IB Business Management Finance

Financiers

(banks, lenders); final accounts matter to them because it will check on the creditworthiness of the business to establish how much money they can lend it

Equity

AKA shareholder's equity; includes share capital and retained profits

Net current assets

AKA working capital; calculated through the difference between current assets and current liabilities

Investing

Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit

external sources of finance

This can include: share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capital, and business angles

illiquid

a business is described as this if it is not able to pay its short-term debts

Liabilities

a company's financial debt or obligations that arise during the course of its business operations; settled over time through the transfer of economic benefits including money, goods or services

finance lease

a financial agreement where at the end of the leasing period the business is given the option to purchase the asset

Cash flow forecast

a financial document that shows the expected month by month cash receipts (cash inflows) and payments (cash outflows) of a business that have not yet occurred

high geared

a large proportion of loan capital to share capital; viewed as risky by finance sources

Insolvency

a profitable business with little or no cash and an inability to pay off its debts

Margin of safety

also known as the safety margin; a measure of the difference between the break-even level of output and the actual (current) level of output; the range of output over which profit is made

Working capital management

an assessment of the way the current assets and current liabilities are being administered

Personal funds

an internal source of finance that comes from personal savings; it is cheap and easily available because there is no interest to be paid; it can prove difficult because of the risk of possibly investing life savings or needing more than what this source can offer; a source of finance for sole traders that comes mostly from their personal savings

Efficiency ratio

assess how well a firm internally utilizes its assets and liabilities; also help analyze the performance of a firm

Return on capital employed

assesses the returns a firm is making from its capital employed

Shareholders

buyers of shares that may be entitled to dividends when profits are made

Gross profit margin

calculated by dividing the gross profit by the sales revenue, expressed as a percentage

Net profit margin

calculated by dividing the net profit before interest and tax by the sales revenue, expressed as a percentage

Semi-variable cost

costs comprising both fixed and variable components; also known as semi-fixed costs or mixed costs

Net profit after interest and tax

equal to net profit before tax less tax

Revenue streams

examples of these include rental income, sale of fixed assets, dividends, interests on deposits, donations, grants, and subsidies

Share (equity) capital

external source of finance; money raised from the sale of shares of a limited company

Business angel

external source of finance; they tend to give easier financial terms than other sources; also tend to invest in the person rather than the business and how viable it is

Debt factoring

gives businesses immediate cash to use to fund other activities; the risk/responsibility of debt collecting is handed to the second party that takes on that invoice;

Long-term liabilities

long-term debts or borrowings payable after 12 months by the business

Current ratio

makes a comparison of a firm's current assets to its current liabilities

Liquidity ratio

measure the ability of a firm to pay off its short-term debt obligations; measures how quickly an asset can be converted into cash; two ratios of this are: current ratio, acid test ratio

Average rate of return (AAR)

measures the annual net return on an investment as a percentage of its capital cost

Short-term finance

money needed for the day-to-day running of a business and therefore provides its needed working capital; lasts for one year or less Examples: overdraft, trade credit, debt factoring

Share capital

money raised from the sale of shares of a limited company

Capital Expenditure

money spent to acquire fixed assets in a business

Acid test (quick) ratio

more stringent indicator of how well a firm is able to meet its short-term obligations; removes stock as part of the current assets; otherwise it is very similar to current ratio

Assets

property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies

Profitability ratio

ratios that asses the performance of a firm in terms of profit-generating ability two types: gross profit margin and net profit margin

Losses

sales that are less than the break-even quantity

Current assets

short-term assets that last in a business for up to 12 months; include cash, debtors, and stock

Current liabilities

short-term debts that are payable by the business within 12 months;

Trading account

shows the difference between the sales revenue and the cost to the business of those sales; establishes the gross profit

Profit and loss statement

shows the record of income and expenditure flows of a business over a given period of time

Balance sheet

statement of financial position that outlines assets, liabilities, and equity of a firm at a specific point in time; the requirement is that the assets must equal the liabilities plus how the assets are financed (equity)

Authorized share capital

suggests the maximum amount the shareholders of a company intend to raise

Solvency

the ability of a company to meet its long-term financial goals

Retained profit

the amount of earnings left after dividends and other deductions have been made

Target profit

the amount of net operating income or profit that management desires to achieve at the end of a business period

Working capital

the capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities

Finance

the control of how money is spent, especially for a company or government

Working capital

the difference between current assets and current liabilities

Net profit before interest and tax

the difference between gross profit and expenses

Cost of Goods Sold (COGS)

the direct cost of producing or purchasing the goods that were sold during that period

Flexibility

the ease with which a business can switch from one source to another

State of the external environment

the factors that the business has no control of

Payback period

the length of time required for an investment project to pay back its initial cost outlay

Target profit output

the level of output that is needed to earn a specified amount of profit

Final accounts

the main ________ __________ are: income statement balance sheet

Cash flow

the money that flows in and out of a business over a given period of time; a major indicator of a firms' ability to meet its financial obligations;

Cash outflow

the monies paid out by a business over a period of time

Cash inflow

the monies received by a business

Opportunity cost

the next best alternative that is forgone after choosing one source over the other

Working capital cycle

the period of time between payment for goods supplied to a business and the business receiving cash from their sale

Investment appraisal

the quantitative techniques used in evaluating the viability or attractiveness of an investment proposal

Break-even quantity/point

the total costs equal the total revenue

internal sources of finance

this can include: personal funds, retained profit, and the sale of assets

fixed assets

type of capital expenditure that includes machinery, land, buildings, vehicles, and equipment; can be used as collateral because of their high fixed costs

Goodwill

value of positive or favorable attributes that relate to a business;

Capital

wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing:

liquidated

when all a firm's assets are sold off to pay any funds owing—leading to its closure

Income statement

AKA profit and loss statement/account; shows the records of income and expenditure flows of a business over a given time period; establishes whether a business has made a profit or loss and how it was distributed at the end of the period

Shareholders

Final accounts for these people are used to assess the safety of their investment; want to make worthwhile returns on their investments

Managers

Final accounts give them information to set target and judge/compare performance within a particular financial year or number of years

Employees

Final accounts matter to them because it indicates information about their jobs (eg. job security or pay raises);

Net assets

Total assets minus total liabilities of an individual or company; also called shareholders' equity or net worth

Revenue

a measure of the money generated from the sale of goods and services

low geared

a smaller proportion of loan capital to share capital

dividends

a sum of money paid to shareholders decided by the board of directors of a company

Business angel

also known as angel investing

Sale of assets

an internal source of finance that happens when a business sells off its unwanted or unused assets to raise funds

Retained profit (earnings)

an internal source of finance; profit that remains after a business has paid corporation tax to the government and dividends to shareholders; also known as ploughed-back profit to be reinvested into the business

Profit

any sales that exceed the break-even quantity

Total contribution

calculated when more than one unit is sol; it is found by subtracting the total variable costs from the total sales revenue

Situation

considerations to be made when deciding on the most appropriate source of finance: status and size-sole traders are less well known amount required-changes the length of payback flexibility state of the external environment gearing

Indirect cost (overhead)

costs that are not clearly identified with the production of specific goods or services

Direct cost

costs that can be identified with the production of specific goods or services

Variable cost

costs that change with the number of goods or services produced; these expenses change in proportion to business activity

Fixed cost

costs that do not change with the amount of goods or services produced; these have to be paid regardless of business activity

Debt factoring

external source of finance; a financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a a percentage of the owed debt in cash

Leasing

external source of finance; a source of finance that allows a firm to use an asset without having to purchase it by cash

Loan (debt) capital

external source of finance; also known as debt capital; the advantage lies in how accessible it is and how it can be arranged for a firm's specific purpose

Trade credit

external source of finance; an agreement between businesses that allows the buyer of goods or services to pay the seller at a later date

Subsidy

external source of finance; financial assistance granted by a government, a non-governmental organization (NGO), or an individual to support business enterprises that are in the public interest

Venture capital

external source of finance; financial capital provided by investors to high-risk, high-potential start-up firms or small businesses; include investment banks; they own a stake in the business and expect dividends

Grants

external source of finance; funds usually provided by a government, foundation, trust, or other agency to businesses that do not need to be repaid

Business angel

external source of finance; highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their business

Loan (debt) capital

external source of finance; moneys sourced from financial institutions such as banks, with interest charged on the loan to be repaid

Grant makers

external source of finance; providers of grants who are very selective on who receives the grants

Overdraft

external source of finance; when a lending institution allows a firm to withdraw more money that it currently has in its account;

Customers

final accounts matter to them because it helps them negotiate better cash or credit terms with firms; they can either extend the trade credit period or demand immediate cash payments

Competitors

final accounts matter to them because it will allow them to assess how they are performing financially

The government

final accounts matter to them because they will check on whether the business is abiding by the law regarding accounting regulations

The local community

final accounts matter to them because they will want to know the business's profitability and expansion potential

Appropriation account

final part of the profit/loss account that shows how the company's net profit after interest and tax is distributed; the distribution is in two forms: dividends to shareholders or retained profit

Collateral

financial security pledged for repayment of a particular source of finance such as bank loans

Gross profit

found by deducting cost of goods sold from sales revenue

Net profit before tax

found by subtracting interest from net profit before interest and tax

Long-term finance

funding obtained for the purpose of purchasing long-term fixed assets or other expansion requirements of a business; time period of between more than five years to around 30 years Examples: long-term bank loans and share capital

GAAP

generally accepted accounting principals integrity, objectivity, professional competence and due care, confidentiality, and professional behavior

Break-even chart

graphical method that measures the value of a firm's costs and revenues against a given level of output and helps in identifying the break-even point

Total revenue

income gained from the sale of goods and services; also known as sales revenue or sales turnover

Fixed assets

long-term assets that last in a business for more than 12 months; can include: buildings, equipment, vehicles, and machinery

Medium-term finance

money mostly used to purchase assets such as equipment or vehicles that have useful lifespans for a specific period of time; duration of between one year and five years Examples: leasing, medium-term bank loans, grants

Revenue Expenditure

money spent on the day-to-day running of a business; include payments or expenses such as rent, wages, raw materials, insurance, and fuel

Capital Expenditure

money spent to acquire items in a business that will last for more than a year and may be used over and over again

Revenue Expenditure

money used in the day-to-day running of a business

Profit

obtained by subtracting total fixed costs from the total contribution

Intangible assets

patents, good will, copyright laws, and Trademarks; difficult to value and subjective in nature, often times not shown in balance sheet

Variable interest rate

referring to the interest rates on loans for capital for finance; this type of interest changes periodically based on the prevailing market conditions;

Fixed interest rate

referring to the interest rates on loans for capital for finance; this type of interest does not fluctuate and remains fixed for the entire term of the loan repayment

Contribution per unit

refers to the difference between the selling price per unit and variable cost per unit

Cost

refers to the total expenditure incurred by a business in order to run its operations

Plough-back

retained profits that can be reinvested in the business

Gearing

the relationship between share capital and loan capital

Target price

the retail price for which a producer hopes to sell a product that is currently being developed

Stock exchange

the shares of public limited companies are sold in a special share market, which does not happen when private limited companies sell their stocks