117-122 finance

• Budget


  A financial plan for the future aimed at controlling expenditure and/or revenues
• Variance analysis


  Checking actual outcomes against predicted outcomes
• Adverse variance


  When the actual figure will lead to less overall profit being made than was budgeted. This could either be that actual costs were higher than budgeted or actual revenue was lower than budgeted
• Favourable variance


  When the actual figure will lead to more overall profit being made than was budgeted. This could either be that actual costs were lower than budgeted or actual revenue was higher than budgeted
• Internal source of finance


  Generated from within the business e.g. owner's capital, sale of assets, reinvested profit
• External sources of finance


  Raised from outside of the business e.g. money raised from share issue/capital, overdraft, venture capital, bank loan, hire purchase, leasing, trade credit, debt factoring
• Overdraft


  An arrangement where a bank allows its customer to take out more money than is in their account. The bank can charge interest and/or a fee for this arrangement. It is for short term use only.
• Loan


  An agreed sum borrowed from the bank paid back over a set period of time (long term) with additional interest. It could be available very quickly once agreed.
• Share capital


  The money invested in a company by the shareholders. Share capital is a long-term source of finance. In return for their investment, shareholders gain a share of the ownership of the company. LTD and PLC companies have share capital.
• Venture capital


  Usually invests in small-medium high risk growing businesses in return for a high stake in the business and has a direct say in how the business is run. This type of finance is usually more appropriate for new smaller businesses with less shareholders/owners present
• Leasing


  Where a business pays for the use of an asset/equipment but will never own the asset, improving short term cash flow compared to buying the asset outright
• Trade credit


  When a business buys raw materials, components, services or other goods from another business but agrees to pay for those at a later scheduled date.
• Debt factoring


  Where a business can raise cash by selling their outstanding sales invoices (money owed by customers) to a third party (a debt factoring company) at a discount. This is a short term source of finance and is useful when the business has a cashflow problem
• Cash flow forecast


  A projection/prediction of the likely cash inflows and outflows in a business.
• Income statement


  Shows the business financial performance over a given time period e.g. one year. It shows gross profit and net profit.
• Gross profit


  Calculates a company's revenues minus its cost of goods sold (direct costs)
• Cost of goods sold (cost of sales)


  The direct costs (variable costs) related to the supply of a product/service.
• Net profit


  Measures the revenue minus all of the expenses. The formula is gross profit-expenses or indirect costs
• Gross profit margin


  Gross profit/sales revenue x 100. It shows how well a business controls its production costs e.g. raw materials. It is an indicator of how efficient the business is at making and selling its product
• Net profit margin


  Net profit/sales revenue x 100. It shows how efficiently a business controls all its expenses. It shows how well it manages its expenses