some firms might have more
focusing on managing a healthy cash flow. Relating to the ability of an organisation
to find its day to day operation.

Profit objectives
It is very common for a business to have a PO. As with cost minimisation, this is
frequently an objective for the entire business and not just its finance function or
department. Relating to the amount of profit to be achieved.

Return on investment objectives

Relating to the levels of profit to be achieved by each investment.

Capital structure objectives

Relating to the extent the Business if financial internally, or by debt.

Gross profit
The difference between revenue and the cost of producing goods or services sold.
Revenue - the costs of sales

Operating profit
Operating profit is an accounting figure that measures the profit earned from a firm's
normal core business operations, thus excluding deductions of interest and taxes.
Profit made from trading (gross profit - administration/operating expenses).
This value also does not include any profit earned from the firm's investments, such
as earnings from firms in which the company has partial interest.

Operating profit
The profit earned by a business from its entire trading operations - stated before
financing (e.g: interest) and tax.

Investment
Describes items that are purchased by firms because they help them to produce
goods or services.

Return on investment
A measure of the efficiency of an investment in financial terms, used to compare the
financial returns of alternative investment.

Investment appraisals
Process that managers use to compare the costs of an investment to the expected
revenues it will incur.

Debt as a proportion of long term funding

- Debts, such as bank loans, mean that businesses must pay back interest payments
and the full amount must be paid back by an agreed cost.
- Shareholder funding (or share capital) requires no repayment, but shareholders will
expect a dividend (% of the profit).

Income statement
An income statement is a financial statement that reports a company's financial
performance over a specific accounting period. Financial performance is assessed
by giving a summary of how the business incurs its revenues and expenses through
both operating and non-operating activities.

Assets
Is amounts owned by, or owed to a business. Something valuable that an entity
owns, benefits from, or has use of, in generating income.

Non-current assets
Items that a business owns and which it expects to retain for 1 year or longer.

Current assets
Cash or other assets expected to be converted to cash within a year.

Capital expenditure
CAPEX. Expenditure on assets which are intended to be kept in the business (e.g: IT
systems, machinery) rather than sold or turned into products. Spending on terms that
can be used time and time again; machinery.

Debt capital
Borrowed funds (bank loans/debentures).
Debentures
Loans for 10+ years. Loan made by a business at an agreed fixed % of interest and
repayable on a stated date. A form of bonds or long term loan which is used by the
company - typically fixed to interest over the course of the loan.

Equity capital
Capital provided by shareholders.

Outgoings
Expenditures: car, holidays, tickets, mortgages and bills.

Incomings
Payments in: Jobs, Loans, Parents and savings.

Budget
Is a financial plan for the future covering income and expenditure over a certain
period of time.

Income budget
Shows the agreed, planned income of a business over a period of time.

Expenditure budget
Shows the agreed, planned amount of money to be spent by the business over a
period of time.

Profit budget
Shows the agreed, planned profit of a business over a period of time.

Variance
The difference between a budgeted figure and actual figure achieved.

Variance analysis
Is the comparison, by an organisation of its actual performance with its expected,
budgeted performance over a certain period of time.

Favorable variance
When: the actual figure is BETTER than budgeted figures. Actual costs are lower
than budgeted costs, actual revenue is higher than expected and actual profits are
higher or better than budgeted profit.

Adverse variance
When: the actual figures are WORSE than the budgeted figures. Actual costs are
higher than budgeted costs, actual revenue is lower than expected and actual profit
is worse than budgeted profit.

Balance sheet
The financial statement that provides a snapshot of the assets and liabilities of a
business at a particular date.
Dividend
Amounts paid to shareholders out of the profits earned by a company.

Gearing
This is the measure of risk, because the more debt that has been used to fund the
business, the more the business is vulnerable to changes in the interest rates etc.
A ratio that focuses on the long-term financial stability and capital structure of a
business. The gearing ratio measures the proportion of assets in a business that are
financed by borrowing.

Liabilities
Amounts owed by a business to others.

Liquidity
The ability of a business to finance required payments to creditors.

Corporation tax
The tax levied on the profits of companies. The percentage varies depending on the
size of the profits earned; typically 20-30%.

Average rate of return

A measure of the total accounting return from an investment project.

Delegated budgets
Giving some control in the setting and spending of budgets to departments or
individuals.

Cash flow
The total cash payments (inflows) into a business minus the total cash payments
(outflows).

Liquidation
This is turning assets into cash and may be insisted on by courts if suppliers have
not been paid.

Insolvent
When a business cannot meet its short term loans.

Cash inflows
Payments in cash received by a business.

Cash outflows
Payments in cash made by a business - expenditure.

Debtors
These are customers who have bought products on credit and will pay cash at an
agreed date in the future.

Credit sales
Value of goods sold to customers who do not pay cash immediately.
Cash flow forecast
Process of estimating the expected cash inflows and cash outflows over a period of
time (usually over a year). An estimate of firm's future cash inflows and outflows.

Opening balance
Cash held by a business at the start of the month - previous monthly closing
balance.

Closing balance
Cash held by a business at the end of the month - actual cash the business has
available. BECOMES NEXT MONTH'S OPENING BALANCE.

Net cash flow

Net cash flow refers to the difference between a company's cash inflows and
outflows in a given period. Inflows - Outflows.
Refers to the change in a company's cash balance as detailed on its cash flow
statement.
Surplus - inflows are bigger than outflows.
Deficit/shortfalls - inflows are less than outflows.

Receivables (debtors)
People who owe the business money, usually customers who have been given credit
terms.

Payables (creditor)
Money owed to creditors, lenders, employees, or government (taxes), presented as
a liability in the balance sheet of a firm.

Overtrading
Overtrading happens when a business expands too quickly without having the
financial resources to support such a quick expansion. If suitable sources of finance
are not obtained, overtrading can lead to business failure.

Contingencies
A sensible cash flow forecast allows for.

Costs
The expenses that a business incurs in order to operate.

Start-up costs
Are the one-off expenditure items that are incurred at the set up stage of a business.

Running costs
Are the day to day costs incurred in order for the business to operate.

Contribution
Is the surplus made after all variable costs have been paid from sales revenue,
which then goes towards paying out the fixed costs. It looks at whether an individual
product (or activity) is helping the business make a profit.
It is not a profit, until the fixed costs are covered.

Total contribution
Total Sales revenue - Total Variable costs or Contribution per unit x output (Q)

Contribution per unit

Selling price per unit - Variable costs per unit

Profit (contribution)
Total contribution - Fixed costs

Break-even output
The no. of units a business needs so that it neither makes a profit nor a loss.
TR=TC. NO profit/loss. Formula = Fixed costs / Contribution per unit.

Profitability
The ability or efficiency of a business to generate profit. Measure your businesses
profits and helps you determine your success or failure. It looks at what your
business's profits mean in the form of percentages or decimals.

Profit
Is the surplus amount that a business gains after total costs are covered from the
revenue.

Profit of the year

This is the profit available to the owners (or shareholders). It includes all revenue
(including sale of assets) and all expenditure (including interest payments and tax).

Gross profit margin (%)

Or gross profit to sales. This measures gross profit as a % of sales turnovers. The
ratio measures how efficiently the business is transforming raw materials into
products.

Operating profit margin (%)

Or profit from operating margin. This measures operating profit as a % of sales. This
ratio measures how efficiently the business is making a profit from the resources that
it is using for its trading activities.

Profit for the year margin (%)

This measures the profit that is available for owners and shareholders, as a % of
sales turnover. This ratio measures how much the shareholders may benefit directly
from the financial performance of the business.

Short-term finance
Finance that is normally intended for repayment within 12 months, usually intended
for revenue expenditure.
Long-term finance
Finance that is normally intended for capital expenditure and where repayment, if
necessary is due after 3 years or more.

Medium-term finance
Covers the period between long and short term.

Internal finance
Finance provided by the owners or raised within the business.

External finance
Sources of finance provided or borrowed from an external source or lender.

Revenue expenditure
This is spending on current, day to day costs; purchase of raw materials and
payments of wages. Such expenditure provide a quick return, so usually a short-term
source of finance is used here.

Overdrafts
SHORT TERM – EXTERNAL. When a bank allows an individual an individual or
organisation to overspend its current account in the bank up to an agreed limit for a
stated period of time.
When you are allowed to be overdrawn up to a certain amount without being
charged or having to pay direct debit.

Retained profits
LONG TERM – INTERNAL. The part of a firm's profit that is reinvested in the
business rather than distributed to shareholders. It is also known as ploughed back
profit, it allows a business to use the surplus for future activities.

Debt factoring
SHORT TERM – INTERNAL. The sale of a busines’s invoice to a 3rd party.
They are charged with processing the invoice, and the business lending the invoice
is able to receive loans based on the expected payments on the invoice. When a
factoring company (bank) bays the right to collect the money from credit sales of a
business are allowed to delay payment to the business.

Owner Capital
SHORT AND LONG TERM – INTERNAL. When the owner uses their own savings to
invest in the business, usually as a sole trader who will start up a business with their
own savings - not paid back.

Loans or Loan capital

LONG TERM – EXTERNAL. Money received by an organisation in return for the
organisations agreement to pay interest during the period of the loans and to repay
the loans within an agreed time.

Venture capital
LONG TERM – EXTERNAL. Finance that is provided by a small or medium sized
firm that seeks growth, but may be considered as risky as typical share buyers or
other lenders. £50,000 - £150,000.

Leasing
MEDIUM-LONG TERM - EXTERNAL
Immediate cash can be acquired by selling of a property the business owns and then
renting (leasing) it back from the new owner. Where monthly payments are made for
use of equipment; car or property.

Mortgage
LONG TERM – EXTERNAL. A type of loans from a bank. Common method of
financing land and premises is to take out a mortgage and they are paid back over a
long period of time. In effect, this method uses the property owned by the business
as security for a loan.

Sales of assets
LONG TERM – INTERNAL. Selling assets that are longer needed, to fund the
purchase of new assets in more profitable profits of the business.

Personal sources
LONG TERM – INTERNAL. Small business are often established through funds
provided by the owner or owners from their savings or personal assets. Funds may
be borrowed from relatives.

Peer to peer lending

EXTERNAL. This is another form of loan capital and is usually carried out outline. A
website is used to match people who have savings, guarantees are required from
the business itself or its owners, so that the risk to lenders is reduced.

Crowdfunding
This is another method of raising finance online. Businesses outline the deadlines of
their business and invite people to help to provide funding. Prospective investors
with will visit and evaluate on whether to invest and provide finance. Can also be
based on loans with an agreed interest rate rather than share capital.

Bad debt
An amount owed by a customer that will not be paid.

Credit Control
Managing the risks and amount of money owed by customers.

Capital employed
AKA: long term funding. Share capital, Equity capital, Debt capital and Retained
funds.

Profit variance
Budgeted profit - Actual profit