Business Definitions

Profit

The money remaining from the sales revenue after all costs have been paid. It is the difference between revenue and costs. Profit= total revenue- total cost

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Revenue

Money earned by a business

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Sales Revenue

Money earned by selling goods and services. Sales revenue = sales volume x unit selling price.

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Sales volume

The number of goods or services sold by a business in a period of time.

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Selling Price

The amount charged to a customer for the purchase of a good or service.

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Entrepreneur

A person who is willing to take risks to set up their own business

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Initaitive

The quality of taking action without needing somebody else to tell you to do so or give you direction.

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Resilience

The ability to withstand or recover from different situations.

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Hard-working

Willing to work long hours or to do difficult tasks to make your idea happen.

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Creative

Having original ideas.

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Self Confident

Believing in your own ideas/abilities.

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Regulations

Rules that businesses have to follow.

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Capital Investment

Spending on equipment and premises.

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Working Capital

The money available to fund the day to day running of the business.

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Caculated Risks

The risky actions for which you have considered the probability of success or failure.

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Motives

The factors that encourage an entrepreneur to go into business and to take particular decisions.

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Non-profit Motives

The reasons for setting up a business which are not linked to making profit, for example, control over working hours or self-fulfilment.

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Ethical Motives

The reasons linked to doing ‘what is right’. For example, setting up a business or organisation which benefits a section of the community, or which is committed to ethical employment and sourcing activities.

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Leadership

The process of influencing others to work willing towards an organisation’s goals.

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Motivation

Using the right strategy to help employees work more efficiently. By meeting the needs of the business situation and the employees, leaders can increase commitment and so encourage hard work.

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Autocratic leaders

Take top-down decisions without consulting employees to find out their views. They may provide very little information on the reasons for the decision.

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Democratic leaders

Guide rather than dictate, consulting widely and encouraging everyone to participate in the decision-making process.

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Paternalistic leaders

Behave rather as a parent might in making family decisions. They consult at every level and explain their reasons, but take the final decision themselves

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Theory X managers

Assume that their employees are lazy and prefer to be given firm direction with strict controls. Managers will adopt a stick and carrot approach to make them work hard. This may involve targets with heavy penalties if not reached.

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Theory Y managers

Assume that human beings want to work and will commit themselves to work effectively without strict controls. They will engage with the objectives of the organisation, accept responsibility and use their initiative to help solve problems.

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Markets

Markets exist wherever there are buyers and sellers who can communicate with each other and agree to buy or sell at a price that makes the transaction worthwhile.

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Exchange

Selling what we have or can produce and using the money to buy what we want for ourselves.

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Specialisation

Concentrating on creating the products we can make and sell most efficiently.

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Competition

The process by which businesses strive against one another to attract more customers by keeping prices down and making the product more appealing. The more sellers there are in the market the stiffer competition so lower prices are more likely.

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Costs

All the payments that have to be made in order to get a product into the market place. They will include wages, premises and all other input costs- raw materials, components, inputs bought from wholesalers, business rates, interest, energy bills ect.

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Investment

Spending now in order to generate income in the future, for example, investing in capital equipment such as machinery, computers or vans, researching and developing the product, or training key people.

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Scarcity

A situation in which people want to buy more of a product that is currently being produced.

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Incentives

Financial and other rewards that can induce people to behave in a certain way.

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Supply

The level at which a business is willing and able to provide a product or service at a given price level.

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Demand

The level at which a consumer is willing and able to purchase a product/service at a given price level.

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Choice

Because resources are scarce, everyone has to choose what they want most, in light of the price they will have to pay for it. Choice will be constrained by the level of income- the amount that the consumer can spend.

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substitutes

Products that can be used to replace each other. So if the price of one rises, the demand for the other will rise. The vast number of substitutes effects levels of demand

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Complements

Used together, so if the price of one rises, the demand for the other will fall. In practice the changes may be quite small but we can always show the direction of the change.

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Inferior Goods

Those which people buy more of when their incomes fall.

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Costs of production

The payments that are needed in order to create a product and make in available in the market. They include wages, the cost of premises and capital equipment and the cost of any bought-in inputs like components in a car factory/shampoo in hairdresser

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Product innovation

The development of completely new products.

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Process innovation

New technologies to produce existing or similar products at lower cost.

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Technical/technological change

Uses new scientific knowledge and improved engineering techniques to create both new products and new production methods.

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Market orientation

Uses new scientific knowledge and improved engineering techniques to create both new products and new production methods.

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Product orientation

Implies that the business will focus its efforts on creating the product rather than responding to market preferences.

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The demand curve

Shows the relationship between the price and the quantity that the customers want to buy. A demand curve is normally used to show the total demand for all the customers who are in the market for the product, at a range of prices.

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The supply curve

Shows the relationship between the price and the quantity that producers want to create and sell. Its shows the total amount supplied to the market by all producers of that product, at a range of prices.

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The equilibrium price

The price at which both buyers and sellers will be satisfied, in that the amount that producers wish to sell is the same as the amount that customers want to buy.

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The market clearing price

The price at which all of the product that is currently available sells, and no one who wanted to buy the product at the going price fails to get it.

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Market research

The process of gathering data in order to understand current and future customer needs and factors affecting the marketplace. This reduces the risks associated with developing a new business idea.

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Primary market research

Research obtained ‘first hand’ by the business that is interested in the results. Also known as field research.

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Secondary market research

Research which uses data that has been gathered previously by another organisation and is publicly available. Also known as desk research.

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Quantitative market research

Market research conducted where the results are numerical and can be analysed statistically.

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Qualitative market research

Market research conducted where the results are based on opinions and feelings.

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Sampling

Collecting data from a group of people who will be representative of the target market or the population as a whole.

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Bias

When information collected from a sample does not accurately reflect variations in the total population. This is likely if the sample is small or inappropriately selected.

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Random sample

Where everyone has an equal chance of being selected.

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Quota sample

Dividing the target market into groups according to their consumer characteristics; a percentage of the sample will be allocated to each group.

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Stratified sample

Similar to quota sampling but select participants within the groups on a random basis, to gain greater accuracy

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Market size

Measured either by the total value or the total volume of goods sold in the market.

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Market share

Shown by percentage of the market that the individual business sells to.

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Market growth

An increase in the size of a market.

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Market segmentation

Where the market is divided up into groups, each of which has distinctive customer preferences. Both products and marketing strategies can be differentiated to meet the requirements of each segment. Common groupings include age, gender, family status

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Mass marketing

Applies to a business that is aiming its product at the largest part of the market.

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Niche marketing

Deliberately targeting a small group of customers, within a larger market, who shame the same characteristics or needs.

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Differentiated products

Designed so that they have distinctive features that are different from those of competing products. The product may have unique characteristics or it may be marketed in a different way from its competitors, so that it has a distinct image.

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Market positioning

Refers to the way the product is perceived in comparison with competing products. Considering the positioning of the product helps the business make decisions about the way product range matches customer preferences to appeals to different segments.

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Market map

A tool that plots brands in the market according to how they meet customers’ needs. It allows a business to position individual products effectively.

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Gap in the market

Indicates that there is scope for a new product that is not currently being provided.

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Repositioning

Targeting a different segment of the market, one where its individual features are more in keeping with the needs of the customer.

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Competitive advantage

Achieved using any factor that will help the business to succeed when competing with rivals. Price may be important by there are many other ways of making a product competitive. Innovation, reputation and reliability can all be important.

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Added value

The difference between the price that is charged and the total cost of the inputs needed to create the product. It applies to services as well as to manufactured goods. It may come from improving the product itself, or from improving the perception.

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Opportunity cost

The cost of the next best alternative which has been forgone when a decision is made.

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Trade-offs

When two things cannot be fully achieved. Having more of one thing may mean having less of the other.

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Test marketing

The new product will be marketed and sold within a small area to see how potential customers react to it. This market needs to have similar features to the ultimate target market. It is quite an expensive way to find if the product will sell.

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Product trial

When a business trial a product in a small section of the market first to gauge demand for it.

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Repeat purchases

When the customer decides to buy the product on a regular basis.

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The economic cycle

The sequence of depression, recovery, boom and recession which created significant fluctuations in demand for many products. Also known as the business cycle or the trade cycle.

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Gross domestic product (GDP)

A measure of the size of the economy and gives the money value of all output. It is also used as a measure of national income and total expenditure in the economy. GDP or incomes in real terms refer to data that has had inflation effects removed.

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Economic growth

An increase in the total output of the economy. If it is rising, the standard of living should improve. Many businesses will experience rising demand for their products.

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Unemployment

A person is willing and able to work but is unable to find a paying job despite an active search. High unemployment is wasteful: resources, in the form of people, are not producing anything and the government has to increase spending on benefits.

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Inflation

Is a sustained rise in the general level of prices for goods and services. If incomes stay the same, purchasing power will fall. Inflation can be measured in different ways.

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Globalisation

Refers to the way in which all the world’s economies have become more closely integrated. There is more trade in products and services. There is foreign investment and many businesses are active in more than one country.

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Exchange rate

The price of one currency expressed in terms of another.

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Government expenditure

Spending by the government on services to the public, e.g. law and order, welfare benefits for the elderly, disabled and unemployed, public housing etc. Decisions are likely to be taken in the public interest, rather than for profit.

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Public sector

Part of the economy that is directly organised by the government, either local or national, using its own employees.

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Private sector

All the businesses and self-employed people that take their decisions independently. They must at least cover their costs if they are to stay alive, and most will see making a profit as an important objective.

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Start-up costs

Costs incurred in setting up a business organisation.

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Capital spending

Occurs when a business invests in fixed assets or something of long term benefit to the business.

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Investment

Spending now which generates income in the future. It may involve buying capital equipment or spending on research or training.

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Running costs

Paid by a business on a regular basis. Running costs may be fixed or variable costs.

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Fixed costs

Not directly linked to the level of output of the business. They don't change when output increases/decreases. These are sometimes called ‘indirect costs’ or ‘overheads’. Fixed costs include all capital spending + also some regular costs e.g.salaries

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Variable costs

Directly linked to the level of output of the business. They change as output increases/decreases. These are sometimes called ‘direct costs’. They include costs of paying employees who are paid according to their actual contribution (direct labour)

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Internal finance

Comes from within the business. It can be retained profit or cash raised from the sale of assets.

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Retained profit

The profit that can be reinvested in the business rather than being given to the owner in the form of income (unincorporated business) or dividend payments (incorporated business). It does not incur interest. It is a long term source of finance.

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Sale of assets

Refers to the physical assets such as machinery or property, or to intangible assets such as the patent to a particular product. It is a long term source of finance.

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Working capital

Cash held by the business and used to keep day-to-day business going in the short run.

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Loan

A fixed amount of money borrowed for a fixed period at a fixed interest rate. The loan is paid back in regular instalments until the total amount plus interest is repaid. Loans are medium to long-term sources of finance.

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Overdraft

A short-term flexible loan where a bank allows a business to operate with a negative bank balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a fixed sum loan.

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Debentures

Loans that can be bought and sold in the same way as shares. They have a fixed interest rate. They do not give part-ownership of the company but they are much less risky than shares, for the investor.

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Venture capital

Money invested in a new business by individuals who believe that the business will succeed and therefore increase in value, but are accept the risk that the business idea may fail.Venture capital is long term in exchange for a share of business.

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Ordinary share capital

Long-term finance raised by selling shares in a business. Money raised does not have to be repaid. Investors receive part-ownership of the business and a share of the profits in the form of dividends.

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Equities

Another name for shares.

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Leasing

Allows a business to use an asset without owning it, by making regular payments to the owner of the asset. Over time the total sum paid for the lease may be more that the cost of buying the asset outright. It reduced the need for external finance.

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Trade credit

Short-term source of finance offered when suppliers allow a time period before payment for supplies must be made. The credit period will vary between suppliers and may be changed by the supplier at any time.

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Sole trader

An unincorporated business owner and operated by one person. The sole trader may employ workers but it is most common that they work alone. The sole trader had unlimited liability for the debts of his/her business.

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Partnership

Unincorporated business owned and operated by two or more individuals. The partners are jointly and severally liable for the debts of the business- this means that they are each individually responsible for all of the business debts.

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Unlimited liability

The individual has no legal separation from their business and is therefore personally responsible for the debts of the business. Their personal assets could be used to pay business debts if the business assets aren't sufficient to pay debts incurred

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Limited liability

Protects shareholders of incorporated businesses. This means that the individual is not fully liable for the debts of the business. The most that shareholders have to contribute to business debts is original investment capitals.

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Private limited companies

Private limited companies Owners have limited liability for business debts but cannot raise finance from the general public. They are often family businesses and the shareholders are members of the family/personal friends. Usually small/medium firms.

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Public limited companies (PLCs)

Owned by their shareholders, who have limited liability. The companies can raise finance by selling shares to the general public and large organisations such as pension funds. In this way they can raise substantial finance in order to expand.

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Cost plus pricing

Calculates the cost of producing a product then adds a percentage of this cost to arrive at a price. The added amount is called the mark-up.

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Competitor based pricing

Takes account of prices charged for similar products in the market, setting a price similar to or just below this.

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Premium pricing

Charging a high price for the product, above the market price. This reflects the high quality of the product itself and may help to convey matching customer perceptions of high quality.

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Price discrimination

Charges customers in different market segments different prices for the same product in order to reach as many customers as possible.

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Marketing mix

A model for considering different aspects of a product and its market. Also known as the 4 ‘P’s, the aspects are price, place, product and promotion.

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Break-even revenue level

The amount of sales revenue needed to exactly cover all of the costs of a business. At this revenue level the business makes neither a profit nor a loss; it just covers it costs.

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Break-even point

The volume of sales at which a business breaks even, so revenue covers costs exactly.

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Break-even analysis

The process of calculating and interpreting information relating to the break-even revenue level.

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Contribution

That part of sales revenue which can be put towards paying the fixed costs of a business. Contribution= selling price- variable cost per unit.

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Margin of safety

The amount by which sales can fall from their current level before reaching the break-even point. Margin of Safety = actual level of output – break-even level of output

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Turnover

Total sales revenue for the year.

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Costs of goods sold

The cost of inputs to the actual production process. It excludes overheads. It will vary directly with the amount produced.

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Overheads

The costs that stay the same regardless of how much is produced.

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Gross profit

Sales revenue less the immediate costs of producing the goods sold. Sales revenue – cost of goods sold

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Net profit

What remains from sales revenue after deduction of all operating costs. Net profit = Gross profit - expenses

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Gross profit margin

Gross profit as a percentage of sales revenue. Gross profit margin = Gross profit / sales revenue x 100

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Net profit margin

Net profit as a percentage of sales revenue. It can be used as a performance measure, giving a view of how successful the business has been, in comparison to past years. Net profit margin = Net profit/sales revenue x 100

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Investment

Spending now that will yield future income in the future. It can mean investing in one’s own business, either to start up or expand, or taking a part share in someone else’s.

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Business plan

A written document detailing all aspects of a business idea. A business plan includes information on the product or service, marketing, production, human resources, equipment needed and financial information.

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Business planning

The process of carrying out market research and thinking through a business idea in order to construct a business plan.

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Cash flow forecast

A month by month prediction of the timing of expected cash inflows and outflows in a business.

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Cash inflows

Money coming into a business. This includes revenue, investment and borrowing.

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Cash outflows

Money leaving a business. This includes fixed and variable costs as well as cash withdrawals by the business owner(s).

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Insolvency

When a business fails because a sustained lack of working capital means that debts cannot be paid.

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Business Definitions

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