Business Terms

Business Revision-

Direct Costs

Direct costs are costs that are directly involved in producing products. For example raw materials.

Indirect Costs

Indirect costs are costs that do not directly go into the producing of products. For example overheads.

Fixed Costs

Fixed costs are those that are not dependant on the level of production. I.e. Telephone bills.

Variable Costs

Variable are costs that change dependant of the level of output. For example raw materials.

Break Even

The break even point is the point where a businesses outputs will just cover it's cost. Calculating the break even point: fixed costs/(selling price Ð'- variable costs)

Internal Finance

Five sources:

Retained Profit (Putting profit back in)

Fixed Assets (Selling them)

Re-invest savings

External Finance

Short term (less than 1 year):

Overdraft

Personal Savings

Medium-term (1-5 years):

Bank loan

Lease assets instead of buying

Grants

Long-term(>5 years):

Mortgage

Issue more shares

Factors that affect choice:

Amount needed. A small amount of finance can be gained from overdraft, large from loan, etc.

Cost of finance. Load: High interest. Grant: Free!

Cash-flow

Cash flow is the flow of all money. Money flows in when products are sold. Money flows out when products are produced.

Liquidity: How well money flows around the business. I.e. If not enough money is available to buy materials, bad liquidity.

Poor cash flow can cause:

Bad motivation. Staff may not get paid on time, causing staff to get all angry.

Not able to produce more products.

Cash flow forecast

Cash flow forecasts allow businesses to predict cash flow and take action in case of bad liquidity.

The trading, profit, and loss account

The trading, profit and loss account compares a businesses income to it's cost of running the business over one year. It calculates gross, net and then retained profit.

The trading account contains:

Values to calculate gross profit, I.e. turnover, cost of sales.

Values to calculate net profit, I.e. gross profit Ð'- expenses (=operating profit).

Values to calculate retained profit, I.e. net profit Ð'- tax Ð'- dividends.

Limited companies are required to make these by law.

The balance sheet

The balance sheet is used to determine where money has gone. It records money coming in and money coming out. These values should equal out, hence balance sheet.

It first calculates Fixed Assets, then Current Assets, then Current Liabilities.

Current Assets minus Current Liabilities produces Net Current Assets.

Net Current Assets is added to Fixed Assets to give Net Assets.

Shareholder funds (I.e. money coming from owner of business, including retained profit) are calculated.

Then Long-term liabilities (I.e. Liabilities that will take over a year to pay off, e.g. Bank loans) are calculated.

Profit added to starting capital gives Capital Employed.

Capital Employed and Net Assets should be balanced.

Businesses must also make one of these by law.

Gross profit margin

This shows how much gross profit is made in percentage to turnover. It is calculated by dividing gross profit by sales. I.e.

_Gross profit_

Net Profit Margin = Sales Turnover

Net profit margin

Net profit margin shows how much net profit is made in percentage to sales turnover. It is calculated in the same way as gross profit. I.e.

__Net profit__

Gross Profit Margin = Sales Turnover

Return on capital employed (ROCE)

ROCE shows how much profit is made as a proportion to capital employed. Put simply, ROCE is how much profit is made as a percentage to how much is invested in the business all together.

ROCE = Net Profit

Capital Employed

Key Terms

Turnover - Money from sales

Profit - Turnover minus cost of sales and expenses

Assets - Things owned by a businesses

Current Liabilities - Things that need to be paid soon, I.e. Overdrafts.

Current Assets - Assets that will last for a short amount of time. I.e. Cash, stock.

Net