Key Business Management Concepts and Terminology
Key Business Management Concepts
Nature of business: A decision-making organization involved in the process of using inputs to produce goods/services.
Entrepreneur: An individual who plans, organizes, and manages a business, taking on financial risks in doing so.
Intrapreneur: The act of being an entrepreneur but as an employee within a large organization.
- Private sector organizations: Part of the economy run by private individuals and businesses rather than by the government.
- Public sector organizations: Part of the economy controlled by the government.
- Privately held companies: Businesses owned by shareholders with limited liability but whose shares cannot be bought by or sold to the general public.
- Publicly held companies: Incorporated limited liability businesses that allow shareholders to buy and sell shares in the company via a public Stock Exchange.
Incorporation: The legal difference between the owners of a company and the business itself.
- Sole trader: A self-employed person who runs a business on his/her own.
- Partnerships: Private sector business entities owned by 2-20 people (known as partners). They share the responsibilities and burdens of running and owning the business.
- Company: A limited liability business that is owned by shareholders. A certificate of incorporation gives the company a separate legal entity from its owners.
- Limited liability: A restriction on the amount of money that owners of a company can lose if the business goes bankrupt (i.e., shareholders cannot lose more than the amount they invested in the company).
- Cooperatives: For-profit social enterprises set up, owned, and run by their members, who might be employees and/or customers.
- NGOs: Private sector not-for-profit social enterprises that operate for the benefit of others rather than primarily aiming to earn a profit.
Vision statement: An organization’s long-term aspirations.
Mission statement: A declaration of an organization’s overall purpose.
CSR: Conscientious consideration of ethical and environmental practices related to business activity.
Stakeholders: Individuals or organizations with a direct interest in the activities and performance of a business, such as shareholders, employees, customers, and suppliers.
Shareholders: Owners of a limited liability company. Shares in a company can be held by individuals or businesses.
Pressure groups: Consist of individuals with a common concern who seek to place demands on organizations to act in a particular way or to influence a change in their behavior.
Economies of scale: Unit costs decrease as the output increases.
Diseconomies of scale: Unit costs increase as the output increases.
Demerger: A company sells off part of its business, thereby separating it into two or more businesses.
Business Growth and Finance
Franchising: An agreement between a franchisor selling its rights to other businesses (franchisees) to allow them to sell products under its corporate name in return for a fee and regular royalty payments.
Joint venture: A growth strategy that combines the contributions and responsibilities of two or more different organizations in a shared project by creating a separate legal enterprise.
Merger: A form of external growth whereby two or more firms agree to form a new organization, thereby losing their original identities.
Synergy: A strategy where organizations combine their resources and efforts to accomplish more together than they do on their own.
Capital expenditure: Refers to investment spending on fixed assets.
Revenue expenditure: Refers to spending on the day-to-day running of a business.
Collateral: Refers to the financial guarantee for securing external loan capital to finance investment expenditure for business growth.
Sources of Finance
- Personal funds: A source of internal finance referring to the use of an entrepreneur’s own savings.
- Retained profit: The value of the surplus that a business keeps to use within the business after paying taxes and dividends.
- Sale of assets: Selling existing items of value that the business owns, such as unused or obsolete assets.
- Share capital: Money raised from selling shares in a limited liability company.
- Loan capital: Refers to medium- to long-term sources of interest-bearing finance obtained from commercial lenders.
- Overdraft: Allows a business to spend in excess of the amount in its bank account, up to a predetermined limit.
- Trade credit: Allows a business to postpone payments or to ‘buy now and pay later’.
- Crowdfunding: The practice of raising finance for a business venture or project by getting small amounts of money from a large number of people, usually through online platforms.
- Leasing: A form of hiring whereby a lessee pays rental income to hire assets from the lessor, the legal owner of the assets.
- Microfinance: A financial service aimed at entrepreneurs of small businesses, especially females and those on low incomes.
- Business angels: Extremely wealthy individuals who risk their own money by investing in small to medium-sized businesses that have high growth potential.
Costs and Revenue
Variable costs: Costs of production that change in proportion to the level of output.
Fixed costs: Costs that do not change with the level of output.
Direct costs: Costs specifically attributed to the production or sale of a particular good or service.
Indirect costs (or overheads): Costs that do not specifically relate to the production or sale of a specific product.
Set-up costs: Items of expenditure needed to start a business.
Break-Even Analysis
Break-even point: The position where the total cost line intersects with the total revenue line. No profit or loss is made.
Contribution: Refers to the amount of money that remains after all direct or variable costs have been deducted from the sales revenue of a product.
Margin of safety: The difference between a firm’s actual sales quantity and its break-even quantity.
Target profit output: The sales volume required to achieve the target profit that business managers expect to achieve by the end of a given time period.
Target profit: The amount of surplus a firm intends to achieve, based on price and cost data.
Target price: The price set by a firm in order to reach break-even or a certain target profit.