Business Management

Business

An organization engaged in commercial, industrial, and professional activities. Features include decision-making groups, factors of production use, and goods/services production.

Factors of Business

Land, Labour, Capital, Entrepreneurship

Enterprise

An organization involved in commercial activities to gain profits.

Goods and Services

Goods are tangible items, while services are intangible items with visible results.

Business Functions

Interdependent functions include Human resources, Finance and accounts, Marketing, and Operations Management.

Chain of Production

Stages of production from primary production to consumers.

Added Value

The worth added during production, highest in quaternary sector.

Industrialization

Transition towards the manufacturing sector as the primary output.

Private Limited Company

A privately held business entity with limited shareholders and less financial disclosure.

Public Limited Company

A publicly held business entity with shares sold on stock exchanges and more financial transparency.

Corporate Social Responsibility (CSR)

Concept where organizations consider societal interests by taking responsibility for the impact of their activities on stakeholders.

Ethical Objectives

Specific goals set by a business based on established codes of behavior to promote ethical practices.

SWOT Analysis

Tool to assess internal strengths and weaknesses, and external opportunities and threats for strategic planning.

Ansoff Matrix

Tool to analyze growth strategies based on market and product expansion.

Stakeholders

Individuals or groups with vested interests in the actions and outcomes of an organization.

Stakeholders mapping

Identifying different groups based on their interest and power in a business to determine their level of influence.

Economies of scale

Cost advantages that a business gains as it increases its production output, leading to a decrease in average unit cost.

Diseconomies of scale

The increase in per unit production cost as a business expands its output or activities, resulting in higher average unit costs.

Internal economies of scale

Cost savings that occur within a specific organization as it grows, leading to reduced costs due to operating on a larger scale.

Multinational Companies (MNCs)

Businesses operating in more than one country or legally registered in multiple countries, allowing for global operations and growth.

Globalization

The process of regional economies integrating into a single global unit, characterized by large post-national businesses and impacting domestic businesses through increased competition and efficiency.

Franchise

A form of external growth where a business expands locally or globally by selling the rights to offer the same concept and sell products or services to other businesses.

Capital Expenditures

One-time large purchases of fixed assets for revenue generation over a longer period.

Revenue Expenditures

Ongoing operating expenses for daily business operations.

Internal Source of Finance

Money obtained from within the business, easier to access for established businesses.

Personal Funds

Key source of finance for sole traders, mainly from personal savings, maximizing control over the business.

Retained Profit

Profit remaining after dividends, reinvested for growth, a long-term finance source.

Sale of Assets

Selling unwanted assets for funds, no interest costs incurred.

Share Capital

Equity capital raised by investors for shares, providing ownership in return.

Loan Capital

Capital raised by taking out a loan, repayments spread over time.

Overdrafts

Lending institution allows withdrawing more money than in the account, charged interest on the excess.

Trade Credit

Buying goods/services on account without immediate payment, improving cash flow.

Crowdfunding

Funding from many contributors for a project, accessed through platforms like Kickstarter.

Leasing

Contract with a leasing company to use assets without purchasing, useful for occasional asset needs.

Microfinance Providers

Offer banking services to low-income individuals or small businesses, promoting self-sufficiency.

Business Angels

Affluent individuals providing capital to start-ups for ownership equity, high-risk investments.

Short-term Finance

Money for daily business operations, expected to be repaid within 12 months.

Long-term Finance

Funding for long-term assets or expansion, to improve overall business.

Factors Influencing Finance Choice

Purpose, costs, status/size, amount required, flexibility, external environment, gearing.

Costs

Expenditure to produce or sell goods/services, including business resource acquisition.

Revenue

Income from goods/services sale, generating money for the business.

Profit

Calculated by subtracting costs from revenue, indicating business success.

Fixed Costs

Costs not varying with production, paid per time period, e.g., rent, salaries.

Variable Costs

Costs changing with production, paid per quantity produced, e.g., raw materials.

Direct Costs

Expenses directly linked to specific goods/services production, e.g., material costs.

Indirect Costs

Expenses not directly traceable to a product, e.g., rent, salaries.

Total Revenue

Calculated as price per unit multiplied by quantity sold, including other revenue streams.

Suppliers

Use final accounts to negotiate better cash or credit terms. Can either extend trade credit periods or demand immediate cash payments. Security of a business relies on their ability to pay off debts.

Government and Tax Authorities

Check whether businesses abide by laws regarding accounting regulations. Interested in the profitability of the business to see how much tax it pays.

Competitors

Want to compare financial statements with other firms to see how they perform financially.

Financiers

Banks check the creditworthiness of the business to establish how much money they can lend.

Local Community

Residents nearby want to know the profitability and expansion potential. Can create job opportunities for them and lead to growth in the community.

Income Statement

Shows the record of income and expenditure flows of a business over a given time period. Divided into three parts:trading accounts, the profit and loss account, and the appropriation account.

Trading Account

Gross profits = sales revenue - cost of sales. Net profit reflects the amount of money left after paying all allowable business expenses, while gross profit is after deducting the cost of goods sold from revenue.

Profit and Loss Statement

Shows the profit before interest and tax, profit before tax, and profit before period.

Appropriation Account

Final part of the profit and loss account that shows how the company profit for the period is distributed. Two forms of distribution:dividends to shareholders or retained profits.

Balance Sheet

Statement of financial position outlining the assets, liabilities, and equity of a firm at a specific point in time. Shows the financial position of a firm and calculates the firm’s net worth.

Long-term Loans

Loans obtained by a firm for an extended period, impacting interest payable and gearing ratio.

Acid Test Ratio

A stringent measure of a firm's ability to meet short-term obligations, calculated as (current assets - stock)/current liabilities.

Stock Turnover Ratio

Indicates how quickly a firm sells and replaces its stock over a period, calculated as cost of sales/average stock.

Debtor Days

Average number of days for a firm to collect debt from customers, assessing credit control efficiency.

Gearing Ratio

Measures the extent of a firm's financing by loan capital, calculated as (loan capital/capital employed) x 100.

Insolvency

Financial state where a person or firm can't meet debt payments, leading to bankruptcy if debts exceed assets.

Cash Flow

The movement of money in and out of a business over a period, different from profit, crucial for liquidity assessment.

Working Capital

Funds needed for day-to-day operations, calculated as current assets - current liabilities.

Liquidity Position

Indicates the ability of an organization to convert assets into cash to continue business activities.

Cash Flow Forecasts

Future predictions of a firm's cash inflows and outflows, crucial for financial planning and decision-making.

Closing Cash Outflows

The estimated cash available at the end of the month, calculated as the net cash flow of one month plus the operating balance of the same month.

Benefits of Cash Flow Forecasts

A planning document useful for business startups, providing estimated projections for future performance and aiding in securing funding from financial institutions.

Investment Appraisal

Quantitative techniques used to evaluate the viability of an investment proposal, assessing the profitability and justifying the capital expenditure allocated to a project.

Payback Period

Estimates the time required for an investment project to pay back its initial cost outlay, focusing on how long it takes to recover the principal investment amount from net cash flow.

Average Rate of Return

Measures the average annual net return on an investment as a percentage of its capital cost, assessing the profitability generated by a project over time.

Net Present Value

The difference between the present values of future cash inflows and the original cost of investment, considering the time value of money and opportunity cost in investment decisions.

Budgets

Quantitative financial plans estimating revenue and expenditure over a specified future time period, aiding in setting targets and efficient resource allocation within organizations.

Cost and Profit Centre

Cost centers are parts of a business incurring and recording costs, while profit centers are sections where both costs and revenues are identified to calculate profits.