LO4: Able to use financial info to check financial health of businesses
definition of financial terms
cost
fixed costs - are not affected by how much the business makes or sells, have to be paid even if the business produces or sells nothing, examples include: business rates, heating and lighting and salaries
variables costs - these vary directly with the output e.g. if the output doubles then cost doubles etc - if output is 0 then variable costs will be 0 - examples include raw materials, packaging materials, wages
revenue
income a business receives - known as sales revenue, total revenue, turnover - examples include cash sales, packaging materials and wages
cash flow
movement of money in and out of the business - money going out is cash outflow, money coming in is cash inflow - net cash flow (difference between the 2) - if inflows are greater than outflows then net cash flow will be positive - if outflows are greater than inflows, then net cash flow will be negative
profit/loss
difference between a firms revenue and firms costs - if revenue is greater than costs then business will make profit - if costs are greater then revenue then business will make a loss
break-even point
level of sales where total revenue equals total costs - neither profit or loss is made - business has covered its costs but has not yet made a profit
margin of safety
how far beyond the breakeven point a profitable firm is operating - amount of sales could fall by before the business would make a loss
how to calculate profit/loss, BEP & MOS
profit/loss = total revenue - total cost
total revenue = selling price x quantity sold
margin of safety (in units) = actual output in units - breakeven output in units
breakeven output = fixed costs/(selling price - variable costs)
income statement- document that reports the profit or loss the business has made
cash flow statements & forecasts
cash flow statement - document that shows the historic flow of funds into and out of a business - documents which show the actual cash inflows and actual cash outflows over a period of time
cash flow forecasts - document that predicts the expected cash flows of funds in and out of the business in the future -
key components of a cash flow statement and forecast
cash inflow - funds flowing into the business i.e. receipts
cash outflows - funds flowing out of the business i.e. payments
net cash flows - difference between cash inflows and cash outflows
opening balance - amount of funds available at the start of the time period (usually a month)
closing balance - amount of funds available at the end of the time period (usually a month)
gross profit - accounting term used when variable costs (cost of sales) have been deducted from revenue
operating profit - term used when cost of sales and operating expenses have been deducted from revenue
profit before tax - term used when cost of sales, operating expenses and non operating expenses (finance costs) have been deducted from revenue
net profit - accounting term used all business costs have been deducted from revenue
dividends - payments made to shareholders as a reward for investing in the company
retained profit - amount of profit not distributed to owners, sum is ploughed back into the business
statement of financial position- document that shows what a business is worth at a given moment in time
non-current assets - assets that the business owns are intended to remain in teh business to help it carry out its day to day operations e.g. property, vehicles, fixtures and fittings
net book value - value of a non-current asset at the present time - now how much it cost to purchase - vehicles machinery and computers are non current assets which tend to lose value over time - depreciation
current assets - items the business owns that are likely to be converted to cash during its annual trading e.g. invenotry, cash at bank, trade recievables
trade receivables - money owed to the business by debtors, usually because goods have been sold to them on credit - buy now, pay later
prepayments - monies paid in this accounting period which relate to the next accounting period e.g. advanced payment of rent or insurance
trade payables - money the business owes to creditors, usually for the purchase of stock which the business has on credit - buy now, pay later
accurals - expenses for this accouting period which have yet to be paid for - e.g. broadband expenses for end of december which are still owing (possibly because bill has not arrived)
net assets - all of a businesses assets minus all of its liabilities - net assets figure will match the total equity figure showing the net worth of the business
total equity - total capital invested in teh business - this figure will match the net assets figure showing the net worth of the business
key components = assets (what business owns), liabilities ( what the business owes), capital (owners funds that are financing the business