Component 2 Key Terms Flashcards
Key terms in Component 2 Topics 201-210
Quantitative data
Numerical information that can be analysed using statistics
Qualitative data
non-numerical information, such as information from in-depth interviews or focus groups
Price Elasticity of Demand
Measures the sensitivity of demand to a change in price
Formula: % change in quantity demanded/ % change in price
Income Elasticity of demand
Measures the sensitivity of demand to a change in income
Formula: % change in quantity demanded/ % change in income
Extrapolation
Identifying the underlying trend in past data and projecting this trend forwards. Extrapolation predicts future trends based on what has happened in the past.
Correlation
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.
Time-series analysis
Statistical methods to analyse and forecast sales. An example of time series analysis is the calculation of a 3 point moving average
Budget variance
The difference between the actual outcome and the predicted outcome.
Balance sheet
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)
Non-current (fixed) assets
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
Current assets
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)
Current liabilities
Money owed by the business that will be paid within a year.
For example, trade payables (suppliers) and overdraft
Non-current (long term) liabilities
Money owed which is repaid over more than a year. For example a bank loan, a mortgage
Net assets
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
Shareholder’s funds
(also called equity)
Money that has been invested into the business by the owners through the sale of shares, and also includes retained profit and reserves.
Working capital
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
Capital employed
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.
Depreciation
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
Window dressing
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
Non-financial performance
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.
Vision Statement
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
Objectives
Targets business will set to achieve its aims
SMART Objectives
Objectives that are specific, measurable, achievable or agreed, realistic and time based. They are quantifiable, thus can be used more easily to monitor progress
Mission Statement
A broad statement of its aims and values. It will guide the everyday operations and decision-making of the business
Strategy
medium to long term plan
Corporate Strategy
medium to long term plan affecting entire business on how to achieve business’ mission/vision/aims/objectives decided by senior management/leaders
Divisional Strategy
plans that relate to divisions in a business, guided by the corporate strategy e.g a business may be divided by products
Tactics
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
Corporate plan
long term course of action/plan that affects the whole business and is decided on by senior managers
SWOT analysis
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
Porter’s 5 forces
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)
Ansoff Matrix
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
Horizontal integration
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
Vertical integration
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)
Organic growth
Organic (or internal) growth involves expansion from within a business, for example by expanding the product range or by increasing sales
External growth
Growth that comes from buying new businesses e.g. through mergers or takeovers
Merger/takeover
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.
Franchise
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.
Rationalisation
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.
Outsourcing
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.
Scientific decision making
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.
Intuitive decision making
Intuitive decision-making uses experience and intuition (gut feeling) to make a decision
Strategic decisions
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.
Operational decisions
The day to day decisions made in a business. These are lower level decisions that tend to be short term and have little risk
Tactical decisions
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.
Decision trees
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.
Critical path analysis
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.
Investment appraisal
Investment appraisal is a technique used to evaluate planned investment by a business and measure its planned financial value to the business.
Payback
The amount of time it would take for a business to recover a project’s initial cost
Average rate of return (ARR)
This measures the average annual profit as a percentage of the initial investment.
Discounted cashflow/net present value
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.
Special orders
A special order is an extra order or an order for an item specially requested by a customer.
Contribution
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
Total contribution
Total revenue – total variable costs.
Contribution per unit
Selling price per unit – variable cost per unit
