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