Unit 3.3 | Finance - ALL definitions

Name	Definition
Fixed costs	Costs that do not change as output changes. E.g: rent, salaries, insurance.
Variable costs	Costs that change as output changes. E.g. raw materials, wages.
Direct costs	Costs that can be directly linked to particular product lines. E.g. costs of running the machinery used to manufacture individual products, cost of raw materials used in the product.
Indirect costs/Overheads	Costs that are shared between the different product lines and do not relate to one particular product line. E.g. cost of stationery used for all the company’s products, salaries of office staff who are involved with all the products.
Break-even point	The number of products which have to be sold to cover the costs. selling price - variable cost = contribution total fixed costs ÷ unit contribution = break-even point
Assets	Items of value which are owned by the business. It can be: Fixed assets: items of value owned by a business for more than one year. E.g. Buildings, vehicles, equipment Current assets: items of value owned by a business for less than a one year. E.g. Debtors, cash
Liabilities	Items owed by the business. It can be: Long-term liabilities: long-term borrowings that does not have to be paid in one year. Current liabilities: short-term borrowings that has to be paid in less than one year. E.g. creditors, dividends, corporation tax.
Gross Profit	It is the difference between the costs of goods sold and the sales revenue. It is calculated using a trading account. Gross profit = Sales revenue - Cost of goods sold
Net Profit	The profit made by a business after all cost have been deducted from sales revenue.  Net profit = Gross profit - overhead costs
Profit and Loss Account	The profit and loss account shows how net profit is calculated.
Balance sheet	The balance sheet shows you a business's assets and liabilities at a particular time.
Working capital	Used to pay short-term debts and known as net current assets. If a business do not have enough working capital then it might be forced to go out of business. Working capital = current assets - current liabilities
Net Assets	Shows the net value of all assets owned by the company. These assets must be paid for or finance by shareholders' funds or long term liabilities. Net assets = Fixed assets + Working capital
Shareholder’s Funds	The total sum invested into the business by its owners. This money is invested in two ways: Share capital: Money from newly issued shares. Retained profits: Profit that is owned by shareholders but not distributed to them but kept as part of shareholders' funds.
Capital employed	Long-term and permanent capital of a business that has been used to pay for all the assets.  Capital employed = Shareholders' funds + long-term liabilities Capital employed = net profits
ROCE (Return on capital employed)	It shows how profitable the owners’ investment is by calculating the percentage return. It allows the investors to asses whether is worthwhile continuing to invest in the business. ROCE = (net profit ÷ capital employed) x 100
Gross Profit Margin	Shows what percentage of turnover is represented by the gross profit.  Gross Profit Margin = (gross profit ÷ sales turnover) x 100
Net Profit Margin	Shows what percentage of turnover is represented by the net profit. Net Profit Margin = (net profit ÷ sales turnover) x 100
Current ratio	Checks the ability of the business to pay its short-term debts. Current ratio = current assets ÷ current liabilities
Acid test ratio	To see if the business can meet its short-term debts without having to sell any stock. Acid test ratio = (current assets - stock) ÷ current liabilities
Liquidity	Measures the ability of the business to pay back its short-term debts.
Dividends	Payment made to shareholders from the profits of a company after it has paid corporation tax.
Credit Terms	The goods can be used before the payment is made.
Cash Flow	The flow of money in and out of a business. It can be: Cash inflow:  sale of goods for cash payment from debtors borrowing from a source sale of unwanted assets Cash outflows: purchasing goods for cash payment of wages/salaries purchasing fixed assets repaying loans and creditors
Cash flow forecast	It is useful to predict when they might face a cash shortage and need some short-term finance.
Internal Finance	Money which is obtained from within the business itself. E.g.: retained profit sale of existing assets running down stocks to raise cash owner’s savings
External finance	Money obtained from individuals or institutions outside of the business. E.g.: issue of shares bank loans selling debentures factoring of debts
Short-term finance	Provides the working capital needed by the business for day-to-day operations. It is finance needed for up to three years. E.g. overdrafts trade credit
Medium-term finance	Finance which is available for between three to ten years. E.g.: bank loans hire purchase leasing
Long-term finance	Finance which is needed for more than ten years. E.g.: issue of shares long-term loans or debt finance