Financial estimation and Sourcing

Module-3
 Content
• ESTIMATION OF CAPITAL REQUIREMENTS
– PRE-OPERATIVE EXPENSES,
– FIXED EXPENSES
– WORKING CAPITAL
• PROJECT FINANCING - SOURCES OF FUNDING-
EQUITY FINANCING - VENTURE CAPITAL, ANGEL
INVESTORS,
• DEBENTURES AND SHARES,
• TYPES OF SHARES
• CROWD FUNDING
 ESTIMATION OF CAPITAL
REQUIREMENTS
• Expenses/costs begin much before the
production commences.
• It begins from the day you think of starting a
business.
• Expenses prior to commencing production
 post commencement of production
How much money do you need until your business
is up and running?  Startup capital + Fixed
capital+ working capital
• You can calculate the capital requirements by
adding founding expenses, investments and
start-up costs together.
• The reason for estimating capital requirement
is to determine the total amount of capital
you will need to operate your business until
the business is able to create positive cash
flow.
• Total capital requirement = Preliminary costs
+ Preoperative costs + Fixed Capital + Working
Capital
 Preliminary expenses

Expenses incurred before the incorporation of the

company.
Examples are:
Market research cost, Legal cost, Professional fees,
Stamp duty, Printing fees, statutory fees ,company
logo, survey report, Charges paid to charter ac.
counting firm before forming a company.
Startup cost = Preliminary expenses + pre
operative expenses
 Pre-operative Expenses
• Definition: Pre-operating expenses are those
expenses which are needed in order to plan and
to prepare for the business operation.

• Expenses incurred after company formation but

before commencement of business

• This includes preliminary expenditure to be

incurred by the unit
– For project formulation
– Legal opinion charges

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– Charges on building plan and plan approval
from an authorized engineer
– Clearances from various govt. departments
/ bodies
– Loan acquisition costs
– Interest during construction
– Salaries
– Travel expenditure
– Trial run expenditure
– Market survey ( Not Market research)
– Testing
• Travel expenses to source
- Suppliers of raw materials
- Machinery
- Negotiate with potential market outlets, etc.

• Worker training costs, before production

commences
- On-the-job training to the workers by
trained/ experienced professionals/ trainers
- Stipend during on-the-job training

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 Fixed capital
• Expenses are required to create fixed assets
• Fixed assets are long-term assets that a company
purchases and uses for the production of
its goods and services.
• Fixed assets are noncurrent assets meaning the
assets have a useful life of more than one year.
• Examples of fixed assets: Land, Building,
Machinery, Equipment, Tools, Furniture, fixtures
etc.
• The funds required in fixed assets remain
invested in the business for a long period of time.
 Working capital
• The capital of a business which is used in its
day-to-day trading operations.
• These costs vary continuously and is in
proportion to the production.
• Examples: Wages, Electricity, raw material
cost, Consumables etc
 SOURCE OF FUNDING

Source

Internal External

Internal Sources:
• Personal savings and investments
• Loans from PF, LIC etc.
• Loan from friends and relatives
• Mortgage of assets like land, building, shares ,
bonds, debentures etc.
• Profits earned or transferred from existing
business or investment or trade.

External Sources:
Financial Institutions:
EG: IDFC, IDB I, SIDBI,TIIC
• Banks- Commercial & Cooperative Banks

Commercial  Private, Nationalized,

Foreign, Regional Rural

Cooperative  Urban and state

cooperative
Land Development bank
NABARD Nat. Bank for Agri & Rural Dev
• Private lending Institutions: Eg: Magnum finance
• Venture Capitalists: Canbank VC
• Angel Investors
• Crowd Funding
• Private Lenders
• Business Incubators
• Educational institutions
• Debentures and Bonds
• Equity funding
 EQUITY FINANCING
• Equity financing is the process of raising capital
through the sale of shares in an enterprise.
• Equity financing essentially refers to the sale of an
ownership interest to raise funds for business
purposes.
• Equity financing spans a wide range of activities in
scale and scope, from a few thousand Rupees raised
by an entrepreneur from friends and family, to
giant initial public offerings (IPOs) running into crores
by household names such as L&T, Reliance etc.
• While the term is generally associated with
financing by public companies listed on an exchange,
it includes financing by private companies as well.
 Venture Capital
Venture capital is viewed broadly as a
professionally managed pool of equity capital
and frequently the equity pool is formed from
resources of wealthy limited partners.
The limited partners, who supplied the
funding, are frequently institutional investors
such as insurance companies, endowment
funds, bank trust departments, pension funds,
and wealthy individual families.

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• In other words: Venture capital is financing that
investors provide to startup companies and small
businesses that are believed to have long-term
growth potential.
• VC generally comes from well-off investors,
investment banks & any other financial institutions.
• However, it does not always take just a monetary
form but can be in the form of technical or
managerial expertise.
• The venture capital investment is made when a VC
buys shares of such a company and becomes a
financial partner in the business.
• Venture Capital investment is also referred to risk
capital or patient risk capital, as it includes the risk of
losing the money if the venture doesn’t succeed and
takes medium to long term period for the
investments to fructify.
 Types of Venture Capital firms

Types of Venture Capital firms

Pvt. VC firms Small business Industry sponsored: State Govt. University

investment cos. sponsored sponsored
Banks
Fin. Inst.
Non Financial Inst.

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Features of Venture Capital investments
• High Risk
• Lack of Liquidity
• Long term horizon
• Equity participation and capital gains
• Venture capital investments are made in
innovative projects
• Suppliers of venture capital participate in the
management of the company
 Venture Capital Process
• Entrepreneur needs to understand the Venture Capital
– Philosophy
– Objective
– Process

• Objective:
– To generate long term capital appreciation through debt and equity
investments
– More risk is involved in early stages of a company hence high ROI is
expected compared to later stages of development

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 Risk and return criteria

Lowest risk
Highest risk

Early Development Acquisitions

stage and leveraged
financing buyouts

50% 40% 30%

ROI ROI ROI

Highest return Lowest return

expected expected

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 Contd…
• The VC may or may not seek control of the company
• The VC would prefer to have the firm and entrepreneur at
most risk
• A VC would want at least one seat on the board
• A VC would do anything to support the management team so
that the firm prospers
• The VC is expected to provide guidance and the management
is expected to run the firm
• The VC will support the management with investment,
financial skills, planning and expertise in required fields.

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 Contd…
• The VC expects the firm to satisfy 3 general criteria before
committing to the venture

1. A strong management team

- Experience
- Background
- Commitment
- Expertise
- Capabilities
- Flexibility etc.
2. Product and/or market opportunity must be unique, having a
differential advantage in a growing market
- It is better when protected by a patent or trade
secret
3. The business opportunity must have significant capital
appreciation

A VC typically expects 40 to 60 % ROI

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 VC funding Process
• The venture capital funding process typically
involves four phases in the company’s
development:

1. Idea generation
2. Start-up
3. Ramp up
4. Exit
• Step 1: Idea generation and submission of the B Plan
• The initial step in approaching a Venture Capital is to
submit a business plan. The plan should include the
below points:
• There should be an executive summary of the business
proposal
• Description of the opportunity and the market
potential and size
• Review on the existing and expected competitive
scenario
• Detailed financial projections
• Details of the management of the company

There is detailed analysis done of the submitted plan, by

the Venture Capital to decide whether to take up the
project or no.
• Step 2: Introductory Meeting
• Once the preliminary study is done by the VC
and they find the project as per their
preferences, there is a one-to-one meeting
that is called for discussing the project in
detail.
• After the meeting the VC finally decides
whether or not to move forward to the due
diligence stage of the process.
• Step 3: Due Diligence
• The due diligence phase varies depending
upon the nature of the business proposal. This
process involves solving of queries related to
customer references, product and business
strategy evaluations, management interviews,
and other such exchanges of information
during this time period.
• Step 4: Term Sheets and Funding
• If the due diligence phase is satisfactory, the
VC offers a term sheet, which is a non-binding
document explaining the basic terms and
conditions of the investment agreement. The
term sheet is generally negotiable and must
be agreed upon by all parties, after which on
completion of legal documents and legal due
diligence, funds are made available.
The venture capital funding procedure gets complete in
six stages of financing corresponding to the periods of a
company’s development
• Seed money: Low level financing for proving and
fructifying a new idea
• Start-up: New firms needing funds for expenses related
with marketingand product development
• First-Round: Manufacturing and early sales funding
• Second-Round: Operational capital given for early
stage companies which are selling products, but not
returning a profit
• Third-Round: Also known as Mezzanine financing, this
is the money for expanding a newly beneficial company
• Fourth-Round: Also called bridge financing, 4th round
is proposed for financing the "going public" process
 Types of financing
• Early stage financing
• Expansion financing
• Acquisition or Buyout Financing

Advantages of Venture Capital

• They bring wealth and expertise to the company
• Large sum of equity finance can be provided
• The business does not stand the obligation to repay the
money
• In addition to capital, it provides valuable information,
resources, technical assistance to make a business
successful
 Disadvantages of Venture Capital
• As the investors become part owners, the autonomy
and control of the founder is lost
• It is a lengthy and complex process
• It is an uncertain form of financing
• Benefit from such financing can be realized in long run
only
Exit route
• There are various exit options for Venture Capital to
cash out their investment:
• IPO
• Promoter buyback
• Mergers and Acquisitions
• Sale to other strategic investor
 ANGEL INVESTORS

• Angel investors are typically a diverse group of

individuals who have amassed their wealth
through a variety of sources. However, they
tend to be entrepreneurs themselves, or
executives recently retired from the business
empires they've built.
• One of the most common and controversial
characteristics of working with angel investors
is that they may take active management roles
and board seats in the companies in which
they invest.
• This often means that entrepreneurs give up
some control over their businesses.
• However, angel investors also can provide
crucial managerial or technical expertise,
particularly in areas where the entrepreneur is
less confident.
 DEBENTURES AND SHARES

• A debenture is a medium to long-term debt

format that is used by large companies to
borrow money
• Debentures are typically loans that are
repayable on a fixed date, but some
debentures are irredeemable securities (these
are sometimes called perpetual bonds), which
means that they do not have a fixed date of
expected return of the funds.
• Most debentures are secured on the borrower’s
reputation or credit history and based on the
borrower’s assets.
• Most debentures also pay a fixed rate of
interest. It is required that this interest is paid
prior to dividends being paid to shareholders.
• Debenture holders (investors) do not have any
rights to vote in the company's general meetings
of shareholders, but they are allowed separate
meetings or votes e.g. on changes to the rights
attached to the debentures.
• The main advantage of debentures to
companies is the fact that they have a lower
interest rate than e.g. overdrafts. Also, they
are usually repayable at a date far off in the
future.
• For an investor, their main advantages are that
they are often easy to sell in stock exchanges
and they contain less risk than other options
such as equities, for example.
• There are two types of debentures:
• Convertible debentures: Convertible bonds or
bonds that can be converted into equity shares of
the issuing company after a predetermined
period of time. Convertible bonds are more
attractive to investors since the bonds have the
ability to convert and also attractive to
companies since they typically have lower
interest rates than non-convertible corporate
bonds.
• Non-convertible debentures: regular debentures
which cannot be converted into equity shares of
the liable company. Since they are not able to
convert, they usually carry higher interest rates
than convertible debentures.
 Shares
Shares are units of ownership interest in a
a corporation or financial asset that provide for
an equal distribution in any profits, if any are
declared, in the form of dividends.
The two main types of shares are common
shares and preferred shares.

– Signifies ownership in the company

– A company might have thousands of
Shareholders
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 Characteristics of a share
• Right to dividends declared on shares.
• Generally a right to vote at general meetings.
• Right to receive assets.
• Obligation to subscribe capital of a given amount.
• Rights of membership under the CA 1985 &
Memorandum & Articles of Association, e. g. right to
vote attached to ordinary shares.
• Transferable nature subject to restrictions in the
articles.

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 Types of shares
• Ordinary – carry normal rights.
• Preference – have the right to preferred
dividends, therefore guaranteed payment of a
certain amount.
• Redeemable – company has a right to
redeem/ buy back the shares.
• Deferred/ founders’ shares.
• Non- voting – generally issued to first time
employee
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 CROWD FUNDING

• Crowdfunding is the use of small amounts of capital

from a large number of individuals to finance a new
business venture.

• Crowdfunding makes use of the easy accessibility of

vast networks of people through social media and
crowdfunding websites to bring investors and
entrepreneurs together.

• It has the potential to increase entrepreneurship by

expanding the pool of investors from whom funds
can be raised beyond the traditional circle of owners,
relatives and venture capitalists.
 Types of crowdfunding:
• Two primary types of crowdfunding:
1) Rewards crowdfunding: entrepreneurs presell a
product or service to launch a business concept
without incurring debt or sacrificing
equity/shares.
2) Equity crowdfunding: the backer receives shares
of a company, usually in its early stages, in
exchange for the money pledged.

Other types:Software value token, Debt Based,

Donation based
END OF MODULE-3
Financial Accounting
Module-4
 CONTENT
Financial analysis :-
• Balance sheet
• Income statement
• Cash flow statement
• Break even analysis
• Pricing policy and Profit planning
• Classification of costs
• Book keeping and accounting terminology
 Balance sheet
• Balance Sheet is the financial statement of a
company which includes assets, liabilities,
equity capital, total debt, etc. at a point in
time. (Bal.Sheet = Assets + Liabilities + Equity)
• Balance sheet is more like a snapshot of the
financial position of a company at a specified
time, usually calculated after every quarter, six
months or one year.
• Balance Sheet has two main heads –assets
and liabilities.
• Where
– Assets are those resources or things which the
company owns. They can be divided into current as
well as non-current assets or long term assets.
– Liabilities on are debts or obligations of a company. It
is the amount that the company owes to its creditors.
Liabilities can be divided into current liabilities and
long term liabilities
• Another important head in the balance sheet is
shareholder or owner’s equity. Assets are equal
to total liabilities and owners’ equity. Owner’s
equity is used when the company is a sole
proprietorship and shareholders’ equity is used
when the company is a corporation. It is also
known as book value of the company.
• Here is the general order of accounts within current
assets:
• Cash and cash equivalents: the most liquid assets,
these can include Treasury bills and short-term
certificates of deposit, as well as hard currency
• Marketable securities: equity and debt securities for
which there is a liquid market
• Accounts receivable: money which customers owe
the company, perhaps including an allowance for
doubtful accounts
• Inventory: goods available for sale, valued at the
lower of the cost or market price
• Prepaid expenses: representing value that has
already been paid for, such as insurance, advertising
contracts or rent
•
• Long-term assets include the following:
• Long-term investments: securities that will not or
cannot be liquidated in the next year
• Fixed assets: these include land, machinery,
equipment, buildings and other durable,
generally capital-intensive assets
• Intangible assets: these include non-physical, but
still valuable, assets such as intellectual property
and goodwill
• Note: intangible assets are only listed on the
balance sheet if they are acquired, rather than
developed in-house; their value may, therefore,
be wildly understated—by not including a
globally recognized logo, for example
• Current liabilities accounts might include:
• Current portion of long-term debt
• Bank indebtedness
• Interest payable
• Rent, tax, utilities
• Wages payable
• Customer prepayments
• Dividends payable and others
• Long-term liabilities can include:
• Long-term debt: interest and principal on bonds
issued
• Pension fund liability: the money a company is
required to pay into its employees' retirement
accounts
• Deferred tax liability: taxes that have been
accrued but will not be paid for another year;
besides timing, this figure reconciles differences
between requirements for financial reporting and
the way tax is assessed, such
as depreciation calculations
• Some liabilities are off-balance sheet, meaning
that they will not appear on the balance
sheet. Operating leases are an example of this
kind of liability.
 Income statement
The income statement also called a profit and loss
statement is a report made by company management.
The statement quantifies the amount of revenue
generated and expenses incurred by an organization, as
well as any resulting net profit or loss for a period.
This could be monthly, quarterly, semi-annually, or
annually.
These weekly or monthly income statements help
management evaluate the company’s performance.
Quarterly and annual income statements are more
commonly used by investors and creditors to track the
overall performance of the company.
 Cash flow statement
• It is a financial statement that provides aggregate
data regarding all cash inflows a company receives
from its on-going operations and external investment
sources, as well as all cash outflows that pay for
business activities and investments during a given
period.

• CFS shows how changes in balance sheet accounts

and income affect cash and cash equivalents, and
breaks the analysis down to operating, investing and
financing activities.
Three main sections of Statement of Cash Flows:
1. Operating Activities
2. Investing Activities
3. Financing Activities

The money coming into the business is called cash inflow,

and money going out from the business is called cash outflow.

• Essentially, the cash flow statement is concerned with the

flow of cash in and out of the business.
• The statement captures both the current operating results
and the accompanying changes in the balance sheet.
• As an analytical tool, the statement of cash flows is useful
in determining the short-term viability of a company,
particularly its ability to pay bills.
Operating activities
• Operating activities include the production, sales and
delivery of the company's product as well as collecting
payment from its customers. This could include
purchasing raw materials, building inventory,
advertising, and shipping the product.

• Operating cash flows include:

– Receipts for the sale of loans, debt or equity instruments
in a trading portfolio
– Interest received on loans
– Payments to suppliers for goods and services
– Payments to employees or on behalf of employees
– Interest payments
– buying Merchandise
• Investing activities include
– Purchase or Sale of an asset (assets can be land,
building, equipment, marketable securities, etc.)
– Loans made to suppliers or received from customers
– Payments related to mergers and acquisition.

• Financing activities include:

– Payments of dividends
– Payments for repurchase of company shares
– For non-profit organizations, receipts of donor-
restricted cash that is limited to long-term purposes
– Items under the financing activities section include:
– Dividends paid
– Sale or repurchase of the company's stock
– Net borrowings
– Repayment of debt principal, including capital
leases
People and groups interested in cash flow
statements include:
– Accounting personnel, who need to know whether
the organization will be able to cover payroll and
other immediate expenses
– Potential lenders or creditors, who want a clear
picture of a company's ability to repay
– Potential investors, who need to judge whether
the company is financially sound
– Potential employees or contractors, who need to
know whether the company will be able to afford
compensation
– Shareholders of the business.
 Break even analysis
• Break Even Point:In simple words, the BEP can
be defined as a point where total costs
(expenses) and total sales (revenue) are equal.
• Break-even point can be described as a point
where there is no net profit or loss.
• Moreover, the break-even point is also helpful
to managers as the provided info can be used
in making important decisions in business, for
example preparing competitive bids, setting
prices, and applying for loans.
• The break-even analysis, in its simplest form,
facilitates an insight into the fact about
revenue from a product or service
incorporates the ability to cover the
relevant production cost of that particular
product or service or not.
• Break-even analysis is a simple tool defining
the lowest quantity of sales which will include
both variable and fixed costs. Moreover, such
analysis facilitates the managers with a
quantity which can be used to evaluate the
future demand.
• If, in case, the break-even point lies above the
estimated demand, reflecting a loss on the
product, the manager can use this info for
taking various decisions. He might choose to
discontinue the product, or improve the
advertising strategies, or even re-price the
product to increase demand.
• Another important usage of the break-even
point is that it is helpful in recognizing the
relevance of fixed and variable cost. The fixed
cost is less with a more flexible personnel and
equipment thereby resulting in a lower break-
even point.
 Pricing policy
• The policy by which a company determines the wholesale
and retail prices for its products or services is called pricing
policy.

• Managers should start setting prices during the

development stage as part of strategic pricing to avoid
launching products or services that cannot sustain
profitable prices in the market.

• This approach to pricing enables companies to either fit

costs to prices or scrap products or services that cannot be
generated cost-effectively.

• Through systematic pricing policies companies can reap

greater profits and increase or defend their market shares.
 Profit planning
• Profit planning is the set of actions taken to
achieve a targeted profit level.

1. Establishing profit goals: Implies that profit goals

should be set in alignment with the strategic plans
of the organization. Moreover, the profit goals of an
organization should be realistic in nature based on
the capabilities and resources of the organization.
• 2. Determining expected sales volume: Constitutes the
most important step of the profit planning process. An
organization needs to forecast its sales volume so that
it can achieve its profit goals. The sales volume can be
anticipated by taking into account the market and
industry trends and performing competitive analysis.
• 3. Estimating expenses: Requires that an organization
needs to estimate its expenses for the planned sales
volume. Expenses can be determined from the past
data. If an organization is new, then the data of similar
organization in same industry can be taken. The
expense forecasts should be adjusted to the economic
conditions of the country.
• 4. Determining profit: Helps in estimating the exact
value of sales.
Classification of costs
(A). Direct Costs:
• The direct costs are those which can be identified
easily and indisputably with a unit of operation or
costing unit or cost centre. Costs of direct
material, direct labour and direct expenses can
be directly allocated or identified with a
particular cost centres or a cost unit and can be
directly charged to such cost centre or cost unit.
These costs are also called ‘traceable costs’.
• i. Direct Material:
– The direct material costs are those which can be
identified easily and indisputably with a unit of
operation or costing unit or cost centre. The direct
material cost can be directly allocated or identified
with particular cost centres or cost units and can
be directly charged to such cost centres or cost
units.
– Raw materials are directly identifiable as part of
the final product and are classified as direct
materials. For example, wood used in production
of tables and chairs, steel bars used in steel
factory etc. are the direct materials that becomes
part of the finished product.
• ii. Direct Labour:
– The labour cost incurred on the employees who are
engaged directly in making the product, their work can be
identified clearly in the process of converting the raw
materials into finished product is called ‘direct labour cost’.
– For example, wages paid to the workers engaged in
machining department, fabrication department,
assembling department etc.

• iii. Direct Expenses:

– The direct expenses refers to expenses that are specifically
incurred and charged for specific or particular job, process,
service, cost unit or cost centre. These expenses are also
called ‘chargeable expenses’.
• Some of the examples of direct expenses include
the following:
• (1) Cost of drawings, designs and layout.
• (2) Royalties payable on use of patents copyrights
etc.
• (3) Hire charges of special tools and equipment
for a particular job or work.
• (4) Architects, surveyors and other consultation
fees of particular job or work.
• Sometimes, if the direct expenses are negligible
or small amount, it will be treated as overhead.
(B) Indirect Costs:
• Indirect costs cannot be allocated but which can
be apportioned to cost centres or cost units.
These costs are also called as ‘common costs’. The
indirect costs are not traceable to any plant,
department, operation or to any individual final
product. All overhead costs are indirect costs.
• Costs of indirect material, indirect labour and
indirect expenses in aggregate constitute the
overhead costs and are the indirect component
of the total cost. Indirect costs cannot be directly
allocated to cost units or cost centres and have to
be absorbed or recovered into cost units
(i) Indirect Material:
– The costs incurred on materials used to further
the manufacturing process, which cannot be
traced into the end product and the material
required in the production process but not
necessarily built into the product are called
‘indirect material’.
– For example cutting oil used in cutting surface,
threads and buttons used in stitching clothes,
lubricants used in maintenance of plant and
machinery, cotton waste used in cleaning the
machinery etc. are considered as indirect
materials.
(ii) Indirect Labour:
– The cost of indirect labour consist of all salaries
and wages paid to the staff for the purpose of
carrying and tasks incidental to goods or services
provided which will not form part of salaries and
wages paid in working directly upon the product.
– For example, salaries and wages paid to store
keepers, watch and ward, supervisors,
timekeepers, quality control, managers, clerical
staff, salesmen etc. These indirect labour costs
cannot be identified with any particular job,
process, cost unit or cost centre.
(iii) Indirect Expenses:
– Indirect expenses are those which are incurred by
the organization in carrying out their total
business activities and cannot be conveniently
allocated to job, process, cost unit or cost centre.
– Rent, rates, taxes, insurance, lighting, telephone,
postage and telegrams, depreciation etc. are the
examples of indirect expenses.
 Book keeping and accounting terminology
• Accounts Payable – The amount owed by a business to its
suppliers or vendors for goods and services purchased on
credit
• Accounts Receivable – The amounts owed to a business
from its customers or clients for goods or services provided
on credit
• Accrual Accounting – A method of accounting where
income and expenses are recorded in the periods in which
they occur, not necessarily the periods in which cash is
exchanged
• Accrued Liabilities – Also known as Accrued Expenses,
these are payment obligations that you will pay in the
future for merchandise or services already provided to your
company
• Accrued Revenue – Is money your company has earned but
hasn’t yet billed the customer for
• Amortization – Gradual reduction of amounts in
an account over time, either assets or liabilities
• Asset – property with a cash value that is owned
by a business or individual
• Bad debts – The estimated amount of credit sales
that have become questionable as to collectibility
in the current period.
• Book value – The value of assets, liabilities, and
equity recorded on the balance sheet of a
business
• Budgeting – the process of assigning forecasted
income and expenses to accounts, which
amounts will be compared to actual income and
expense for analysis of variances
• Credit – An account entry with a negative value
for assets, and positive value for liabilities and
equity
• Debit – An account entry with a positive value for
assets, and negative value for liabilities and
equity
• Debt – The amounts owed by a business to
outside persons or businesses
• Depreciation – Recognizing the decrease in the
value of an asset due to age and use
• Dividends – Amounts paid to shareholders out of
current or retained earnings
• Gross and Net Profit (or Loss) – Gross is the difference
between the sales and the cost of sales, while net is what is
left after taking the expenses out of the gross profit and
adding any other income
• Insolvent – A term used to describe a business that does
not have enough assets to meet its debt obligations in the
short term. Insolvency must be corrected quickly or it could
lead to bankruptcy
• Invoice – The original billing from the seller to the buyer,
outlining what was purchased and the terms of sale,
payment, etc.
• Income – Income can be defined two ways: sales and other
income. Sales is the money generated from the sale of
goods or services before taking anything out for costs or
discounts. Other income is any money received into the
business by way of interest, discounts, or anything not
directly related to the product or service of the business.
• Liability – Money owed to creditors, vendors, etc.
• Loan – Money borrowed from a lender and usually
repaid with interest
• Liquidity – The ability of an asset to convert into cash
or its ability to be easily sold. Assets are shown on the
balance sheet in the order of their liquidity, the most
liquid (cash) being listed first
• Operating Income – Income generated from regular
business operations
• Other Income – Income generated from other than
regular business operations, i.e. interest, rents, etc.
• Owners’ Equity – The amounts owed by a business to
its owners rather than outside parties
• Payroll – A list of employees and their wages
• Revenue – Total income before expenses.
• Solvency – The ability of a company to settle its
liabilities with its assets.
• Taxable Income – The amount of the net income
that is subject to income tax.
• Total Debt Ratio – A measure of the long-term
solvency of your company. It is calculated by
dividing total debt by total assets.
• Transaction – A financial business event that is
recorded in a business’s books.
• Write off – A slang term for expensing a cost in
the books of a business.
END OF MODULE-4