Business HL

Flashcards for exam

Capital Expenditure

The spending on a company’s fixed assets

Revenue Expenditure

The spending on a company’s operation costs

Insolvency

A company that cannot fund it’s revenue expenditure. When the company has little-to-no liquid assets.

Internal sources of Finance

The money raised from a business’s assets.

* personal funds
* retained profits
* the sale of assets

Business Plan

Refers to the document that sets out the business idea, its goals, objectives and other information about how the business will operate.

Primary Sector

Involves extracting RAW MATERIALS from the earth

* fishing
* farming
* mining minerals/oil/metals
* agriculture.

Secondary Sector

Involves transforming raw materials into finished/semi-finished products.

* Construction
* processing
* manufacturing

Tertiary Sector

Involves the delivery of services.

* Education
* healthcare
* travel & tourism
* entertainment
* home & car repair services

Quaternary Sector

Includes services related to the development and use of data and information. (usually considered as a subset of the Tertiary Sector)

Public Sector

The part of the economy that is owned and operated by the government. This includes organizations and institutions that provide public goods and services \[education, healthcare, infrastructure, law enforcement\]. Funded through taxation and other government revenue.

Private Sector

The part of the economy that is owned, controlled and operated by private individuals or organizations. Generally driven by the persuit of profit. Operate in a variety of industries and sectors \[manufacturing, finance, retail & service\].

Private Limited Companies

Owned by a relatively small number of shareholders with limited liabilities but whose shares cannot be sold to the general public. These companies who wish to access a large amount of capital in order to grow may decide to go ‘public’ in an Initial Public Offering (IPO)

Public Limited Company

An incorporated business that allows the general public to buy and sell shares of the company via stock exchange. All shareholder enjoy limited liability.

Initial Public Offering (IPO)

When a business sells all or part of its business on a stock exchange for the first time.

Limited Liability

A restriction on the amount of money that owners can lose of their business goes bankrupt. \[shareholders cannot lose more than they invested\]

Unlimited Liability

A feature of sole traders and ordinary partnerships who are legally liable for all the money owed to their creditors.

Incorporation

There is a legal difference between the owners of a company and the business itself. This ensures that the owners are protected by limited liability.

Sole Trader

For-profit business owned by a single individual. There is a little legal distinction between the business and its owner, the owner is personally responsible for the debts of the business (unlimited liability).

Partnership

For-profit business owned by 2 or more individuals who are each personally responsible for the debts of the business (unlimited liability).

Corporation

For-profit business owned by numerous shareholders who enjoy limited liability. Individual shareholders are not responsible for the debts of a business.

Non-Governmental Organization (NGO)

Private sector not-for-profit social enterprises that operate for the benefit of others rather than primarily aiming to make a profit. They are not managed or operated by the government.

Charities

Not-for-profit social enterprises provide voluntary support for good causes, such as protecting children, animals, and the natural environment. They have strict guidelines to follow to be considered one and are often picked by the government.

Cooperative

For-profit social enterprise owned by its members who come together to work towards a common interest.

Microfinance Providers

Make financial services available to individuals whose needs cannot be met by traditional financial institutions such as banks.

Public-Private Partnerships (PPPs)

When the government works with the private sector to jointly provide a certain good or service. Public/private sector both share risk and reward.

Social Enterprises

Organizations that engage in business activity but that also set themselves important goals in terms of improving society or protecting the environment.

Vision Statement

Written expression of an organization’s long term ambitions that it hopes to realize in the future. Often optimistic and idealistic, used to inspire those in the firm.

Mission Statement

Written expression of an organization’s purpose and reason for being. may be seen as means of accomplishing the organization’s vision. It forms the foundation for setting objectives of a business.

Aims

Considered to be broad and general goals that the organisation would like to accomplish. They may be stated in somewhat vague and optimistic language and involve the medium to long term.

Objectives

Concrete short-term targets an organisation sets for itself. They may be formulated in order to accomplish wider aims and can be developed using the acronym SMART.

SMART Objectives

Targets that are specific, measurable, achievable, realistic and time-constrained.

Strategy

A plan, approach, or scheme for achieving an aim or objective. They are generally considered to involve important decisions that may be risky and are taken by senior management.

Tactic

An approach or scheme for achieving an aim or objective. Compared to strategies, tactics usually involve fewer resources and may be less risky.

Corporate Social Responsibility (CSR)

Conscientious consideration of ethical and environmental practices related to business activity. A business that adopts it acts morally towards its various stakeholder groups and the well-being of society as a whole.

Pressure Groups

Individuals with a common concern (such as environmental protection) who seek to place demands on organisations to act in a particular way or to influence a change in their behaviour.

External Stakeholders

Individuals and organisations not part of the organisation but have a direct interest in its activities and performance. \[Customers, Suppliers, Governments, Unions, Banks, Pressure GroupsSociety/environment, etc.\]

Internal Stakeholders

Members of the organisation. \[Employees, Managers, Shareholders, Board of Directors, Supervisors, CEO, etc.\]

SWOT

Internal Factors

* Strengths
* Weaknesses

External Factors

* Opportunities
* Threats

Ansoff Matrix

Existing Products, New Products → Increasing risk

Existing Markets, New Markets → Increasing risk

\

1. Market Penetration 2. Product Development
2. Market Development 3. Diversification (related)
3. Diversification (unrelated)

Market Penetration

A growth strategy part of the Ansoff matrix.  It involves selling more of the same products and services to the same customers or the same type of customers.

Product Development

A  growth strategy part of the Ansoff Matrix. It involves selling new products in the organisation’s existing market, often to existing customers.

Market Development

A growth strategy part of the Ansoff Matrix. It involves selling existing products to new customers.

Diversification

Considered the riskiest growth strategy in the Ansoff Matrix, as it involves selling new products in a new market. The business is thereby getting involved in an activity of which it has little knowledge, and as a consequence, there is more potential for making costly mistakes.

STEEPLE

**S**ocial

**T**echnological

**E**conomical

**E**thical

**P**olitical 

**L**egal

**E**nvironmental

Economies of Scale

Refers to the case where the average unit cost of production decreases as the level of output increases.

Types: (MPTFM)

* **M**arketing
* **P**urchasing
* **T**echnical
* **F**inancial
* **M**anagerial

Diseconomies of Scale

The case when the average unit cost of production increases as the level of output increases.

Optimal Level of Output

Most efficient scale of operation for a business which occurs at the level of output where average costs of production are minimised.

Profit Satisficing

The behaviour of business owners who choose not to grow their business because the existing enterprise meets their financial needs.

Internal Growth (Organic Growth)

Everything an organisation undertakes on its own to expand and develop.

External Growth (Inorganic Growth)

Development that involves the participation of another organisation. That is, the company works with another company in order to expand. This includes mergers, acquisitions and takeovers, joint ventures, strategic alliances and franchising.

Merger

When two (or more) firms agree to form a new organisation, thereby losing their original identities. (Form of external growth)

Acquisition

One firm purchases another firm. (Form of external growth)

Joint Venture

Creation of a new company by two or more 'parent' companies. It is formed in order to carry out an aim or objective that might be difficult for each of the parent companies to achieve on its own. (External Growth)

Strategic Alliance

Two or sometimes more organizations work together to realize a set of common objectives. The relationship between the companies may be spelled out in a contractual agreement; however, no new entity is created, and the original organizations remain intact. (External Growth)

Franchise

A legal agreement whereby a franchisee buys the rights to use the name and business model of a franchisor. The franchisee pays for the franchise and must respect the norms and practices of the franchise. The franchisor usually supports the franchisee with franchise-wide purchasing, marketing, 'best practices', and training. (External Growth)

Franchisee

An individual or company that holds a franchise for the sale of goods or the operation of a service.

Franchisor

An individual or company that sells or grants a franchise for the sale of goods or the operation of a service.

Globalization

It is the process by which businesses or other organisations develop international influence or start operating on an international scale.

Multinational Companies (MNC)

Corporations that operate in at least two countries, one of which is outside the corporation's 'home' country.

Supply Chain

The network of all the individuals, organisations, resources, activities and technology involved in the creation and sale of a product. \[Raw materials → Manufacturing → Distribution → Wholesaler → Retail\]

Forward Vertical Integration

A growth strategy that occurs when a business acquires a business operating further up the supply chain or when a business decides to operate further up the supply chain through internal growth. (External growth)

Backward Vertical Integration

A growth strategy that occurs when a business acquires a business operating earlier in the supply chain or when a business decides to operate earlier in the supply chain through internal growth.

Horizontal Integration

When a business combine with a firm operating in the same stage of production. (External growth)

Lateral Integration

Refers to mergers & acquisitions between firms that have similar operations but do not directly compete with each other. \[PepsiCo acquiring Quaker Oats Company\]

Conglomerate

Businesses that provide a diversified range of products and operate in an array of different industries, where the acquisition has no clear connection to the business buying it.

Fishbone Diagram

Cause & Effect

Decision Tree

Probability tree

Key

Square → A decision has to be made

Circle → give two options

Triangle → each option (calculate expected value (EMV))

Force Field Analysis

Driving Forces

Restraining Forces

BCG Matrix

Axis:

* Market Growth (verticle)
* Market Share (horizontal)

MG/MS

High/High → Star

High/Low → Question Mark/Problem Child (?)

Low/High → Cash Cow

Low/Low → Dog

\
* Milk your cows
* Help your stars shine
* Support your problem child
* Keep your dog as a pet

Personal Funds

Money invested by the owner(s) of a company. It is most suitable for business start-ups or to ensure survival in times of crisis and recession. (Internal source of finance \[short, medium & long-term\])

Sale of Assets

When an organization sells one or more of its fixed assets it usually raises massive amounts of money. (Internal source of finance \[short, medium & long-term depending on the size of the asset\])

Retained Profits

The value of surplus that the business keeps to use within the business after paying corporate taxes on its profits to the government and dividends to its shareholders. (Internal source of finance \[short, medium & long-term\])

External Sources of Finance

Funds from outside the organisation:

* Equity Finance: share capital, business angles, venture capitalists.
* Debt Finance: overdrafts, loan capital 
* Financial Aid: subsidies, grants. 
* Other: debt factoring, trade credit, leasing, sale-and-leaseback.

Loan Capital

Used to buy fixed assets. (External & a debt finance \[medium & long-term\])

Overdraft

It is a high-cost, short-term loan that is used to cover short-term cash flow problems as well as to help meet day-to-day expenses (revenue expenditure). (short-term source of external finance and debt finance)

Subsidies

An amount of money granted by the government to a firm or business to lower production costs as the output provides benefits to societies. \[Farmers are often provided with subsidies to stabilize food prices\] (External source of finance & financial aid \[short to medium-term\])

Grant

An amount of money offered to businesses that are in a position to help the wider community by the government. Like a loan but with no interest. (External source of finance & financial aid \[long-term\])

Trade Credit

Allows for a business or consumer to “buy now and pay later”. (External source of finance \[short-term\]).

Debt Factoring

Financial service whereby a party (such as a bank) collects debts on behalf of other businesses in return for a fee. (External source of finance \[short-term\]).

Debtor

Someone who owes you money.

Leasing

A form of hiring whereby a contract is agreed upon between a leasing company (the lessor) and the customer (the lessee). The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets. (External source of finance \[short & medium-term\]).

Sale-and-leaseback

A business selling a fixed asset but immediately leasing the asset back. In essence, the lessee transfers ownership to the lessor but the asset does not physically leave the business. (External source of finance)

Share Capital

Money that is raised through the issue of shares. This source of finance is only available to companies and corporations. (External source of finance & equity finance \[long-term\])

Share Issue

When an existing public limited company raises further finance by selling more of its shares.

Business Angel

wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential. (External source of finance & equity finance \[long-term\])

Venture Capitalists

Companies that use the money from their clients to fund investments. The long-term aim for a them is to help the company grow so they can later sell their stake for an increased price. (External source of finance & equity finance \[long-term\])

Direct Costs

Costs specifically attributed to the production or sale of a particular good or service. Can be traced back to the product and/or to a cost center.

Indirect Costs (overheads)

Costs that do not directly link to the production or sale of a specific product.

* rent
* wages of cleaning staff
* lighting

Break-Even

Break-Even Point = Fixed costs/cost per unit

Margin of Safety = current level of output - Break-Even Point

Profit & Loss

Sales Revenue

Opening Stock

Purchases

Less Closing Stock

COGS

Gross Profit

Less Expenses

Net Profit before Interest & Tax

Interest

Net Profit before Tax

Less Tax

Net Profit after Interest & Tax

Dividends

Retained Profits

Net Current Assets (Working capital)

Funds available for the day-to-day running of the business such as the payment of wages and fuel or the purchase of raw materials.

Intangible Assets

Non-physical items of value owned by the firm that have a lifespan of over a year.

* goodwill
* copyrights
* brand names
* registered trademarks

Goodwill

when the value of a firm exceeds its book value, when the selling price of the company is higher than the value of its net assets.

Book Value

The value of an asset as shown on a balance sheet. 

Balance Sheet

Assets

Fixed Assets

Less accumulated depreciation

Net Fixed Assets

Current Assets

Total Current Assets

Current Liabilities

Net Current Assets

Total Assets less Current Liabilities

Net Assets

Financed by:

Share Capital

Retained Profit

Equity (must be = to Net Assets)

Price Elasticity of Demand (PED)

Measure of the responsiveness of changes in the quantity demanded of a product due to a change in its price. Price-inelastic demand is good responsiveness, and price-elastic demand is bad responsiveness.

Gross Profit Margin (GPM)

Indicates the profitability of the business's core business activities.

Net Profit Margin (NPM)

Indicator of the dividends that might be paid to shareholders as well as the amount of retained profits that the firm might have. Also shows how well managers can control overheads-expenses.

Return On Capital Employed (ROCE)

Measures how efficiently a company can generate profits from its capital employed.

Liquidity

Refers to the firm's ability to convert its short-term assets into cash.