Finance key terms

Question 1

What’s a start-up costs?

Answer 1

The amount of money spent setting up a business before it starts trading.

Question 2

What’s an operating costs (or running costs)?

Answer 2

Money spent on a regular basis to keep a business running.

Question 3

What’s income?

Answer 3

Money which is paid into a business.

Question 4

What’s fixed costs (or indirect costs)?

Answer 4

Expenditure on items which does not change with the number of items sold.

Question 5

What’s variable costs (or direct costs)?

Answer 5

Costs which vary according to the number of items sold or produced.

Question 6

What’s total costs?

Answer 6

The total amount of money spent running a business over a certain period of time (e.g. a month)

Question 7

How do you calculate total costs?

Answer 7

Fixed costs + variable costs

Question 8

What sources can businesses receive money from?

Answer 8

Interest - paid on money in a bank savings account
Investment - income from people buying shares in the business or lending it more money (a bank loan for example)
Leasing or rental income - by renting out property or equipment that is not currently required to another business.

Question 9

How do you calculate revenue?

Answer 9

number of sales X price per unit

Question 10

What’s expenditure?

Answer 10

Money that a business spends.

Question 11

What’s overheads?

Answer 11

The everyday running costs of the business.

Question 12

What’s profit?

Answer 12

Occurs when revenue is more than expenditure.

Question 13

What’s loss?

Answer 13

Occurs when expenditure is more than revenue.

Question 14

How do you calculate profit/loss?

Answer 14

Revenue - Expenditure

Question 15

How do you calculate break-even point?

Answer 15

Fixed costs ÷ selling price per unit - variable cost per unit

Question 16

What are the 3 planning tools for a business?

Answer 16

Break-even, Budget, Cash flow forecast (BBC)

Question 17

What is budgeting?

Answer 17

Planning future expenditure and revenue targets with the aim of ensuring a profit is made.

Question 18

What is budgetary control?

Answer 18

The process of checking what is actually happening, comparing this with the plan and taking action if things are not correct.

Question 19

What is cash inflows?

Answer 19

The amounts of money entering a businesses bank account.

Question 20

What is cash outflows?

Answer 20

The amounts of money leaving a business’s bank account.

Question 21

What is net cash flow?

Answer 21

The difference between the cash inflows and the cash outflows figures over a particular time period.

Question 22

What is cash balance?

Answer 22

The amount of money forecast to be in the bank account after the net cash flow figure has been added or subtracted from the existing bank balance.

Question 23

What are 3 examples of inflows?

Answer 23

Capital from investors
Loan from a bank
Property rental

Question 24

What are 7 examples of outflows?

Answer 24

Staff wages
Utilities (Gas, Electricity, Telephone)
Materials for manufacturing
Insurance
Interest on loan
Dividends
Rental

Question 25

What are dividends?

Answer 25

These are paid to shareholders if the business makes a profit.

Question 26

What's an overdraft?

Answer 26

This occurs if a business pays more out of its bank account than it has in credit. The bank may allow this but will make an extra charge.

Question 27

What is capital?

Answer 27

Money spent by the business on items which should last a long time.

Question 28

What's cost of sales?

Answer 28

The cost of producing a product.

Question 29

What's gross profit?

Answer 29

The money made from selling a product (the sales revenue) after the cost of producing that product (cost of sales) has been deducted.

Question 30

What's net profit?

Answer 30

The money made from selling a product after all costs (expenditure) have been deducted from the gross profit.

Question 31

How do you work out gross profit?

Answer 31

Revenue - cost of sales

Question 32

What are fixed assets?

Answer 32

Items that a business must keep to be able to trade, such as a van or a computer. They are called fixed because they are here to stay.

Question 33

What are current assets?

Answer 33

Items that are changing with every transaction, such as stock, debtors and cash in the bank. Current assets can be turned into cash quickly if necessary.

Question 34

What are current liabilities?

Answer 34

Money that must be paid back within a year, such as to suppliers and a bank overdraft.

Question 35

What are long term liabilities?

Answer 35

They include loans that can be repaid over a long period.

Question 36

What's the financial year?

Answer 36

Th trading period over which a business collects information for their annual income statement (for example, a business might have a financial year that starts on 1 may and ends 30 april).

Question 37

What are assets?

Answer 37

Items that a business buys that normally last a long time, such as a van or a computer, or money it is owned.

Question 38

What is the other term for an income statement?

Answer 38

The profit and loss account

Question 39

What's the other term for the statement of financial position?

Answer 39

The balance sheet

Question 40

What are Debtors (Or trade receivables)?

Answer 40

People who owe money to the business for goods or services they have received. Trade payables are traders to whom the business owed money because they have supplied goods or services.

Question 41

What are liabilities?

Answer 41

Amounts of money which a business owes.

Question 42

What is share capital?

Answer 42

The amount of money invested in the business by the shareholders.

Question 43

What's working capital (or net current assets)?

Answer 43

Money the business can raise quickly which is calculated by deducting current liabilities (all current debts owed by the business) from current assets money owed to the business at the current time).

Question 44

What's reserves?

Answer 44

Money that has been saved from previous profitable years.