average rate of return ARR
calculates the average annual profit of an investment project
acid test ratio
liquidity ratio that measures the ability of a firm to meet its debts within the next 12 months, but it ignores stock because not all stock can be easily turned into cash in the short-run
appropriation account
final section of the P&L account and shows how the profits after tax are distributed between the owners and as retained profits
assets
items with a monetary value that belong to a business; they can either be fixed assets (e.g. machinery, tolls, buildings) or current assets (e.g. cash, stock, debtors)
book value
value of an asset as shown on a balance sheet
business angels
wealthy entrepreneurs who risk their own money in small to medium sized businesses that have high growth potential
capital employed
value of all long-term sources of finance for a business, e.g. bank loans, share capital, reserves
cash
actual money a business has received from selling its products and exists in form of cash in hand (cash held in the business) or cash at bank (cash held in a bank account)
cash flow
movement of money into and out of an organisation; cash inflows mainly come from sales revenue, cash outflows mainly from expenditures
cash flow forecast
financial document that records the actual cash inflows and outflows for a business over a specified trading period
closing balance
value of cash left in a business at end of the month, as shown in its cash flow forecast
costs of goods sold COGS
(= variable costs = direct costs) costs that are directly linked to the production, e.g. costs of raw material
creditors
individuals or organisations that have sold goods or services on credit and will collect this money within the next 12 months
contingency fund
reserve budget that is set aside for emergency and back-up use
current assets
resources owned by a business and intended to be used within the next 12 months, e.g. cash, debtors, stocks
current ratio
efficiency ratio that shows the ability of a firm to meet its debts within the next 12 months
debentures
type of long-term loan with fixed annual interest payments which are repayable on maturity
debt factoring
financial service whereby a factor (such as the bank) collects debts on behalf of other businesses, in return for a fee
debtors
customers who have purchased goods or services on credit, so owe the business money which is collected within the next 12 months
depreciation
fall in the value of fixed assets, due to wear and tear or out of fashion
expenses
spending in the working capital cycle of a business, e.g. salaries, rent, advertising
external sources of finance
getting funds from outside the organisation, e.g. overdrafts, loans
final accounts
annual financial statements that all limited companies are legally obliged to report; these include balance sheet, trading account, profit and loss account
fixed assets
resources owned by a business and not intended for sale within the next 12 months, e.g. land, machinery
gearing
measures the percentage of a firm‘s capital employed that comes from long-term liabilities
gross profit
difference between sale revenue and its direct cost
gross profit margin
profitability ratio which shows the percentage of sales revenue that turns into gross profit
intangible assets
fixed assets but do not exist in a physical form, e.g. copyrights, brand names
investment appraisal
financial decision-making tool that helps managers to assess whether certain investment projects should be undertaken based on quantitative techniques
liabilities
debts owed by a business; current liabilities are short-term debts which need to be repaid within 12 months, long-term liabilities are repayable over a longer period
liquid assets
assets of a business that can be turned into cash quickly
liquidity
ability of a business to convert assets into cash quickly and easily without a fall in its value
liquidity crisis
cash flow emergency situation where a business doesn’t have enough cash to pay its current liabilities
net assets
shows the value of a business by calculating the value of all its assets minus long-term liabilities
net cash flow
cash that is left over after cash inflows minus cash outflows
net profit
surplus that a business makes after all the expenses have been paid for out of gross profit
net profit margin
profitability ration which shows the percentage of sales revenue that turns into net profit
opening balance
amount of cash at the beginning of a trading period the opening balance is the same value as the preceding month‘s closing balance
overdrafts
allow a business to spend in excess of the amount in its bank account, up to a predetermined limit
overheads
(= fixed costs = indirect costs = expenses) costs which are not directly linked to the production, e.g. costs of rent, advertising
overtrading
situation that occurs when a business attempts to expand too quickly, without the sufficient resources to do so, usually by accepting too many orders
payback period
investment appraisal technique which estimates the length of time needed to get the initial cash flow of an investment project back
profit and loss account
shows the trading position of a business at the end of a specified accounting period and split into 3 parts: trading account, P&L account, appropriation account
qualitative investment appraisal
judging whether an investment project is worthwhile through non-numerical means, e.g. whether the investment is in line with the corporate culture
quantitative investment appraisal
judging whether an investment project is worthwhile through numerical means, e.g. payback period, ARR, NPV
ratio analysis
management tool that compares different financial figures found in the balance sheet and PLA of a business and helps to analyse and judge the financial performance of a business
return on capital employed
efficiency ratio which measures the profit of a business in relation to its size (as measured by capital employed)
share capital
money raised from selling shares in a company
shareholder’s funds
shows the sources of finance of a company less its long-term liabilities, e.g. retained profit, reserves
sources of finance
where or how a business obtains its funds
stock
physical goods that a business has in its possession for further production (e.g. raw material, unfinished goods) or for sale (e.g. finished goods)
trading account
appears at the top section of the P&L account and shows the gross profit (or loss) of the business
window dressing
legal act of manipulating financial data to make the result look more flattering
working capital
amount of finance available to a business for its daily operations
average cost
total costs divided by the quantity produced
average revenue
total revenue divided by the quantity sold
balance sheet
shows financial information on assets, liabilities and the capital invested on one specific day
break-even analysis
tool used to calculate the level of sales needed to cover all costs of production
break-even chart
graph that shows a firm’s costs, revenues and profits
break-even point
position on a break-even chart where the total cost line intersects the total revenue line, where TR = TC
break-even quantity
level of output that generates neither any profit nor loss
capital expenditure
investment spending on fixed assets
cost
sum of money that a business needs in the production process
direct costs
(= variable costs = COGS) costs that are directly linked to the production, e.g. costs of raw material
contribution
difference between sale revenue and total variable costs; the difference contributes towards the payment of fixed costs
contribution analysis
tool that helps managers to identify areas of their business that are relatively profitable and areas that might need more attention
contribution per unit
price minus average variable cost or contribution divided by quantity sold
current liabilities
debts that must be repaid within the next 12 months
expenses
(= indirect costs = overheads = fixed costs) costs which are not directly linked to the production, e.g. costs of rent, advertising
fixed costs
(= indirect costs = overheads = expenses) costs which are not directly linked to the production, e.g. costs of rent, advertising
grants
government financial gifts to support businesses
indirect costs
(= fixed costs = overheads = expenses) costs which are not directly linked to the production, e.g. costs of rent, advertising
insolvency
situation where a firm’s working capital is insufficient to meet its current liabilities
internal sources of finance
getting funds from within the organisation, e.g. retained profits
leasing
form of hiring whereby a contract is agreed between the leasing company (the lessor) and the customer (the lessee); the lessor is the legal owner of the assets, the lessee pays renatl income to use the assets
loans
money obtained from commercial lenders such as banks; interest charges are imposed; the money is paid back in instalments over a predetermined period
margin of safety
difference between a firm’s level of demand and its break-even quantity
price
amount of money a product is sold for
profit
positive difference between a product’s revenue and its costs
retained profit
value of profits that the business keeps (after paying taxes and dividends)
revenue
money a business receives from the sale of its products
revenue expenditure
spending on the day-to-day running of a business, e.g. rent, wages
revenue stream
money a business receives from its various business activities
semi-variable costs
costs of production that have an element of both fixed and variable costs, e.g. power and electricity
total cost
sum of variable cost and fixed cost
trade credit
allows a business to „buy now and pay later “; creditor is a supplier
variable costs
(= direct costs = COGS) costs that are directly linked to the production, e.g. costs of raw material
venture capital
high-risk capital invested by venture capital firms or individuals, usually at the start of a business idea; the finance is usually in the form of loans and/or shares
