Business key terms

Chapter	Key term	Definition
1	Consumer goods	the physical and tangible goods sold to the general public – they include durable consumer goods, such as cars and washing machines, and non-durable consumer goods, such as food, drinks and sweets that can be used only once.
	Consumer services	the non-tangible products sold to the general public – they include hotel accommodation, insurance services and train journeys.
	Capital goods	the physical goods used by industry to aid in the production of other goods and services, such as machines and commercial vehicles.
	Creating value	increasing the difference between the cost of purchasing bough-in materials and the price the finished goods are sold for.
	Added value	the difference between the cost of purchasing bought-in materials and the price the finished goods are sold for.
	Opportunity cost	the benefit of the next most desired option which is given up.
	Entrepreneur	someone who takes the financial risk of starting and managing a new venture
	Social enterprise	a business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximising returns to owners.
	Triple bottom line	the three objectives of social enterprises: economic, social and environmental.
2	Primary sector business activity	firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms.
	Secondary sector business activity	firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes-making and construction.
	Tertiary sector business activity	firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications.
	Public sector	comprises organisations accountable to and controlled by central or local government (the state).
	Private sector	comprises businesses owned and controlled by individuals or groups of individuals.
	Mixed economy	economic resources are owned and controlled by both private and public sectors.
	Free-market economy	economic resources are owned largely by the private sector with very little state intervention.
	Command economy	economic resources are owned, planned and controlled by the state.
	Sole trader	a business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits.
	Partnership	a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities.
	Limited liability	the only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder.
	Private limited company	a small to medium-sized business that is owned by shareholders who are oft en members of the same family; this company cannot sell shares to the general public.
	Share	a certificate confirming part ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights.
	Shareholder	a person or institution owning shares in a limited company.
	Public limited company	a limited company, oft en a large business, with the legal right to sell shares to the general public – share prices are quoted on the national stock exchange.
	Memorandum of Association	this states the name of the company, the address of the head office through which it can be contacted, the maximum share capital for which the company seeks authorisation and the declared aims of the business.
	Articles of Association	this document covers the internal workings and control of the business – for example, the names of directors and the procedures to be followed at meetings will be detailed.
	Franchise	a business that uses the name, logo and trading systems of an existing successful business.
	Joint venture	two or more businesses agree to work closely together on a particular project and create a separate business division to do so.
	Holding company	a business organisation that owns and controls a number of separate businesses, but does not unite them into one unified company.
	Public corporation	a business enterprise owned and controlled by the state – also known as nationalised industry.
3	Revenue	total value of sales made by a business in a given time period.
	Capital employed	the total value of all long-term finance invested in the business.
	Market capitalisation	the total value of a company’s issued shares.
	Market share	sales of the business as a proportion of total market sales.
	Internal growth	expansion of a business by means of opening new branches, shops or factories (also known as organic growth).
4	Mission statement	a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups.
	Corporate social repsonsibility	this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment
	Management by objectives	a method of coordinating and motivating all staff in an organisation by dividing its overall aim into specific targets for each department, manager and employee.
	Ethical code (code of conduct)	a document detailing a company’s rules and guidelines on staff behaviour that must be followed by all employees.
5	Stakeholders	people or groups of people who can be affected by – and therefore have an interest in – any action by an organisation.
	Stakeholder concept	the view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders.
	Corporate social responsibility	the concept that accepts that businesses should consider the interests of society in their activities and decisions, beyond the legal obligations that they have.
10	Manager	responsible for setting objectives, organising resources and motivating staff so that the organisation’s aims are met.
	Leadership	the art of motivating a group of people towards achieving a common objective.
	Autocratic leadership	a style of leadership that keeps all decision-making at the centre of the organisation.
	Democratic leadership	a leadership style that promotes the active participation of workers in taking decisions.
	Paternalistic leadership	a leadership style based on the approach that the manager is in a better position than the workers to know what is best for an organisation.
	Laissez-faire leadership	a leadership style that leaves much of the business decision-making to the workforce – a ‘hands-off ’ approach and the reverse of the autocratic style.
	Informal leader	a person who has no formal authority but has the respect of colleagues and some power over them.
	Emotional intelligence (EI)	the ability of managers to understand their own emotions, and those of the people they work with, to achieve better business performance.
11	Motivation	the internal and external factors that stimulate people to take actions that lead to achieving a goal.
	Self-actualisation	a sense of self-fulfilment reached by feeling enriched and developed by what one has learned and achieved.
	Motivating factors (motivators)	aspects of a worker’s job that can lead to positive job satisfaction, such as achievement, recognition, meaningful and interesting work and advancement at work.
	Hygiene factors	aspects of a worker’s job that have the potential to cause dissatisfaction, such as pay, working conditions, status and over-supervision by managers.
	Job enrichment	aims to use the full capabilities of workers by giving them the opportunity to do more challenging and fulfilling work.
	Time based wage rate	payment to a worker made for each period of time worked, e.g. one hour.
	Piece rate	a payment to a worker for each unit produced.
	Salary	annual income that is usually paid on a monthly basis.
	Commission	a payment to a sales person for each sale made.
	Bonus	a payment made in addition to the contracted wage or salary.
	Performance-related pay	a bonus scheme to reward staff for above-average work performance.
	Profit sharing	a bonus for staff based on the profits of the business – usually paid as a proportion of basic salary.
	Fringe benefits	benefits given, separate from pay, by an employer to some or all employees.
	Job rotation	increasing the flexibility of employees and the variety of work they do by switching from one job to another.
	Job enlargement	attempting to increase the scope of a job by broadening or deepening the tasks undertaken.
	Job redesign	involves the restructuring of a job – usually with employees’ involvement and agreement – to make work more interesting, satisfying and challenging.
	Quality circles	voluntary groups of workers who meet regularly to discuss work-related problems and issues.
	Worker participation	workers are actively encouraged to become involved in decision-making within the organisation.
	Team-working	production is organised so that groups of workers undertake complete units of work.
12	Human resource management (HRM)	the strategic approach to the effective management of an organisation’s workers so that they help the business gain a competitive advantage.
	Recruitment	the process of identifying the need for a new employee, defining the job to be filled and the type of person needed to fill it and attracting suitable candidates for the job.
	Selection	involves the series of steps by which the candidates are interviewed, tested and screened for choosing the most suitable person for vacant post.
	Job description	a detailed list of the key points about the job to be filled – stating all its key tasks and responsibilities.
	Person specification	a detailed list of the qualities, skills and qualifications that a successful applicant will need to have.
	Employment contract	a legal document that sets out the terms and conditions governing a worker’s job.
	Labour turnover	measures the rate at which employees are leaving an organisation. It is measured by: \( \frac{ \textrm{ number of employees leaving in 1 year } }{ \textrm{ average number of people employed } } \times 100 \)
	Training	work-related education to increase workforce skills and efficiency.
	Induction training	introductory training programme to familiarise new recruits with the systems used in the business and the layout of the business site.
	On-the-job training	instruction at the place of work on how a job should be carried out.
	Off-the-job training	all training undertaken away from the business, e.g. work-related college courses.
	Employee appraisal	the process of assessing the effectiveness of an employee judged against pre-set objectives.
	Dismissal	being dismissed or sacked from a job due to incompetence or breach of discipline.
	Unfair dismissal	ending a worker’s employment contract for a reason that the law regards as being unfair.
	Redundancy	when a job is no longer required, the employee doing this job becomes unnecessary through no fault of their own.
	Work-life balance	a situation in which employees are able to give the right amount of time and eff ort to work and to their personal life outside work, for example to family or other interests.
	Equality policy	practices and processes aimed at achieving a fair organisation where everyone is treated in the same way and has the opportunity to fulfil their potential.
	Diversity policy	practices and processes aimed at creating a mixed workforce and placing positive value on diversity in the workplace.
16	Marketing	the management task that links the business to the customer by identifying and meeting the needs of customers profitably – it does this by getting the right product at the right price to the right place at the right time.
	Marketing objectives	the goals set for the marketing department to help the business achieve its overall objectives.
	Marketing strategy	long-term plan established for achieving marketing objectives.
	Market orientation	an outward-looking approach basing product decisions on consumer demand, as established by market research.
	Product orientation	an inward-looking approach that focuses on making products that can be made – or have been made for a long time – and then trying to sell them.
	Asset-led marketing	an approach to marketing that bases strategy on the firm’s existing strengths and assets instead of purely on what the customer wants.
	Societal marketing	this approach considers not only the demands of consumers but also the effects on all members of the public (society) involved in some way when firms meet these demands.
	Demand	the quantity of a product that consumers are willing and able to buy at a given price in a time period.
	Supply	the quantity of a product that firms are prepared to supply at a given price in a time period.
	Equilibrium price	the market price that equates supply and demand for a product.
	Market size	the total level of sales of all producers within a market.
	Market growth	the percentage change in the total size of a market (volume or value) over a period of time.
	Market share	the percentage of sales in the total market sold by one business. This is calculated by the following formula: \( \frac{ \textrm{ firm’s sales in time period } }{ \textrm{ total market sales in time period } } \times 100 \)
	Direct competitor	businesses that provide the same or very similar goods or services.
	USP - unique selling point (or proposition)	the special feature of a product that diff erentiates it from competitors’ products.
	Product differentiation	making a product distinctive so that it stands out from competitors’ products in consumers’ perception.
	Niche marketing	identifying and exploiting a small segment of a larger market by developing products to suit it.
	Mass marketing	selling the same products to the whole market with no attempt to target groups within it.
	Market segment	a sub-group of a whole market in which consumers have similar characteristics.
	Market segmentation	identifying diff erent segments within a market and targeting diff erent products or services to them.
	Consumer profile	a quantified picture of consumers of a firm’s products, showing proportions of age groups, income levels, location, gender and social class.
17	Market research	this is the process of collecting, recording and analysing data about customers, competitors and the market.
	Primary research	the collection of first-hand data that is directly related to a firm’s needs.
	Secondary research	collection of data from second- hand sources.
	Qualitative research	research into the in-depth motivations behind consumer buying behaviour or opinions.
	Quantitative research	research that leads to numerical results that can be statistically analysed.
	Focus groups	a group of people who are asked about their attitude towards a product, service, advertisement or new style of packaging.
	Sample	the group of people taking part in a market research survey selected to be representative of the overall target market.
	Random sampling	every member of the target population has an equal chance of being selected.
	Systematic sampling	every n th item in the target population is selected.
	Stratified sampling	this draws a sample from a specified sub-group or segment of the population and uses random sampling to select an appropriate number from each stratum.
	Quota sampling	when the population has been stratified and the interviewer selects an appropriate number of respondents from each stratum.
	Cluster sampling	using one or a number of specific groups to draw samples from and not selecting from the whole population, e.g. using one town or region.
	Open questions	those that invite a wide-ranging or imaginative response – the results will be difficult to collate and present numerically.
	Closed questions	questions to which a limited number of pre-set answers is offered.
	Arithmetic mean	calculated by totalling all the results and dividing by the number of results.
	Mode	the value that occurs most frequently in a set of data.
	Median	the value of the middle item when data have been ordered or ranked. It divides the data into two equal parts.
	Range	the difference between the highest and lowest value.
	Inter-quartile range	the range of the middle 50% of the data.
18	Marketing mix	the four key decisions that must be taken in the effective marketing of a product.
	Customer relationship management (CRM)	using marketing activities to establish successful customer relationships so that existing customer loyalty can be maintained.
	Brand	an identifying symbol, name, image or trademark that distinguishes a product from its competitors.
	Intangible attributes of a product	subjective opinions of customers about a product that cannot be measured or compared easily.
	Tangible attributes of a product	measurable features of a product that can be easily compared with other products.
	Product	the end result of the production process sold on the market to satisfy a customer need.
	Product positioning	the consumer perception of a product or service as compared to its competitors.
	Product portfolio analysis	analysing the range of existing products of a business to help allocate resources effectively between them.
	Product life cycle	the pattern of sales recorded by a product from launch to withdrawal from the market and is one of the main forms of product portfolio analysis.
	Consumer durable	manufactured product that can be reused and is expected to have a reasonably long life, such as a car or washing machine.
	Extension strategies	these are marketing plans to extend the maturity stage of the product before a brand new one is needed.
	Price elasticity of demand	measures the responsiveness of demand following a change in price: \( \textrm{PED} = \frac{ \textrm{ percentage change in quantity demanded } }{ \textrm{ percentage change in price } } \)
	Mark-up pricing	adding a fixed mark-up for profit to the unit price of a product.
	Target pricing	setting a price that will give a required rate of return at a certain level of output/sales.
	Full-cost pricing	setting a price by calculating a unit cost for the product (allocated fixed and variable costs) and then adding a fixed profit margin.
	Contribution-cost pricing	setting prices based on the variable costs of making a product in order to make a contribution towards fixed costs and profit.
	Competition-based pricing	a firm will base its price upon the price set by its competitors.
	Dynamic pricing	off ering goods at a price that changes according to the level of demand and the customer’s ability to pay.
	Penetration pricing	setting a relatively low price oft en supported by strong promotion in order to achieve a high volume of sales.
	Market skimming	setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand.
19	Promotion	the use of advertising, sales promotion, personal selling, direct mail, trade fairs, sponsorship and public relations to inform consumers and persuade them to buy.
	Promotion mix	the combination of promotional techniques that a firm uses to sell a product.
	Above-the-line promotion	a form of promotion that is undertaken by a business by paying for communication with consumers
	Advertising	paid-for communication with consumers to inform and persuade, e.g. TV and cinema advertising.
	Below-the-line promotion	promotion that is not a directly paid-for means of communication, but based on short-term incentives to purchase.
	Sales promotion	incentives such as special off ers or special deals directed at consumers or retailers to achieve short-term sales increases and repeat purchases by consumers.
	Personal selling	a member of the sales staff communicates with one consumer with the aim of selling the product and establishing a long-term relationship between company and consumer.
	Sponsorship	payment by a company to the organisers of an event or team/individuals so that the company name becomes associated with the event/team/individual.
	Public relations	the deliberate use of free publicity provided by newspapers, TV and other media to communicate with and achieve understanding by the public.
	Branding	the strategy of diff erentiating products from those of competitors by creating an identifiable image and clear expectations about a product.
	Marketing or promotion budget	the financial amount made available by a business for spending on marketing/ promotion during a certain time period.
	Channel of distribution	this refers to the chain of intermediaries a product passes through from producer to final consumer.
	Internet (online) marketing	refers to advertising and marketing activities that use the Internet, email and mobile communications to encourage direct sales via electronic commerce.
	E-commerce	the buying and selling of goods and services by businesses and consumers through an electronic medium.
	Viral marketing	the use of social media sites or text messages to increase brand awareness or sell products.
	Integrated marketing mix	the key marketing decisions complement each other and work together to give customers a consistent message about the product.
22	Added value	the difference between the cost of purchasing raw materials and the price the finished goods are sold for - this is the same as creating value
	Intellectual capital	intangible capital of a business that includes human capital (well trained and knowledgeable employees), structural capital (databases and information systems) and relational capital (good links with supplier and customers)
	Production	converting inputs into outputs
	Level of production	the number of units produced during a time period
	Productivity	the ratio of outputs to inputs during production, e.g. output per worker per time period
	Efficiency	producing output at the highest ratio of output to input
	Effectiveness	meeting the objectives of the enterprise by using inputs productively to meet customers' need
	Labour intensive	involving a high level of labour input compared with capital equipment
	Capital intensive	involving a high quantity of capital equipment compared with labour input
23	Operations planning	preparing input resources to supply products to meet expected demand
	CAD - computer aided design	the use of the computer programs to create two- or three-dimensional (2D or 3D) graphical representations of physical objects
	CAM - computer aided manufacturing	the use of computer software to control machine tools and related machinery in the manufacturing of components or complete products
	Operational flexibility	the ability of a business to vary both the level of production and the range of products following changes in customer demand
	Process innovation	the use of a new or much improved production method or service delivery method
	Job production	producing a one-off item specially designed for the customer
	Batch production	producing a limited number of identical products — each item in the batch passes through one stage of production before passing on to the next stage
	Flow production	producing items in a continually moving process
	Mass customisation	the use of flexible computer-aided production systems to produce items to meet individual customers' requirements at mass-production cost level
	Optimal location	a business location that gives the best combination of quantitative and qualitative factors
	Quantitative factors	these are measurable in financial terms and will have a direct impact on either the costs of a site or the revenues from it and its profitability
	Qualitative factors	non-measurable factors that may influence business decisions
	Multi-site location	a business that operates from more than one location
	Offshoring	the relocation of a business process done in one country to the same or another company in another country
	Multinational	a business with operations or production bases in more than one country
	Trade barriers	taxes (tariffs) or other limitations on the free international movement of goods and services
	Scale of operation	the maximum output that can be achieved using the available inputs (resources) — this scale can oly be increased in the long term by employing more of all inputs
	Economies of scale	reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations
	Diseconomies of scale	factors that cause average costs of production to rise when the scale of operation is increased
	Enterprise resource planning	the use of a single computer application to plan the purchase and use of resources in an organisation to improve the efficiency of operations
	Supply chain	all of the stages in the production process from obtaining raw materials to selling to the consumer — from point of origin to point of consumption
	Sustainability	production systems that prevent waste by using theminimum of non-renewable resources so that levels of production can be sustained in the future
24	Inventory (stock)	materials and goods required to allow for the production and supply of products to the customer
	Economic order quantity	the optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs
	Buffer inventories	the minimum inventory level that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase.
	Re-order quantity	the number of units ordered each time
	Lead time	the normal time taken between ordering new stocks and their delivery
	Just-in-time	this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just as they are needed in production and completed products are produced to order.
28	Start-up capital	the capital needed by an entrepreneur to set up a business
	Working capital	the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms working capital = current assets – current liabilities
	Capital expenditure	the purchase of assets that are expected to last for more than one year, such as building and machinery
	Revenue expenditure	spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock
	Liquidity	the ability of a firm to be able to pay its short-term debts
	Liquidation	when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
	Overdraft	bank agrees to a business borrowing up to an agreed limit as and when required
	Factoring	selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – only a proportion of the value of the debts will be received as cash
	Hire purchase	an asset is sold to a company that agrees to pay fixed repayments over an agreed time period – the asset belongs to the company
	Leasing	obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period, this avoids the need for the business to raise long-term capital to buy the asset; ownership remains with the leasing company
	Equity finance	permanent finance raised by companies through the sale of shares
	Long-term loans	loans that do not have to be repaid for at least one year
	Long-term bonds or debentures	bonds issued by companies to raise debt finance, oft en with a fixed rate of interest
	Rights issue	existing shareholders are given the right to buy additional shares at a discounted price
	Venture capital	risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources
	Microfinance	providing financial services for poor and low-income customers who do not have access to banking services, such as loans and overdraft s off ered by traditional commercial banks
	Crowd funding	the use of small amounts of capital from a large number of individuals to finance a new business venture
	Business plan	a detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business
29	Direct costs	these costs can be clearly identified with each unit of production and can be allocated to a cost centre
	Indirect costs	costs that cannot be identified with a unit of production or allocated accurately to a cost centre
	Fixed costs	costs that do not vary with output in the short run
	Variable costs	costs that vary with output
	Marginal costs	the extra cost of producing one more unit of output
	Break-even point of production	the level of output at which total costs equal total revenue, neither a profit nor a loss is made
	Margin of safety	the amount by which the sales level exceeds the break-even level of output
	Contribution per unit	selling price less variable cost per unit
30	Income statement	records the revenue, costs and profit (or loss) of a business over a given period of time
	Gross profit	equal to sales revenue less cost of sales
	Revenue	(formerly called sales turnover): the total value of sales made during the trading period = selling price × quantity sold
	Cost of sales	(or cost of goods sold): this is the direct cost of the goods that were sold during the financial year
	Operating profit	(formerly referred to as net profit): gross profit minus overhead expenses
	Profit for the year	(profit aft er tax): operating profit minus interest costs and corporation tax
	Dividends	the share of the profits paid to shareholders as a return for investing in the company
	Retained earnings	(profit): the profit left aft er all deductions, including dividends, have been made, this is ‘ploughed back’ into the company as a source of finance
	Low-quality profit	one-off profit that cannot easily be repeated or sustained
	High-quality profit	profit that can be repeated and sustained
	Statement of financial position	(balance sheet): an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time
	Shareholders' equity	total value of assets – total value of liabilities
	Asset	an item of monetary value that is owned by a business
	Liability	a financial obligation of a business that it is required to pay in the future
	Share capital	the total value of capital raised from shareholders by the issue of shares
	Non-current assets	assets to be kept and used by the business for more than one year. Used to be referred to as 'fixed assets'
	Intangible assets	items of value that do not have a physical presence, such as patents, trademarks and current assets
	Current assets	assets that are likely to be turned into cash before the next balance-sheet date
	Inventories	stocks held by the business in the form of materials, work in progress and finished goods
	Trade receivables (debtors)	the value of payments to be received from customers who have bought goods on credit
	Current liabilities	debts of the business that will usually have to be paid within one year
	Accounts payable (creditors)	value of debts for goods bought on credit payable to suppliers; also known as 'trade payables'
	Non-current liabilities	value of debts of the business that will be payable aft er more than one year
	Intellectual capital or property	the amount by which the market value of a firm exceeds its tangible assets less liabilities – an intangible asset
	Goodwill	arises when a business is valued at or sold for more than the balance-sheet value of its assets
	Cash-flow statement	record of the cash received by a business over a period of time and the cash outflows from the business
	Gross profit margin	This ratio compares gross profit (profit before deduction of overheads) with revenue. \(\textrm{gross profit margin}=\frac{\textrm{gross profit}}{\textrm{revenue}} \times 100 \%\)
	Operating profit margin	This ratio compares operating profit (formerly this ratio was referred to as the net profit margin) revenue \(\textrm{operating profit margin}=\frac{\textrm{operating profit}}{\textrm{revenue}} \times 100 \%\)
	Liquidity	the ability of a firm to pay its short-term debts
	Current ratio	\( \textrm{current ratio}= \frac{\textrm{current assets}}{\textrm{current liabilities}} \)
	Acid-test ratio	\( \textrm{acid-test ratio}= \frac{\textrm{liquid assets}}{\textrm{current liabilities}} \)
	Liquid assets	\( \textrm{liquid assets}= \textrm{current assets}-\textrm{inventories (stocks)}\)
	Window-dressing	presenting the company accounts in a favourable light – to flatter the business performance
31	Cash flow	the sum of cash payments to a business (inflows) less the sum of cash payments (outflows)
	Liquidation	when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors
	Insolvent	when a business cannot meet its short-term debts
	Cash inflows	payments in cash received by a business, such as those from customers (trade receivables) or from the bank, e.g. receiving a loan
	Cash outflows	payments in cash made by a business, such as those to suppliers and workers
	Cash-flow forecast	estimate of a firm’s future cash inflows and outflows
	Net monthly cash flow	estimated difference between monthly cash inflows and cash outflows
	Opening cash balance	cash held by the business at the start of the month
	Closing cash balance	cash held at the end of the month becomes next month’s opening balance
	Credit control	monitoring of debts to ensure that credit periods are not exceeded
	Bad debt	unpaid customers’ bills that are now very unlikely to ever be paid
	Overtrading	expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops

Chapter

Key term

Definition

Consumer goods

the physical and tangible goods sold to the general public – they include durable consumer goods, such as cars and washing machines, and non-durable consumer goods, such as food, drinks and sweets that can be used only once.

Consumer services

the non-tangible products sold to the general public – they include hotel accommodation, insurance services and train journeys.

Capital goods

the physical goods used by industry to aid in the production of other goods and services, such as machines and commercial vehicles.

Creating value

increasing the difference between the cost of purchasing bough-in materials and the price the finished goods are sold for.

Added value

the difference between the cost of purchasing bought-in materials and the price the finished goods are sold for.

Opportunity cost

the benefit of the next most desired option which is given up.

Entrepreneur

someone who takes the financial risk of starting and managing a new venture

Social enterprise

a business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximising returns to owners.

Triple bottom line

the three objectives of social enterprises: economic, social and environmental.

Primary sector business activity

firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms.

Secondary sector business activity

firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes-making and construction.

Tertiary sector business activity

firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications.

Public sector

comprises organisations accountable to and controlled by central or local government (the state).

Private sector

comprises businesses owned and controlled by individuals or groups of individuals.

Mixed economy

economic resources are owned and controlled by both private and public sectors.

Free-market economy

economic resources are owned largely by the private sector with very little state intervention.

Command economy

economic resources are owned, planned and controlled by the state.

Sole trader

a business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits.

Partnership

a business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities.

Limited liability

the only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder.

Private limited company

a small to medium-sized business that is owned by shareholders who are oft en members of the same family; this company cannot sell shares to the general public.

a certificate confirming part ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights.

Shareholder

a person or institution owning shares in a limited company.

Public limited company

a limited company, oft en a large business, with the legal right to sell shares to the general public – share prices are quoted on the national stock exchange.

Memorandum of Association

this states the name of the company, the address of the head office through which it can be contacted, the maximum share capital for which the company seeks authorisation and the declared aims of the business.

Articles of Association

this document covers the internal workings and control of the business – for example, the names of directors and the procedures to be followed at meetings will be detailed.

Franchise

a business that uses the name, logo and trading systems of an existing successful business.

Joint venture

two or more businesses agree to work closely together on a particular project and create a separate business division to do so.

Holding company

a business organisation that owns and controls a number of separate businesses, but does not unite them into one unified company.

Public corporation

a business enterprise owned and controlled by the state – also known as nationalised industry.

Revenue

total value of sales made by a business in a given time period.

Capital employed

the total value of all long-term finance invested in the business.

Market capitalisation

the total value of a company’s issued shares.

Market share

sales of the business as a proportion of total market sales.

Internal growth

expansion of a business by means of opening new branches, shops or factories (also known as organic growth).

Mission statement

a statement of the business’s core aims, phrased in a way to motivate employees and to stimulate interest by outside groups.

Corporate social repsonsibility

this concept applies to those businesses that consider the interests of society by taking responsibility for the impact of their decisions and activities on customers, employees, communities and the environment

Management by objectives

a method of coordinating and motivating all staff in an organisation by dividing its overall aim into specific targets for each department, manager and employee.

Ethical code (code of conduct)

a document detailing a company’s rules and guidelines on staff behaviour that must be followed by all employees.

Stakeholders

people or groups of people who can be affected by – and therefore have an interest in – any action by an organisation.

Stakeholder concept

the view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders.

Corporate social responsibility

the concept that accepts that businesses should consider the interests of society in their activities and decisions, beyond the legal obligations that they have.

Manager

responsible for setting objectives, organising resources and motivating staff so that the organisation’s aims are met.

Leadership

the art of motivating a group of people towards achieving a common objective.

Autocratic leadership

a style of leadership that keeps all decision-making at the centre of the organisation.

Democratic leadership

a leadership style that promotes the active participation of workers in taking decisions.

Paternalistic leadership

a leadership style based on the approach that the manager is in a better position than the workers to know what is best for an organisation.

Laissez-faire leadership

a leadership style that leaves much of the business decision-making to the workforce – a ‘hands-off ’ approach and the reverse of the autocratic style.

Informal leader

a person who has no formal authority but has the respect of colleagues and some power over them.

Emotional intelligence (EI)

the ability of managers to understand their own emotions, and those of the people they work with, to achieve better business performance.

Motivation

the internal and external factors that stimulate people to take actions that lead to achieving a goal.

Self-actualisation

a sense of self-fulfilment reached by feeling enriched and developed by what one has learned and achieved.

Motivating factors (motivators)

aspects of a worker’s job that can lead to positive job satisfaction, such as achievement, recognition, meaningful and interesting work and advancement at work.

Hygiene factors

aspects of a worker’s job that have the potential to cause dissatisfaction, such as pay, working conditions, status and over-supervision by managers.

Job enrichment

aims to use the full capabilities of workers by giving them the opportunity to do more challenging and fulfilling work.

Time based wage rate

payment to a worker made for each period of time worked, e.g. one hour.

Piece rate

a payment to a worker for each unit produced.

Salary

annual income that is usually paid on a monthly basis.

Commission

a payment to a sales person for each sale made.

Bonus

a payment made in addition to the contracted wage or salary.

Performance-related pay

a bonus scheme to reward staff for above-average work performance.

Profit sharing

a bonus for staff based on the profits of the business – usually paid as a proportion of basic salary.

Fringe benefits

benefits given, separate from pay, by an employer to some or all employees.

Job rotation

increasing the flexibility of employees and the variety of work they do by switching from one job to another.

Job enlargement

attempting to increase the scope of a job by broadening or deepening the tasks undertaken.

Job redesign

involves the restructuring of a job – usually with employees’ involvement and agreement – to make work more interesting, satisfying and challenging.

Quality circles

voluntary groups of workers who meet regularly to discuss work-related problems and issues.

Worker participation

workers are actively encouraged to become involved in decision-making within the organisation.

Team-working

production is organised so that groups of workers undertake complete units of work.

Human resource management (HRM)

the strategic approach to the effective management of an organisation’s workers so that they help the business gain a competitive advantage.

Recruitment

the process of identifying the need for a new employee, defining the job to be filled and the type of person needed to fill it and attracting suitable candidates for the job.

Selection

involves the series of steps by which the candidates are interviewed, tested and screened for choosing the most suitable person for vacant post.

Job description

a detailed list of the key points about the job to be filled – stating all its key tasks and responsibilities.

Person specification

a detailed list of the qualities, skills and qualifications that a successful applicant will need to have.

Employment contract

a legal document that sets out the terms and conditions governing a worker’s job.

Labour turnover

measures the rate at which employees are leaving an organisation. It is measured by:
\( \frac{ \textrm{ number of employees leaving in 1 year } }{ \textrm{ average number of people employed } } \times 100 \)

Training

work-related education to increase workforce skills and efficiency.

Induction training

introductory training programme to familiarise new recruits with the systems used in the business and the layout of the business site.

On-the-job training

instruction at the place of work on how a job should be carried out.

Off-the-job training

all training undertaken away from the business, e.g. work-related college courses.

Employee appraisal

the process of assessing the effectiveness of an employee judged against pre-set objectives.

Dismissal

being dismissed or sacked from a job due to incompetence or breach of discipline.

Unfair dismissal

ending a worker’s employment contract for a reason that the law regards as being unfair.

Redundancy

when a job is no longer required, the employee doing this job becomes unnecessary through no fault of their own.

Work-life balance

a situation in which employees are able to give the right amount of time and eff ort to work and to their personal life outside work, for example to family or other interests.

Equality policy

practices and processes aimed at achieving a fair organisation where everyone is treated in the same way and has the opportunity to fulfil their potential.

Diversity policy

practices and processes aimed at creating a mixed workforce and placing positive value on diversity in the workplace.

Marketing

the management task that links the business to the customer by identifying and meeting the needs of customers profitably – it does this by getting the right product at the right price to the right place at the right time.

Marketing objectives

the goals set for the marketing department to help the business achieve its overall objectives.

Marketing strategy

long-term plan established for achieving marketing objectives.

Market orientation

an outward-looking approach basing product decisions on consumer demand, as established by market research.

Product orientation

an inward-looking approach that focuses on making products that can be made – or have been made for a long time – and then trying to sell them.

Asset-led marketing

an approach to marketing that bases strategy on the firm’s existing strengths and assets instead of purely on what the customer wants.

Societal marketing

this approach considers not only the demands of consumers but also the effects on all members of the public (society) involved in some way when firms meet these demands.

Demand

the quantity of a product that consumers are willing and able to buy at a given price in a time period.

Supply

the quantity of a product that firms are prepared to supply at a given price in a time period.

Equilibrium price

the market price that equates supply and demand for a product.

Market size

the total level of sales of all producers within a market.

Market growth

the percentage change in the total size of a market (volume or value) over a period of time.

Market share

the percentage of sales in the total market sold by one business. This is calculated by the following formula:
\( \frac{ \textrm{ firm’s sales in time period } }{ \textrm{ total market sales in time period } } \times 100 \)

Direct competitor

businesses that provide the same or very similar goods or services.

USP - unique selling point (or proposition)

the special feature of a product that diff erentiates it from competitors’ products.

Product differentiation

making a product distinctive so that it stands out from competitors’ products in consumers’ perception.

Niche marketing

identifying and exploiting a small segment of a larger market by developing products to suit it.

Mass marketing

selling the same products to the whole market with no attempt to target groups within it.

Market segment

a sub-group of a whole market in which consumers have similar characteristics.

Market segmentation

identifying diff erent segments within a market and targeting diff erent products or services to them.

Consumer profile

a quantified picture of consumers of a firm’s products, showing proportions of age groups, income levels, location, gender and social class.

Market research

this is the process of collecting, recording and analysing data about customers, competitors and the market.

Primary research

the collection of first-hand data that is directly related to a firm’s needs.

Secondary research

collection of data from second- hand sources.

Qualitative research

research into the in-depth motivations behind consumer buying behaviour or opinions.

Quantitative research

research that leads to numerical results that can be statistically analysed.

Focus groups

a group of people who are asked about their attitude towards a product, service, advertisement or new style of packaging.

Sample

the group of people taking part in a market research survey selected to be representative of the overall target market.

Random sampling

every member of the target population has an equal chance of being selected.

Systematic sampling

every n th item in the target population is selected.

Stratified sampling

this draws a sample from a specified sub-group or segment of the population and uses random sampling to select an appropriate number from each stratum.

Quota sampling

when the population has been stratified and the interviewer selects an appropriate number of respondents from each stratum.

Cluster sampling

using one or a number of specific groups to draw samples from and not selecting from the whole population, e.g. using one town or region.

Open questions

those that invite a wide-ranging or imaginative response – the results will be difficult to collate and present numerically.

Closed questions

questions to which a limited number of pre-set answers is offered.

Arithmetic mean

calculated by totalling all the results and dividing by the number of results.

Mode

the value that occurs most frequently in a set of data.

Median

the value of the middle item when data have been ordered or ranked. It divides the data into two equal parts.

Range

the difference between the highest and lowest value.

Inter-quartile range

the range of the middle 50% of the data.

Marketing mix

the four key decisions that must be taken in the effective marketing of a product.

Customer relationship management (CRM)

using marketing activities to establish successful customer relationships so that existing customer loyalty can be maintained.

Brand

an identifying symbol, name, image or trademark that distinguishes a product from its competitors.

Intangible attributes of a product

subjective opinions of customers about a product that cannot be measured or compared easily.

Tangible attributes of a product

measurable features of a product that can be easily compared with other products.

Product

the end result of the production process sold on the market to satisfy a customer need.

Product positioning

the consumer perception of a product or service as compared to its competitors.

Product portfolio analysis

analysing the range of existing products of a business to help allocate resources effectively between them.

Product life cycle

the pattern of sales recorded by a product from launch to withdrawal from the market and is one of the main forms of product portfolio analysis.

Consumer durable

manufactured product that can be reused and is expected to have a reasonably long life, such as a car or washing machine.

Extension strategies

these are marketing plans to extend the maturity stage of the product before a brand new one is needed.

Price elasticity of demand

measures the responsiveness of demand following a change in price:
\( \textrm{PED} = \frac{ \textrm{ percentage change in quantity demanded } }{ \textrm{ percentage change in price } } \)

Mark-up pricing

adding a fixed mark-up for profit to the unit price of a product.

Target pricing

setting a price that will give a required rate of return at a certain level of output/sales.

Full-cost pricing

setting a price by calculating a unit cost for the product (allocated fixed and variable costs) and then adding a fixed profit margin.

Contribution-cost pricing

setting prices based on the variable costs of making a product in order to make a contribution towards fixed costs and profit.

Competition-based pricing

a firm will base its price upon the price set by its competitors.

Dynamic pricing

off ering goods at a price that changes according to the level of demand and the customer’s ability to pay.

Penetration pricing

setting a relatively low price oft en supported by strong promotion in order to achieve a high volume of sales.

Market skimming

setting a high price for a new product when a firm has a unique or highly differentiated product with low price elasticity of demand.

Promotion

the use of advertising, sales promotion, personal selling, direct mail, trade fairs, sponsorship and public relations to inform consumers and persuade them to buy.

Promotion mix

the combination of promotional techniques that a firm uses to sell a product.

Above-the-line promotion

a form of promotion that is undertaken by a business by paying for communication with consumers

Advertising

paid-for communication with consumers to inform and persuade, e.g. TV and cinema advertising.

Below-the-line promotion

promotion that is not a directly paid-for means of communication, but based on short-term incentives to purchase.

Sales promotion

incentives such as special off ers or special deals directed at consumers or retailers to achieve short-term sales increases and repeat purchases by consumers.

Personal selling

a member of the sales staff communicates with one consumer with the aim of selling the product and establishing a long-term relationship between company and consumer.

Sponsorship

payment by a company to the organisers of an event or team/individuals so that the company name becomes associated with the event/team/individual.

Public relations

the deliberate use of free publicity provided by newspapers, TV and other media to communicate with and achieve understanding by the public.

Branding

the strategy of diff erentiating products from those of competitors by creating an identifiable image and clear expectations about a product.

Marketing or promotion budget

the financial amount made available by a business for spending on marketing/ promotion during a certain time period.

Channel of distribution

this refers to the chain of intermediaries a product passes through from producer to final consumer.

Internet (online) marketing

refers to advertising and marketing activities that use the Internet, email and mobile communications to encourage direct sales via electronic commerce.

E-commerce

the buying and selling of goods and services by businesses and consumers through an electronic medium.

Viral marketing

the use of social media sites or text messages to increase brand awareness or sell products.

Integrated marketing mix

the key marketing decisions complement each other and work together to give customers a consistent message about the product.

Added value

the difference between the cost of purchasing raw materials and the price the finished goods are sold for - this is the same as creating value

Intellectual capital

intangible capital of a business that includes human capital (well trained and knowledgeable employees), structural capital (databases and information systems) and relational capital (good links with supplier and customers)

Production

converting inputs into outputs

Level of production

the number of units produced during a time period

Productivity

the ratio of outputs to inputs during production, e.g. output per worker per time period

Efficiency

producing output at the highest ratio of output to input

Effectiveness

meeting the objectives of the enterprise by using inputs productively to meet customers' need

Labour intensive

involving a high level of labour input compared with capital equipment

Capital intensive

involving a high quantity of capital equipment compared with labour input

Operations planning

preparing input resources to supply products to meet expected demand

CAD - computer aided design

the use of the computer programs to create two- or three-dimensional (2D or 3D) graphical representations of physical objects

CAM - computer aided manufacturing

the use of computer software to control machine tools and related machinery in the manufacturing of components or complete products

Operational flexibility

the ability of a business to vary both the level of production and the range of products following changes in customer demand

Process innovation

the use of a new or much improved production method or service delivery method

Job production

producing a one-off item specially designed for the customer

Batch production

producing a limited number of identical products — each item in the batch passes through one stage of production before passing on to the next stage

Flow production

producing items in a continually moving process

Mass customisation

the use of flexible computer-aided production systems to produce items to meet individual customers' requirements at mass-production cost level

Optimal location

a business location that gives the best combination of quantitative and qualitative factors

Quantitative factors

these are measurable in financial terms and will have a direct impact on either the costs of a site or the revenues from it and its profitability

Qualitative factors

non-measurable factors that may influence business decisions

Multi-site location

a business that operates from more than one location

Offshoring

the relocation of a business process done in one country to the same or another company in another country

Multinational

a business with operations or production bases in more than one country

Trade barriers

taxes (tariffs) or other limitations on the free international movement of goods and services

Scale of operation

the maximum output that can be achieved using the available inputs (resources) — this scale can oly be increased in the long term by employing more of all inputs

Economies of scale

reductions in a firm’s unit (average) costs of production that result from an increase in the scale of operations

Diseconomies of scale

factors that cause average costs of production to rise when the scale of operation is increased

Enterprise resource planning

the use of a single computer application to plan the purchase and use of resources in an organisation to improve the efficiency of operations

Supply chain

all of the stages in the production process from obtaining raw materials to selling to the consumer — from point of origin to point of consumption

Sustainability

production systems that prevent waste by using theminimum of non-renewable resources so that levels of production can be sustained in the future

Inventory (stock)

materials and goods required to allow for the production and supply of products to the customer

Economic order quantity

the optimum or least-cost quantity of stock to re-order taking into account delivery costs and stock-holding costs

Buffer inventories

the minimum inventory level that should be held to ensure that production could still take place should a delay in delivery occur or should production rates increase.

Re-order quantity

the number of units ordered each time

Lead time

the normal time taken between ordering new stocks and their delivery

Just-in-time

this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just as they are needed in production and completed products are produced to order.

Start-up capital

the capital needed by an entrepreneur to set up a business

Working capital

the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms working capital = current assets – current liabilities

Capital expenditure

the purchase of assets that are expected to last for more than one year, such as building and machinery

Revenue expenditure

spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock

Liquidity

the ability of a firm to be able to pay its short-term debts

Liquidation

when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

Overdraft

bank agrees to a business borrowing up to an agreed limit as and when required

Factoring

selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – only a proportion of the value of the debts will be received as cash

Hire purchase

an asset is sold to a company that agrees to pay fixed repayments over an agreed time period – the asset belongs to the company

Leasing

obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period, this avoids the need for the business to raise long-term capital to buy the asset; ownership remains with the leasing company

Equity finance

permanent finance raised by companies through the sale of shares

Long-term loans

loans that do not have to be repaid for at least one year

Long-term bonds or debentures

bonds issued by companies to raise debt finance, oft en with a fixed rate of interest

Rights issue

existing shareholders are given the right to buy additional shares at a discounted price

Venture capital

risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources

Microfinance

providing financial services for poor and low-income customers who do not have access to banking services, such as loans and overdraft s off ered by traditional commercial banks

Crowd funding

the use of small amounts of capital from a large number of individuals to finance a new business venture

Business plan

a detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business

Direct costs

these costs can be clearly identified with each unit of production and can be allocated to a cost centre

Indirect costs

costs that cannot be identified with a unit of production or allocated accurately to a cost centre

Fixed costs

costs that do not vary with output in the short run

Variable costs

costs that vary with output

Marginal costs

the extra cost of producing one more unit of output

Break-even point of production

the level of output at which total costs equal total revenue, neither a profit nor a loss is made

Margin of safety

the amount by which the sales level exceeds the break-even level of output

Contribution per unit

selling price less variable cost per unit

Income statement

records the revenue, costs and profit (or loss) of a business over a given period of time

Gross profit

equal to sales revenue less cost of sales

Revenue

(formerly called sales turnover): the total value of sales made during the trading period = selling price × quantity sold

Cost of sales

(or cost of goods sold): this is the direct cost of the goods that were sold during the financial year

Operating profit

(formerly referred to as net profit): gross profit minus overhead expenses

Profit for the year

(profit aft er tax): operating profit minus interest costs and corporation tax

Dividends

the share of the profits paid to shareholders as a return for investing in the company

Retained earnings

(profit): the profit left aft er all deductions, including dividends, have been made, this is ‘ploughed back’ into the company as a source of finance

Low-quality profit

one-off profit that cannot easily be repeated or sustained

High-quality profit

profit that can be repeated and sustained

Statement of financial position

(balance sheet): an accounting statement that records the values of a business’s assets, liabilities and shareholders’ equity at one point in time

Shareholders' equity

total value of assets – total value of liabilities

Asset

an item of monetary value that is owned by a business

Liability

a financial obligation of a business that it is required to pay in the future

Share capital

the total value of capital raised from shareholders by the issue of shares

Non-current assets

assets to be kept and used by the business for more than one year. Used to be referred to as 'fixed assets'

Intangible assets

items of value that do not have a physical presence, such as patents, trademarks and current assets

Current assets

assets that are likely to be turned into cash before the next balance-sheet date

Inventories

stocks held by the business in the form of materials, work in progress and finished goods

Trade receivables (debtors)

the value of payments to be received from customers who have bought goods on credit

Current liabilities

debts of the business that will usually have to be paid within one year

Accounts payable (creditors)

value of debts for goods bought on credit payable to suppliers; also known as 'trade payables'

Non-current liabilities

value of debts of the business that will be payable aft er more than one year

Intellectual capital or property

the amount by which the market value of a firm exceeds its tangible assets less liabilities – an intangible asset

Goodwill

arises when a business is valued at or sold for more than the balance-sheet value of its assets

Cash-flow statement

record of the cash received by a business over a period of time and the cash outflows from the business

Gross profit margin

This ratio compares gross profit (profit before deduction of overheads) with revenue.
\(\textrm{gross profit margin}=\frac{\textrm{gross profit}}{\textrm{revenue}} \times 100 \%\)

Operating profit margin

This ratio compares operating profit (formerly this ratio was referred to as the net profit margin) revenue
\(\textrm{operating profit margin}=\frac{\textrm{operating profit}}{\textrm{revenue}} \times 100 \%\)

Liquidity

the ability of a firm to pay its short-term debts

Current ratio

\( \textrm{current ratio}= \frac{\textrm{current assets}}{\textrm{current liabilities}} \)

Acid-test ratio

\( \textrm{acid-test ratio}= \frac{\textrm{liquid assets}}{\textrm{current liabilities}} \)

Liquid assets

\( \textrm{liquid assets}= \textrm{current assets}-\textrm{inventories (stocks)}\)

Window-dressing

presenting the company accounts in a favourable light – to flatter the business performance

Cash flow

the sum of cash payments to a business (inflows) less the sum of cash payments (outflows)

Liquidation

when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

Insolvent

when a business cannot meet its short-term debts

Cash inflows

payments in cash received by a business, such as those from customers (trade receivables) or from the bank, e.g. receiving a loan

Cash outflows

payments in cash made by a business, such as those to suppliers and workers

Cash-flow forecast

estimate of a firm’s future cash inflows and outflows

Net monthly cash flow

estimated difference between monthly cash inflows and cash outflows

Opening cash balance

cash held by the business at the start of the month

Closing cash balance

cash held at the end of the month becomes next month’s opening balance

Credit control

monitoring of debts to ensure that credit periods are not exceeded

Bad debt

unpaid customers’ bills that are now very unlikely to ever be paid

Overtrading

expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops