Component 2 Key Terms

Question 1

Quantitative data

Answer 1

Numerical information that can be analysed using statistics

Question 2

Qualitative data

Answer 2

non-numerical information, such as information from in-depth interviews or focus groups

Question 3

Price Elasticity of Demand

Answer 3

Measures the sensitivity of demand to a change in price

Formula: % change in quantity demanded/ % change in price

Question 4

Income Elasticity of demand

Answer 4

Measures the sensitivity of demand to a change in income

Formula: % change in quantity demanded/ % change in income

Question 5

Extrapolation

Answer 5

Identifying the underlying trend in past data and projecting this trend forwards. Extrapolation predicts future trends based on what has happened in the past.

Question 6

Correlation

Answer 6

Correlation measures the relationship between two variables e.g. whether there is a link between a business’s advertising expenditure and the amount of sales it achieves.

Question 7

Time-series analysis

Answer 7

Statistical methods to analyse and forecast sales. An example of time series analysis is the calculation of a 3 point moving average

Question 8

Budget variance

Answer 8

The difference between the actual outcome and the predicted outcome.

Question 9

Balance sheet

Answer 9

A statement of the firm’s assets, liabilities and shareholder’s or owner’s funds.
It shows the net worth of a business at a specific point in time. (In accounting it is called the statement of financial position)

Question 10

Non-current (fixed) assets

Answer 10

Assets expected to be retained in the business for more than a year/long term. They are used to produce the output of the business. E.g. machinery, vehicles, computers

Question 11

Current assets

Answer 11

Assets that are cash (bank account) or can be turned into cash within a year.
For example, stock, trade receivables (money owed by customers who have bought on credit)

Question 12

Current liabilities

Answer 12

Money owed by the business that will be paid within a year.
For example, trade payables (suppliers) and overdraft

Question 13

Non-current (long term) liabilities

Answer 13

Money owed which is repaid over more than a year. For example a bank loan, a mortgage

Question 14

Net assets

Answer 14

The value of a company’s assets once the value of its liabilities has been deducted.
Formula: non-current assets + current assets – current liabilities – non-current liabilities

Question 15

Shareholder’s funds
(also called equity)

Answer 15

Money that has been invested into the business by the owners through the sale of shares, and also includes retained profit and reserves.

Question 16

Working capital

Answer 16

Working capital represents the money needed in the business to pay for the day-to-day expenses of a business.
Formula: current assets – current liabilities

Question 17

Capital employed

Answer 17

Capital employed is the amount of money that is used to finance a business in the long term. This finance has been either invested by shareholders or borrowed long term.

Formula: Shareholder’s funds + non-current liabilities.

Question 18

Depreciation

Answer 18

Depreciation is the decrease in value of fixed assets overtime. E.g. due to wear and tear

Formula: Historical Cost – Residual Value/Useful Life of Asset

Question 19

Window dressing

Answer 19

Window-dressing is the manipulation of financial accounts by a business to improve the appearance of its performance. E.g. it could insufficiently depreciate a fixed assets so that its value is overstated in the balance sheet and its profit is more than it should be

Question 20

Non-financial performance

Answer 20

The performance of a business based on data other than the business’s financial information e.g. customer attitude surveys, employee attitude surveys, market share, productivity and a company’s environmental record.

Question 21

Vision Statement

Answer 21

Description of what a business sets out to achieve in medium to long term providing clear guide to senior management of future direction of business

Question 22

Objectives

Answer 22

Targets business will set to achieve its aims

Question 23

SMART Objectives

Answer 23

Objectives that are specific, measurable, achievable or agreed, realistic and time based. They are quantifiable, thus can be used more easily to monitor progress

Question 24

Mission Statement

Answer 24

A broad statement of its aims and values. It will guide the everyday operations and decision-making of the business

Question 25

Strategy

Answer 25

medium to long term plan

Question 26

Corporate Strategy

Answer 26

medium to long term plan affecting entire business on how to achieve business’ mission/vision/aims/objectives decided by senior management/leaders

Question 27

Divisional Strategy

Answer 27

plans that relate to divisions in a business, guided by the corporate strategy e.g a business may be divided by products

Question 28

Tactics

Answer 28

short to medium term decisions that aim to implement strategic decisions, usually carried out by middle management, less complex and more flexible than strategic decisions e.g advertising campaign

Question 29

Corporate plan

Answer 29

long term course of action/plan that affects the whole business and is decided on by senior managers

Question 30

SWOT analysis

Answer 30

a tool to identify and analyse the internal strengths and weaknesses of an organisation, as well as the external opportunities and threats created by the business and economic environment

Question 31

Porter’s 5 forces

Answer 31

a model that suggests there are 5 main forces on a business that determine the behaviour of businesses and the likely levels of profitability.
the forces are:
- buyer power
- supplier power
- threat of substitutes
- threat of new entry
- competitve rivalry (threat from competition)

Question 32

Ansoff Matrix

Answer 32

A strategic tool used by businesses to achieve growth; suggests level of risk associated with each strategy and considers whether to target existing customers or new customers and if existing products should be used or new products should be developed.
The 4 strategies are:
- market penetration
- product development
- market development
- diversification

Question 33

Horizontal integration

Answer 33

When a business merges with or takes over another in the same industry at the same stage of production e.g. JD sports and Footasylum

Question 34

Vertical integration

Answer 34

When a business merges with or takes over a business at either the previous or next stage in the production process. This can be either backwards vertical (taking over a supplier), or forwards vertical (taking over a customer).

Examples are Ikea buying a forest (backwards) or Shell Oil buying a chain of petrol stations (forwards)

Question 35

Organic growth

Answer 35

Organic (or internal) growth involves expansion from within a business, for example by expanding the product range or by increasing sales

Question 36

External growth

Answer 36

Growth that comes from buying new businesses e.g. through mergers or takeovers

Question 37

Merger/takeover

Answer 37

Mergers involve two or more equals, while takeovers involve one larger company that takes over a smaller company. Mergers are always agreed upon using mutual consent, while takeovers may or may not be friendly.

Question 38

Franchise

Answer 38

A franchise is the legal right to use the brand name, products and business style of an existing business. The franchisor is the business who sells their brand name to others, and the franchisee is the business person who has bought the franchise.

Question 39

Rationalisation

Answer 39

The reorganisation of a business in order to increase its efficiency. This reorganisation normally leads to a reduction in business size, a change of policy or an alteration of strategy relating to particular products.

Question 40

Outsourcing

Answer 40

Outsourcing is the business practice of hiring a third party outside a company to perform services or create goods that used to be performed by the company’s own employees and staff.

Question 41

Scientific decision making

Answer 41

Scientific decision making involves the use of facts and data in a systematic way in order to arrive at a logical and evidence based decision. Scientific decision making can involve the use of models such as: decision trees, critical path analysis and cost benefit analysis.

Question 42

Intuitive decision making

Answer 42

Intuitive decision-making uses experience and intuition (gut feeling) to make a decision

Question 43

Strategic decisions

Answer 43

Strategic decisions are long term and will affect the direction the business takes. These decisions will affect the entire business and will be made by the owners or senior management.

Question 44

Operational decisions

Answer 44

The day to day decisions made in a business. These are lower level decisions that tend to be short term and have little risk

Question 45

Tactical decisions

Answer 45

Tactical decisions are short to medium terms and are less complex than strategic decisions and are usually carried out by middle management.

Tactical decisions can also be more flexible – if it is failing to meet its objective then it can be changed.

Question 46

Decision trees

Answer 46

A decision tree is a mathematical model used to help managers make decisions. A decision tree uses estimates and probabilities to calculate likely outcomes. A decision tree helps to decide whether the net gain from a decision is worthwhile.

Question 47

Critical path analysis

Answer 47

Critical path analysis (CPA) is a method of planning and controlling large projects and is used to make decisions on the management of resources and time. It is a technique used to find cheapest and quickest way to complete a task.

Question 48

Investment appraisal

Answer 48

Investment appraisal is a technique used to evaluate planned investment by a business and measure its planned financial value to the business.

Question 49

Payback

Answer 49

The amount of time it would take for a business to recover a project’s initial cost

Question 50

Average rate of return (ARR)

Answer 50

This measures the average annual profit as a percentage of the initial investment.

Question 51

Discounted cashflow/net present value

Answer 51

This takes account of the ‘time value of money’ which recognises that e.g. £1 earned in five years’ time is not the same as £1 earned today. It shows how much an investment is worth throughout its lifetime, discounted to today’s value.

Question 52

Special orders

Answer 52

A special order is an extra order or an order for an item specially requested by a customer.

Question 53

Contribution

Answer 53

This allows a business to analyse whether each of its products covers its own variable costs. After variable costs have been taken away from the selling price, what is left ‘contributes’ to paying off the fixed costs. After these have been paid, what’s left is profit

Question 54

Total contribution

Answer 54

Total revenue – total variable costs.

Question 55

Contribution per unit

Answer 55

Selling price per unit – variable cost per unit