Finance Key Terms

• What is adverse variance?

  Adverse variance refers to a situation where actual results are worse than expected e.g. costs are higher or revenue is lower than expected
• What is average unit cost?

  Total cost in a period divided by the number of units produced
• What is break-even?

  The level of output and sales at which total sales revenue equals total costs
• What is a budget?

  A budget is a financial plan that outlines expected income and expenses over a specific period of time.
• What is cash?

  Legal tender used for making and recieving payments, and money held in bank accounts or in the form of banknotes and coins
• What is cash flow?

  A cash flow is the flow of cash into and out of a business
• What is a cash inflow?

  Cash flowing into a business from sales or loans
• What is cash outflow?

  Cash outflow is when cash flows out of a business
• What is contribution per unit?

  The contribution per unit is the difference between the selling price per unit and the variable cost per unit.
• What is cost of sales?

  The direct costs incurred to produce or acquire goods sold by a company.
• What are debentures?

  Debentures are long-term loans with fixed interest rates which may not have a specific repayment date
• What is debt factoring?

  Debt factoring is when a business will sells its debts or invoices which have not yet been collected from another company/customer to a third party at a discount in exchange for immediate cash with which to finance continued business.
• What is dividend per share?

  The reward per share that is paid to shareholders of a limited company
• What is a dividend yield?

  The dividend yeild is a financial ratio that tells you the percentage of a company's share price that it pays out in dividends each year. For example, if a company has a £20 share price and pays a dividend of £1 per year, its dividend yield would be 5%.
• What is external finance?

  Finance from sources outside the business
• What is favourable variance?

  When costs are lower than expected or revenue is higher. For example when more profit is made than expected.
• What are fixed costs?

  Costs that do not alter when the level of output and sales alter
• What is gross profit?

  Gross profit is revenue minus the cost of sales
• What is internal finance?

  Finance obtained from within a company's own resources, such as retained profit or selling assets.
• What is a loan?

  Money lent by a lender to a borrower, usually or a fixed term, and on which interest is payable by the borrower
• What is long-term finance?

  Finance that is intended for repayment usually after 3 years or more
• What is the margin of safety?

  The difference between the break-even level of output and the actual or budgeted output
• What is net cash flow?

  Cash inflow minus cash outflow
• What is operating profit?

  The gross profit minus all other expenses required to bring that product to the customer
• What is share captial (equity)?

  Equity is the money raised by selling shares to shareholders
• What is an overdraft?

  A flexible source of short-term finance that allows a business to spend more than what is in the current bank account up to an agreed limit
• What is a profit margin?

  The profit margin is the percentage of revenue that remains as profit after deducting expenses.
• What are retained profits?

  The profits of a business, after interest and tax, that are not paid out to the business owners but are kept within the business and reinvested
• What is return on investment?

  The financial benefit gained from an investment expressed as a percentage of the original investment
• What is short-term finance?

  Finance that is needed by a business for a short period of time, usually less than one year
• What is total contribution?

  The difference between sales revenue and total variable costs in a period. This contributes to covering fixed costs and making a profit. At break-even point, total contribution = fixed costs
• What is trade credit?

  When products can be purchased and payment for them is not required immediately. For example, 30 or 60 days might be allowed before payment must be made
• What are trade payables?

  Trade payables are the amounts owed by a company to its suppliers for goods or services received on credit.
• What are trade recievables?

  Trade receivables are amounts owed to a company by its customers for goods or services provided on credit.
• What are variable costs?

  Costs that increase in total with increase in the volume of output and sales
• What is variance?

  Variance is the difference between budgeted and actual performance
• What is variance anlysis?

  The process of calculating and examining variances in order to improve business performance
• What is venture captial?

  Finance provided by investors who specialise in investing in risky business ventures such as start-ups. These investors usually give advice to risky businesses
• What is crowd funding?

  Fundraising from a large number of people, typically through an online platform.
• What is a government grant?

  An amount of money available from the government that does not require payment