AQA A level Business - Unit 7

Mission Statement

A short passage of text that sums up the organisation's mission. May be displayed on walls or websites.

Five Forces

Pressures on the business that Michael Porter says affects its success in the marketplace: competitors, threat of new entrants, possibility of substitutes, power of suppliers, power of customers.

Satisfice

To make a decision that achieves a compromise between different objectives.

Enterprise Resource Planning

Software that models the whole business operation. A customer order triggers a series of activities - from ordering more materials, to sequencing production.

Demographic

Factors relating to the population, such as changes in the number of older people or in the level of immigration.

Financial Objective

Outline what the business wishes to achieve in financial terms during a certain period of time.

Cash Flow

Flow of cash into and out of the business.

Public Limited Company

A company with limited liability and shares which are available to the public.

Corporation Tax

A tax levied as a percentage of a company's profits.

Cost of Goods Sold

Calculation of the direct costs involved in making the goods sold in that time period.

Creditors

Those to whom a firm owes money.

Gross Profit =

Revenue - Cost of goods sold =

Liquidity

Measurement of a firms ability to pay short-term bills.

Reserves

Company's accumulated, retained profit; forms part of total equity.

Revenue

Sales revenue (income)

Stock Exchange

A market for stocks and shares.

Earnings

For a company, earnings means profit after tax.

Inter-firm Comparisons

Comparison of financial performance between firms.

Profit Quality

Assesses the likelihood of the source of the profit made by a business continuing in the future.

Earnings per share

Company profits after tax divided by the number of shares issued.

Private Equity Company

A business set up to buy and sell other businesses. Usually financed by debt and helped by actively avoiding paying tax.

Audited

When accounting figures are checked independently by an expert.

Carbon Footprint

Net total of greenhouse gas emissions produced by an organisation.

Joint Ventures

Agreements between firms to collaborate on specific areas of common interest.

Trade Union

An organisation funded by its members, who want the union to give them protection from rogue employers and a better standard of living.

Recession

Two successive quarters of falling output (Falling GDP).

Intellectual Property

New written, visual, or technical material for which the originator may seek protection.

Tariff

A tax placed on imported goods.

Social Change

Fluidity of human behavior and actions that affect demography and lifestyle.

Urbanisation

Movement of population away from rural areas to live and work in cities.

Demographic Changes

Any change relating to the size, age distribution or make-up a population

Stakeholder

Groups of people who have a direct interest in the business.

Computer Aided Design

A software package to help draw and store new designs in digital form

Computer Aided Manufacture

Uses software to specify speeds, accuracy and quantity to an automated production system.

Cannibalise

Launching a product which eats into sales of your existing brands to prevent rivals from doing so.

Present Value

Discounting of future cash flows to make them comparable with today's cash.

Short-termism

Making decisions based on immediate gains e.g. dividends, without focus on the long-term future of the business.

Gross Profit Margin =

Gross Profit

---------------- x 100 =

Sales Revenue

Operating Profit Margin =

Operating Profit

------------------- x 100 =

Sales Revenue

Profit for the Year =

Operating Profit - Financing and Tax = (or Profit before tax - taxation =)

Payback =

Sum Invested

---------------------------- =

Net Cash per time Period

Average Rate of Return =

total net return /no. of years

----------------------------------- x 100 =

Initial cost (outlay)

Current Ratio =

Current Assets

------------------- =

Current Liabilities

Inventory Turnover =

Cost of Goods Sold

---------------------------- =

Average Inventory held

Mission

An organisation's long-term intentions, its ultimate purpose; sometimes known as corporate aims.

Corporate objectives

Goals of the whole organisation rather than of different functions. They coordinate the activities of and give a sense of direction to the whole organisation. They are dictated by the mission (or corporate aims) of an organisation.

Strategy

The medium to long-term plan through which an organisation aims to attain its objectives.

Tactics

The means by which a strategy is carried out; a range of different tactics may be used as part of a single strategy.

Strategic decision making

General direction and overall policy of an organisation. Has a significant long-term effects on an organisation and therefore require detailed consideration and approval at senior management level.

Functional decision making

Medium term policy concerned with the specific functional. Supports the implementation of strategic decisions, usually made by middle management.

SWOT analysis

A technique that allows an organisation to assess its overall position, or the position of one of its divisions, products or activities. Internal audit to assess its strengths and weaknesses, and an external audit to assess its opportunities and threats.

Income statement

An account showing the income and expenditure (and thus the profit or loss) of a company over a period of time (usually a year).

Management accounting

The creation of financial information for use by internal users (managers) in a business, to predict, plan, review and control the financial performance of a business.

Assets

Items that are owned by an organisation.

Balance sheet

A financial statement that summarises a company's assets (owned), liabilities (owes) and shareholders' equity at a particular point in time. Snapshot of the financial 'health' of a business.

Non-current assets

Resources that can be used repeatedly in the production process, although they do wear out (depreciate) or lose value over time. These are often known as fixed assets, examples are land /buildings/ machinery/ vehicles.

Current assets

Short-term items that can be expected to be turned into cash within one year.

Financial accounting

The provision of financial information to show external users the financial performance of the business. It concentrates on historical data.

Liabilities

Debts owed by an organisation to suppliers, shareholders, investors or customers who have paid in advance.

Non-current liabilities

Debts due for repayment after more than one year.

Current liabilities

Debts scheduled for repayment within one year.

Total equity (or total shareholders' equity)

Funds provided by shareholders to set up the business, fund expansion and purchase fixed assets.

Share capital

The funds provided by shareholders through the purchase of shares.

Reserves and retained earnings

Not distributed to shareholders as dividends, but are retained by the business for future use.

Current assets =

Inventories + receivables + cash and other equivalents =

Working capital =

Current assets - current liabilities =

Net assets =

Non-current assets + (net current assets) - non-current liabilities = (or Non-current assets + working capital - non-current liabilities = )

Assets employed =

Net current assets + non-current assets =

Total equity =

Share capital + reserves =

Capital employed =

Total equity + non-current liabilities =

Gross profit

Revenue minus cost of sales. The gross profit shows how efficiently a business is converting its raw materials or stock into finished products.

Operating profit

The revenue earned from everyday trading activities minus the costs involved in carrying out those activities. It is also gross profit minus expenses.

Operating profit =

Gross profit - expenses =

Profit before tax =

Operating profit + finance income - finance costs =

Ratio analysis

A method of assessing a firm's financial situation by comparing two sets of linked accounting data.

Profitability ratios

Compare profits with the size of the firm, measures the efficiency with which a business makes a profit in relation to its size. As profit is often the primary aim of a company, these ratios are often described as performance ratios.

Gearing

Gearing focuses long-term liquidity and shows whether a firm's capital structure is likely to be able to continue to meet interest payments on, and to repay, long-term borrowing.

Financial efficiency ratios

These generally concentrate on the firm's management of its working capital. They are used to assess the efficiency of the firm in its management of its assets and short-term liabilities.

Managers

This stakeholder identifies the efficiency of a firm and of its different areas, plans ahead, controls operations and assesses the effectiveness of strategic plans.

Employees

This stakeholder is interested to know whether a firm can afford wage rises and to see if profits are being allocated fairly.

Government

This stakeholder reviews the success of its economic policies and to find ways of improving business efficiency overall, and imposes Corporation Tax.

Competitors

This stakeholder compares their performance against rival firms and discover their relative strengths and weaknesses.

Customers

This stakeholders wants to know the firm is secure and therefore any guarantees and after-sales servicing agreements will be honoured.

Shareholders

This stakeholders compares the financial benefits of their investment in shares with alternative ways to invest, e.g. owning shares in a different firm or putting savings into a bank.

Return on capital employed

Measures the profitability of a business by calculating its operating profit as a percentage of capital that a business has at its disposal.

Liquidity ratio

Measures the ability of a business to stay solvent by meeting its short term liabilities. (Profit shows long term success, but pointless if a company cannot pay its short term liabilities)

Current ratio

Measures liquidity by expressing current asses as a ratio to current liabilities.

Solvency

A measure of a firm's ability to pay its debts on time. A firm that can meet its financial commitments is described as 'solvent'; a firm that cannot is described as 'insolvent'.

Gearing =

Non-current liabilities / total equity + non-current liabilities x 100 =

Payables days =

Payables / cost of sales x 365 =

Receivables days =

Receivables / revenue x 365 =

Performance metrics

Measure a business's activities and performance. These measures should be suited to the needs of the stakeholders as a whole, rather than a focus on the needs of shareholders and managers.

Core competences

The unique abilities of a business that enable it to achieve a competitive advantage.

Kaplan and Norton's balanced scorecard

A strategic planning and management system used to ensure that a business's activities are linked to its vision statement.

Elkington's Triple bottom line

Non financial method of assessing business performance that considers three different factors: financial returns, social responsibility and environmental values.

Infrastructure

The 'economic arteries and veins; roads, ports, railways, airports, power lines, pipes and wires that enable people, goods, commodities, water, energy and information to move about efficiently'.

Gross domestic product (GDP)

A measure of economic activity - a total value of a country's output over a given period of time, usually provided as quarterly or annual figures.

Business cycle

The regular pattern of ups and downs in demand and output within an economy, or GDP growth overtime.

Exchange rates

The price of one country's currency in terms of other currencies.

Fixed exchange rates

When a government decides to fix the value of its currency permanently in relation to other currencies or to a single currency.