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Buss3 A2 Key Terms

Finance

QuestionAnswer
A quantifiable statement of a business’s goals which should include measurable targets. Corporate objectives
A quantifiable statement of a department’s goals which should enable it to contribute to the achievement of the business objective. Functional objectives
The plan by which the department intends to achieve its functional objectives on a day-to-day basis. Functional strategy
Specific Measurable Agreed Realistic Time-based SMART targets
A financial objective focused on maintaining a healthy cash balance. Cash-flow targets
The process by which businesses attempt to maximise profits by keeping costs low. Cost minimisation
The minimum percentage return a business strives to achieve from the capital employed in business activities. ROCE targets
The financial rewards to a shareholder in return for their investment; this can include dividends paid and increased share value. Shareholders’ returns
Aiming to achieve a satisfactory level of profit. Satisficing
A member of the board of directors who also holds a position of responsibility in the business on a day-to-day basis, for example marketing director, finance director. Executive director
A member of the board of directors who does not work for the business on a day-to-day basis but sits on the board in an advisory or consultative role. Non-executive director
A financial document that summarises a business’s trading activity and expenses to show whether it has made profit or a loss. Income statement
Profit after cost of sales has been deducted. Gross profit
Profit after all other expenses have been deducted, also referred to as net profit. Operating profit
Gross profit expressed as a percentage of sales revenue. Gross profit margin
Operating profit expressed as a percentage of sales revenue. Operating profit margin
The sustainability of profit. Profit quality
How profit is being used, i.e. whether it is being ploughed back into the business or distributed to shareholders. Profit utilisation
A financial document that summarises the net worth of a business – it balances total assets with total equity and liabilities. Balance sheet
The IFRS term for stocks. Inventories
The total amount of money being utilised in the business from share capital and retained profit. Total equity
Items of value owned by the business that are likely to be kept for more than one year. Non-current assets (fixed assets)
Resources owned by the business whose value varies as a result of daily business activities, e.g. cash, inventories. Current assets
Purchased items without physical form such as goodwill or brand names. Intangible assets
Financial obligations of the business payable within 12 months. Current liabilities
Debts that the business has more than one year to repay. Non-current liabilities (long-term liabilities)
Current liabilities plus current assets [do not forget that current liabilities are a negative figure and shown in () on the balance sheet] Net current liabilities
Total assets minus total liabilities [also obtained by non-current assets plus net current liabilities minus non-current liabilities]. Net assets
A measure of a firm’s ability to meet day-to-day expenses. Working capital
An accounting practice which allows the value of a fixed asset to be spread over its useful life. Depreciations
Amounts owed by debtors to the business. Trade receivables
Someone who owes the business money, i.e. a customer who has not yet paid. Debtor
Amounts owed by the business to creditors. Trade payables
Someone the business owes money to, i.e. a supplier who has not yet been paid. Creditor
A business’s ability to meet short-term cash payments on time. Liquidity
A measure of the ability of a business to meet short-term debts. Current ratio
A measure of the ability of a business to meet short-term debts from liquid assets. Acid test ratio
The relationship between business’s profits and sales revenues. Profitability
A measure of how efficiently a business is using its capital to generate profits. Return on capital employed(ROCE)
A measure of how effectively a business is using its assets to generate sales. Asset turnover
Capital employed = total equity + non-current liabilities. It is the total capital invested in the business from long-term sales. Capital employed
A measure of how many times per year a business turns over its stock through sales. Inventory (or stock) turnover
A measure of the average number of days taken to pay suppliers. Payables (creditor) days
A measure of the average number of days taken by the business to collect its debts from customers. Receivables (debtor) days
The percentage of capital employed that comes from non-current liabilities. Gearing ratio
Ratios that help measure the value of the return received by shareholders. Shareholder ratios
The number of pence per share received by shareholders. Dividends per share
A measure of the return received on an investment, expressed as a percentage of the current market price of the share. Dividend yield
The long-term financial plan of action to achieve the financial objectives of the business. Financial strategy
The range of options available to firms to fund business operations including banks, venture capitalists and share capital. Sources of finance
A section of a business for which costs and revenues and therefore profit can be identified. Profit centres
The purchase of assets that will remain in the business in the medium to long term, accounted for in the balance sheet. Capital expenditure
The process of analysing the financial merits of a possible future investment. Investment appraisal
Calculation of how long it will take to recoup the cost of an initial investment. Payback
Average annual profit expressed as a percentage of initial investment. Average rate of return (AVR)
The total net return of an investment stated in today’s monetary value. Net present value (NPV)
The rate by which future cash flows are reduced (discounted) to reflect current interest rates. Discount factor
Recognition of the fact that £1 today is worth more than £1 in the future due to a fall in its purchasing power. Time value of money
A pre-determined target against which to judge an investment. Investment criteria
Created by: carole appleton