BUSINESS AND FINANCE

The money that a business spends in order to produce goods or services is its costs. Different businesses have different cost structures and define and calculate their costs in different ways.

Fixed costs are those which remain unchanged whatever the level of output, e.g. rent, heating, salaries; variable costs change directly with the output of the business, e.g. materials.

Direct costs are directly related to the things produced. Indirect costs may include things like social security charges on top of the wages.

Things of value owned by a firm are its assets. Fixed assets are long-term assets which are for use in the business and not for re-sale. Current assets are used in the course of business.

Liabilities are what a business owes to those outside the business (suppliers, lenders, etc.).

Capital is the money that a company uses to operate and develop. There are four main ways of obtaining capital:

• retained profit

• borrowing

• share issues

• government grants and loans

Retained profit is the amount of profit after tax that directors of a business decide not to distribute to their shareholders, but to keep within the business.

Borrowing money usually accounts for 20-30 percent of firms’ capital.

The stock market is the financial centre of any country. The stock exchanges exist to allow investors to buy and sell shares, and companies to raise capital. They also provide a market for government loans and securities. On the market, the main operators are the market-makers who trade in a group of shares, and stockbrokers who act as agents for their clients.

A share is any of the equal parts into which the capital of a company is divided. Securities are shares and bonds (official papers given by a company or the government, to prove that you have lent them money and that they will pay it back with interest). Bonds issued by the government are called gilt-edged securities.

When prices in a stock market or currency market are rising people talk about a bull market. When prices are falling people talk about a bear market.

When we speak about investments we mean the purchase by a business of new capital or of capital goods such as new machinery.

Unit Trust is a company that spreads its investors’ capital over a variety of securities.

A company and its shareholders need to know information about the company’s financial performance. The company’s annual report consists of three financial statements:

• profit and loss account. This account shows the revenue (money coming into the business) and expenditure (money going out).

• balance sheet. This account shows the financial situation of the company on a particular date, usually the end of the financial year.

• cash flow statement This document shows the flow of cash in and out of the business.

While some companies perform well and expand, others are less successful and may have to go out of business.

When a person or business is unable to pay its debts they are considered to be in a state of insolvency or to be insolvent.