igcse business studies terms glossary

8/17/2019 IGCSE Business Studies Terms Glossary

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IGCSE Business StudiesTerms Glossary

Dulwich College Suzhou - January 30, 2015

#1IGCSE BUSINESS STUDIES - GLOSSARY


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Glossary:

Economic Problems – unlimited wants but limited resources to produce the goods and

services to satisfy those wants.

Factors of Production – are those resources needed to produce goods or services. These arefour factors of production and they are in limited supply.

Scarcity – the lack of sufficient products to fulfill the total wants of the population.

Opportunity Costs – is the next best alternative given up by choosing another item.

Division of Labour – is when the production process is split up into different tasks and each

worker perform one of these tasks. It is also known as specialisation.

Business Objectives – the aims or targets that a business works towards.

Value Added -the difference between the selling price of a product or service and the cost of

bought in materials and components.

Stakeholders – any person or group with a direct interest in the performance and activities of

a business.

Primary sector – an industry extracts and uses the natural resources of the earth.

Secondary sector – an industry manufactures goods using the war materials provided by the

primary sector.

Tertiary sector – an industry provides services to consumers and the other sectors of industry.

De-industrialization – it occurs when there is a decline in the importance of the

secondary,manufacturing sector of industry in a country.

A free market economy – No government control over factors of production. Also known as

Market economy.

Monopoly – is a business which controls all of the market for a product.

A command economy – it doesn’t have a private sector as all resources are owned by the

state.

A mixed economy – has both a private and public sectors.



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Capital – the invested money.

Profit – the surplus after total costs have been subtracted from sales revenue.

Internal growth- it occurs when a business expands its existing operations.

External growth – when a business takes over or merges with another business,also known as

integration.

Merger – when the owners of two businesses agree to join their firms together to make one

business.

Take over(Acquisition) – when one business buys out the ownes of another business which

then becomes part of the ‘predator’ buiness.

Horizontal integration – when one company merges with or takes over another one in thesame industry at same stage of production.

Vertical integration – when a company merges or takes over another one in the same industry

but at a different stage of production. It can be forward or backward.

Conglomerate integration – when a company merges with or takes over another one in the

different industry at a different stage of production. It is also known as Diversification.

Glossary 03 – FORMS OF BUSINESS ORGANIZATION

*Sole Trader*: It is a business own and operated by one person, although they can employ

others, the owner is a sole proprietor.

*Partnership*: Is a group or association of between 2 and 20 people who agrees to own and

run a business together.

*Partnership Deed Agreement*: Is a legal agreement between the business partners.

*Limited Liability Partnership* (LLP): It offers partners limited liability, but shares in such business can’t be bought or sold. This type of partnership is a separate legal entity which still

exists after a partner quits the business.

*PTE Ltd (private limited): A company is an artificial person created by law having its own

perpetual succession and common seal.



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*Shareholders*: These are the owners of a limited company. They buy shares which represent

part ownership of a company. (Only friends and relatives are invited to buy the shares of a

private limited company). Also known as dividend.

+Prospectus: It is a detailed doc issued by the directors of a company when they are

converting it to public limited company status. It is an invitation to the general public to buy

shares.

*Co-operative*: It’s a form of business which is run and controlled by the members of the

society. It is established for ‘self help’ and generating revenue for the co-operative.

*Close Co-operation*: Is a blend of partnership and private limited company. The maximum

numbers of members are 10 people, members are the shareholders, and however, he firm will

have a limited liability.

*Franchisee*: It’s lending the name of the business and “its format” to another business for

certain amount of royalty (rent).

*Franchisor*: The business which borrows the name and the format of the business for the

royalty which it pays to the franchisee.

+Nationalized: Private company moves to the government’s control.

*Public Corporations*: Business run and controlled by the government. Mostly nationalized

(industries are operated by the government).

Glossary 04 – GOVERNMENT AND ECONOMIC INFLUENCES ON BUSINESS

Inflation: is the increase in the average price level of goods and services over time.

Unemployment: exists when people who are willing and able to work cannot find a job.

Economic Growth: is when a country’s Gross Domestic Product increases – more goods and

services are produced than the previous year.

The Balance of Payments: records the difference between a country’s exports and imports.

Real Income: is the value of income and falls when prices rise faster than money income.



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Gross Domestic Product (GDP): is the total value of output of goods and services in a country

in one year.

Exports: are goods and services sold from one country to other countries.

Imports: Are goods and services bought in by one country from other countries.

The Exchange Rate: is the price of one currency in terms of another, for example

USD $1 : SGD $ 1.38

Exchange Rate Appreciation: is the rise in the value of a currency compared to other

currencies.

Exchange Rate Depreciation: is the fall in the value of a currency compared with other

currencies.

Fiscal Policy: is any change by the government in tax rates or public sector spending.

Direct Taxes: are paid directly from incomes – for example, income tax or profits tax.

Indirect Taxes: are added to the prices of goods and taxpayers pay the tax as they purchase

the goods – for example, VAT.

Disposable Income: is the level of income a taxpayer has after paying income tax.

Import Tariff: is a tax on an imported product.

Import Quota: is a physical limit to the quantity of a product that can be imported.

Monetary Policy: is a change in interest rates by the government or central bank, e.g. the

European Central Bank.

Supply Side Policies: are used by the government to improve the efficient supply of goods

and services in their country

Ethical Decision: is a decision taken by a manager because of the moral code observed in that

firm. This can include improving working conditions for staff beyond legal requirements, ornot producing dangerous or polluting goods – even if these activities are not illegal



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Planning Permission: is given by a government body to allow a business to build a factory or

office in a particular location.

A Development Area: is a region of a country where businesses will receive financial support

to establish there. High unemployment is often a problem in these areas.

Glossary 05 – OTHER EXTERNAL INFLUENCES ON BUSINESS

Constraint: limits or controls the its actions or decisions on a business.

Social Responsibility: when a business takes decisions that may benefit stakeholders other

than shareholders, e.g. a decision to reduce pollution of the local environment by using the

latest and least “dirty” production equipment.

Pressure Groups: are formed by people who share a common interest and who will take

action to try to change government policy or business decisions.

Cost-Benefit Analysis- the valuation by a government agency of all external and private costs

and benefits resulting from a business decision.

External Costs- are the costs paid by the rest of society, other than the business, as a result of a

business decision.

External Benefits- are the gains to the rest of society , other than business, resulting from a

business decision.

Private Costs- the addition of the private and external costs of a business decision.

Social Benefit- the addition of the private and external benefits of a business decision.

Glossary 06 – BUSINESS COSTS AND REVENUE

Fixed costs – these are costs that do not vary as the level of production varies. These include

such things as rent, business rates and security costs. Many of the design costs will fall into

this category.

Variable costs – these are costs that do vary as output varies and so will include things likeraw materials, labour costs, energy costs and so on.



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REVENUE: it is the income of a business during a period of time from the sale of goods or

services.

DIRECT COST: They can be directly related to or identified with a particular product or

department.

INDIRECT COST: They can’t be directly related to a particular product. They are often

termed OVERHEADS or OVERHEAD COSTS.

AVERAGE COST: It is the total cost of production divided by total output.

MARGINAL COSTS: They are the extra costs a business will incur by producing one unit of

output.

ECONOMIES OF SCALE: They are the factors that lead to a reduction in average costs as a

business increase in size.

Budgets: They are plans for the future containing numerical or financial targets.

Forecasts: they are predictions of the future, for example, likely future changes in the size of

the market.

TREND: it is an underlying movement of data over time.

LINE OF BEST FIT: It is drawn through a series of points. Which best shows the trend of that

data. It can be used to forecast results in the future.

BUDGETS: They are plans for the future containing numerical or financial targets.

GLOSSARY 07 – BUSINESS ACCOUNTING

Accounts: The financial records of a firm’s transactions

Accountants: People who are professionally qualified to handle and keep accounts of a firm

accurately and up to date, along with producing the final financial accounts.

Final accounts: They are produced at the end of the financial year of a company and givedetails of the profit or loss made over the year and the worth of the business.

Users of the final accounts of a business are. . .



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! Shareholders: They would want to see the value of the business, and if they are getting a

good offer for investing in the business.

! Creditors: These are other businesses, including banks, which have lent money to the

company; they would want to know the profit or loss made by the company, and would wantto know if the company can pay the, back or not.

! Government: The government and the tax offices would want to know how well or badly

the company is doing; if the company is in profit, then the government would want to

check on the profits tax being paid.!

! Other Companies: They would want to know how well their competitors are doing, and

might be thinking about a merger or even a takeover.

Trading account: Shows the Gross Profit of a business and how it is calculated.

Cost of Goods Sold: This is the cost of producing or buying the goods actually sold by the

business.

Sales Revenue: The income to a business during a period of time, by the sales of goods or

services.

Gross Profit: The raw profit of a business; it is made when the sales revenue is higher than the

cost of goods sold.

Gross Profit Formula:

Gross Profit = Sales revenue – Cost of goods sold

Net Profit: The final profit made by a business. It is calculated by subtracting all overhead

costs from the gross profit.

Profit and Loss Account: Shows how the Net profit and the Retained profit of a business are

calculated.

Depreciation: The fall in the value of a fixed asset over time.

Appropriation Account: That part of the profit and loss account which shows how the profitafter tax is distributed – either as dividends or kept in the company as retained profits.

Retained Profit: The profit reinvested into the company after tax and payments to owners is

deducted.



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Retained Profit Formula:

Retained Profit = (((Sales revenue – Cost of Goods Sold) – Expenses) – (Tax + Dividends))

Balance Sheet: Shows the value of a business’s assets and liabilities at a particular time.

Assets: Items of value which the business owns. They can be Long term (fixed) or short term

(current)

Liabilities: They are items owed by the business to others. They too can be long term (fixed)

or short term (current).

Working Capital Formula:

Working Capital = Current assets – Current liabilities

Net Assets Formula:

Net Assets = Fixed Assets + Working Capital

Liquidity: The ability of a business to pay back its short-term debts.

Return on Capital Employed (R.O.C.E) Formula:

R.O.C.E (%) = (Operating Profit / Capital Employed) x 100

Gross Profit Margin (G.P.M) Formula:

G.P.M (%) = (Gross Profit / Sales Turnover) x 100

Net Profit Margin (N.P.M) Formula:

N.P.M (%) = (Net Profit Before Tax / Sales Turnover) x 100

Liquidity Ratios: They measure the ability of a business to pay back its short-term debts. Two

common ratios are the Current Ratio and the Acid test or Liquid Ratio.

Current Ratio Formula:

Current Ratio = Current Assets / Current Liabilities

Acid Test Ratio Formula:

Acid Test Ratio = (Current Assets – Stocks) / Current Liabilities

Disadvantages of Ratio Analysis:

! Based upon past results, and don’t tell the future of the company’s performance

! Accounting over the years might be affected by inflation, and comparisons between years

might be misleading



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! Different companies might use slightly different accounting methods, and the results

might differ, making the comparison harder.

Glossary 08 – CASH FLOW PLANNING

cash flow – The CASH FLOW of a business is the cash inflows and outflows over a period of

time.

Cash inflows – are the sums of money received by a business during a period of time.

Cash outflows – are the sums of money paid out by a business during a period of time.

Cash flow cycle – shows the stages between paying out cash of labour, materials, etc. and

receiving cash from the sale of goods.

Profit – is the surplus after total costs have been subtracted from sales revenue.

Cash flow forecast – is an estimate of future cash inflows and outflows of a business, usually

on a month by month basis. This will then show the expected cash balance at the end of each

month.

Opening cash balance – is the amount of cash held by the business at the start of the month.

Net cash flow – is the difference, each month, between inflows and outflows.

Closing cash balance – is the amount of cash held by the business at the end of each month.This becomes next month’s opening cash balance.

Glossary 09 – FINANCING BUSINESS ACTIVITY

Start-up Capital is the finance needed by a new business to pay for

essential fixed and current assets before it can begin trading.

Capital Expenditure is the money spent on fixed assets which will last for

more than one year.

Revenue Expenditure is the money spent on day-to-day expenses which do not involve the purchase of a long term asset, for example wages or rent.



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Glossary 10 – ORGANIZATIONAL STRUCTURE

Organizational structure refers to the levels of management and division of responsibility

within an organization.

Delegation means giving a subordinate the authority to perform particular tasks. It is very

important to remember that it is the authority to perform a task but in the end the

subordinate does not have the responsibility.

Chain of command is the structure in an organization which allows instructions to be passed

down from the senior management to the lower part of management.

Span of control is the number of subordinates working directly under a manager.

Line manager have direct authority over subordinates in their department. They are able to

take decisions in their specific area.

Staff manager are specialist advisers who provide support to line managers and to the Board

Of Directors.

Decentralized management structure means that many decisions are not taken in the centre

of the organization but are delegated to the lower levels of management.

Centralized management structure means that most decisions are taken at the centre, or the

higher levels of management.

GLOSSARY 11 – MANAGING A BUSINESS

*Planning: A detailed proposal for doing something.

*Organizing: Arranged into a structured.

*Co-ordinating: Brining different elements of a complex activity together.

*Commanding: Authoritative order

*Strategic Decisions: A decision relating to a long term overall aim and/or interest.

*Tactical Decisions: A militaristic constituting action that is carefully planned.



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*Operational Decisions: Ready for usage in functional matters.

*Human Resources: The people who actually work there.

*Marketing: A gathering of customers to be purchased

*Financing: The management of large amounts of money of companies.

*Production: the action of making something

*Subordinate: someone who is lesser ranked than the boss.

Glossary 12 – COMMUNICATION IN BUSINESS

COMMUNICATION: it is the transferring of a MESSAGE from the sender to the receiver

who understands the message.

MESSAGE: it is the information/ instructions being passed by the sender to the receiver.

TRANSMITTER or SENDER: it is the person starting off the process by sending the message.

MEDIUM OF COMMUNICATION: it is the method used to send a message, e.g. a letter is a

method of written communication and a meeting is a method of verbal communication.

FEEDBACK: it is the reply from the receiver which shows whether the message has arrived,

been understood, and if necessary, acted upon.

INTERNAL COMMUNICATION: When messages are sent between people working in the

same organisation.

EXTERNAL COMMUNICATION:When messages are sent between organisations or outside

individuals.

CHAPTER GLOSSARY 13 – MOTIVATION AT WORK

Motivation: What urges an employee to work hard, effectively and efficiently for a company.

The Theory of Scientific Management: This was created by Frederick W. Taylor and said the

following about the way people work, and how they can get motivated:



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– Man is a rational economic animal concerned with maximizing his economic gain

– People respond as individuals

– People can be treated in a standardized fashion like machines

So effectively, Taylor said that a manager’s job is to tell employees what to do, and that the

main form of motivation is high wages linked to high output. He also said that a worker’s job

is to do what they are told and that they should get paid accordingly.

This theory worked, but it had some flaws:

– It completely ignores the many differences between people, and there is no guarantee

that a ‘best way’ will suit everyone

– While money is a good motivator for some people, it is not necessary for others. Tayloroverlooked the fact that some people work for other reasons that money.

Maslow’s Hierarchy of Needs: It was created by Abraham Maslow, and was presented in the

form of a pyramid, with the more basic needs at the bottom:

However, there are a few flaws in Maslow’s Hierarchy too:

– Individual behaviour seems to respond to several needs – not just one.

– The same need (e.g. Interaction at work) might cause quite different individuals.

– There is a problem in deciding when level is actually satisfied.

– The model often ignores the often-observed behaviour of individuals who tolerate low-

pay for the promise of future benefits.

– There is little evidence to support the model, and some critics suggest that Maslow’s

model is only really relevant to understand the middle-class workers in the UK and the USA.

The Hygiene and Maintenance Theory: Created by Frederick Herzberg, this theory suggests

different types of hygiene and maintenance factors, and different types of motivation forthose factors:



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Herzberg’s theory emphasizes that the moment the motivation factors are taken off the

working environment, the productivity level drops.

Theory X and Theory Y: This theory was created by Douglas Mcgregor, and said that there

are two types of people in the working environment:

Wage: It is payment for work, usually paid weekly

Time Wage: A type of wage payed according to the amount of time that the worker spends

doing the job

Piece Wage: A type of wage payed according to the number of items that the worker

produces

Salary: Payment for work, usually payed monthly

Commission: This is payment relating to the number of sales made

Profit Sharing: This is a system whereby a proportion of the company’s profits is paid out to

employees

Bonus: Is an additional amount of payment above basic pay as a reward for good work.

Performance-related Pay: Is pay which is related to the effectiveness of the employee

Appraisal: It is a method of assessing the effectiveness of an employee

Fringe Benefits: They are non-financial rewards given to employees

Job Satisfaction: It is the enjoyment derived from feeling that you have done a good job

Job Rotation: Involves rotating workers and making them do each specific task for only a

limited time before rotating jobs again.

Job Enlargement: Is where extra tasks of a similar level of work are added to a worker’s job

description.

Job Enrichment: It involves looking at jobs and adding tasks that require more skill and/or

responsibility



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Leadership Styles: They are the different ways of dealing with people in the workplace when

in position of authority; there are three main types of leaders: Autocratic, Democratic and

Laissez-faire.

Autocratic Leadership: It is when the leader is the only person making decisions, and the

employees have to listen to the leader. It is a very strict type of leading style, and there is only

one-way communication, which is from the manager to the employees.

Democratic Leadership: This style of leadership is more lenient and in this case, the manager

asks the employees about their opinions on a pending decision. There is two-way

communication, and it is from the manager to the employees, and vice versa.

Laissez-faire Leadership: In this case, the manager is very laid-back about the decision

making, and leaves it in the hands of the employees. There is one-way communication,

however, there is not a strict atmosphere, and the workers are free to do as they feel right.

Formal Groups in Business: It is a group designated to carry out specific tasks within a

business

Informal Groups in Business: It is a group of people who form independently of any official

groups set up within the business and who have similar interests or something else in

common.


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