Financial Language

1. Financial Language Overview The language of business Key concepts Common terms Fixed v. Variable Costs Capital v Revenue Expenditure Limitations of Financial Information Smart Practice Guide

2. Finance is … The language of business not just of accountants ❶ Communicate with colleagues and staff ❷Deal with accountants, investors and lenders

3. Key Concepts www.fabeducation.com

4. Assets • Are items owned by a business: • to generate sales and hence profits (fixed assets such as premises, plant and vehicles) • Or • to convert into cash (a current asset such as debtors and stocks)

5. Liabilities Are the funds provided to the business by way of loans, credit and deferred payments i.e. what it "owes". The amounts to be settled within the next twelve months are Current Liabilities And Those after twelve months “Long Term or “Non-current”

6. Equity (Owners’ Funds) Means rights and in finance refers to the rights of the owners to the surplus of assets over liabilities i.e. the Net Worth of the business aka Owners’ Funds.

7. Capital Employed Capital employed is the total long term funding in a business i.e. Owners' Funds + Long Term Creditors.

8. Working Capital (Liquidity) Working capital (Net current assets) is the difference between Current Assets and Current Liabilities. A surplus of Current Assets over Current Liabilities means that funds are available to develop the business after meeting current commitments. A deficit means that the business is overtrading and could be at risk of failure, unless it can introduce additional capital.

9. Insolvent • A business is insolvent when it is unable to satisfy Creditors or discharge liabilities, either because: • Of an inability to pay debts as they fall due or • Its Liabilities exceed Assets and Owners Funds combined • a) is a “liquidity crisis” i.e. an urgent but often recoverable situation. • b) is called “Balance Sheet Insolvency” and is usually terminal as there is little if any value left in the business. X

10. Fixed and Variable Costs Fixed Costs: These are costs such as salaries and rent which do not automatically change as volume increases/decreases. They change abruptly in a steps-of-stairs pattern when their capacity is reached. Variable costs change in direct proportion to changes in sales volume. Materials which have to be included in every unit sold would be a good example. Sales € Variable Costs Fixed Costs Increasing volume of output www.fabeducation.com

11. Capital v. Revenue expenditure Capital expenditure refers to "material" (significant relative to the scale of the business) expenditure on fixed assets. Such expenditure will not be charged in full to the profit and loss account in the period that it is made but will be phased or "written off" over the anticipated useful life of the asset in the form of a depreciation charge. This conforms to the principle of "true and fair" and avoids misleading distortions to profit from one period to the next. Revenue expenditure is repetitive expenditure on day to day items such as wages, goods for resale and overheads. The test is that the benefit of the expenditure will be used in the current accounting period as opposed to capital expenditure which creates benefits for a number of accounting periods. www.fabeducation.com

12. Limitations of Financial Information www.fabeducation.com

13. Exercise Over 100 questions and 400 options in 6 categories www.fabeducation.com

14. Practice 6– fixed and variable costs The best way to embed knowledge is to use FaBLinker to actually see how the terms and concepts work in practice Test how variable and fixed costs behave Commission on sales What happens to Overheads when you increase selling price or the number of units sold? What would happen as you change sales if the Overheads were composed only of fixed or variable costs? www.fabeducation.com

15. Practice 7 – Your ideas Liquidity Gearing Revenue expenditure Insolvent Working Capital Profit Loss Capital Expenditure Set up these situations in FaBlinker And any others you can think of www.fabeducation.com