Understanding Business Activity

A need is a good or service essential for living

A want is a good or service which people would like to have but which is not
essential for living. People's wants are unlimited.
Economic Problem- There exist unlimited wants but limited resources to produce the
goods and services to satisfy those wants. This creates scarcity
Factors of production are those resources needed to produce goods and services.
There are four factors of production, and they are in limited supply.
Scarcity is the lack of sufficient products to fulfil the total wants of the
population.
Opportunity cost is the next best alternative given up by choosing another item
Specialization occurs when people and businesses concentrate on what they are best
at
Division of labour is when the production process is split up into different tasks
and each worker performs one of those tasks. It is a form of specialization
Businesses combine the factors of production to make goods and services which
satisfy people's wants.
Added value is the difference between the selling price and the cost of bought-in
materials and components
The primary sector of industry extracts and uses the natural resources of Earth to
produce raw materials used by other businesses
The secondary sector of industry manufactures goods using the raw materials
provided by the primary sector.
The tertiary sector of the industry provides services to consumers and other
sectors of industry.
De-industrialisation occurs when there is a decline in the importance of the
secondary manufacturing sector of industry in a country
A mixed economy has both a private sector and a public (state) sector
Capital is the money invested into the business by the owners
An entrepreneur is a person who organises, operates and takes the risk for a new
business venture
Capital employed is the total value of capital used in the business
Internal Growth occurs when a business expands its existing operations
External Growth is when a business takes over or merges with another business. It
is often called integration, as one business is integrated into another one
A takeover or acquisition is when one business buys out the owners of another
business, which then becomes part of the 'predator' business [the business which
has taken it over]
A merger is when the owners of two businesses agree to join their businesses
together to make one business
Horizontal integration is when one business merges with or takes over another one
in the same industry at the same stage of production
Vertical integration is when one business merges with or takes over another one in
the same industry but at a different stage of production. Vertical integration can
be forward or backwards.
Conglomerate integration is when one business merges with or takes over a business
in a completely different industry. This is also known as diversification.
A sole trader is a business owned by one person.
Limited liability means that the liability of shareholders in a company is limited
to only the amount they invested
Unlimited liability means that the owners of a business can be held responsible for
the debts of the business they own. Their liability is not limited to the
investment they made in the business
Partnership is a form of business in which two or more people agree to own a
business jointly
Unincorporated businesses do not have a separate legal identity. Sole traders and
partnerships are unincorporated businesses
incorporated businesses are companies that have separate legal status from
their owners
Shareholders are the owners of a limited company. They buy shares, which represent
part-ownership of the company.
Private limited companies are businesses owned by shareholders, but they cannot
sell shares to the public.
Public limited companies are businesses owned by shareholders but they can sell
shares to the public and their shares are tradable on the Stock Exchange
Dividends are payments made to shareholders from the profits [after tax] of a
company. They are the returns to shareholders for investing in the company.
A franchise is a business based upon the use of the brand names, promotional logos
and trading methods of an existing successful business. The franchisee buys the
license to operate this business from the franchisor.
A joint venture is where two or more businesses start a new project together,
sharing capital, risks and profits.
A public corporation is a business in the public sector that is owned and
controlled by the state [government]
Business objectives are the aims or targets that a business works towards
Profit is the total income of a business [revenue] minus total costs
Market share is the percentage of total market sales held by one brand or business
A social enterprise has social objectives as well as an aim to make a profit to
reinvest back into the business
A stakeholder is any person or group with a direct interest in the performance and
activities of a business

People in Business
Motivation is the reason why employees want to work hard and work effectively for
the business.
Wage is a payment for work, usually paid weekly
Time rate is the amount paid to an employee for one hour of work
The piece rate is the amount paid for each unit of output
Salary is payment for work, usually paid monthly.
Bonus is an additional amount of payment above basic pay as a reward for good work.
The commission is a payment relating to the number of sales made
Profit sharing is a system whereby a proportion of the company's profits are paid
out to employees
Job satisfaction is the enjoyment derived from feeling that you have done a good
job
Job rotation involves workers swapping around and doing each specific task for only
a limited time and then changing around again
Job enrichment involves looking at jobs and adding tasks that require more and/or
responsibility
Team-working involves using groups of workers and allocating specific tasks and
responsibilities to them
Training is the process of improving a worker's skills
Promotion is the advancement of an employee in an organisation, for example, to a
higher job/managerial level
Organisational structure refers to the levels of management and division of
responsibilities within an organisation
An organisational chart refers to a diagram that outlines the internal management
structure
Hierarchy refers to the levels of management in any organisation, from the highest
to the lowest.
A level of hierarchy refers to managers/supervisors/other employees who are given a
similar level of responsibility in an organisation.
Chain of command is the structure in an organisation which allows instructions to
be passed down from senior management to lower levels of management.
The span of control is the number of subordinates working directly under a manager.
Directors are senior managers who lead a particular department or a division of a
business.
Line managers have direct responsibility for people below them in the hierarchy of
an organisation.
Supervisors are junior managers who have direct control over the employees below
them in the organisational structure.
Staff managers are specialists who provide support, information and assistance to
line managers.
Delegation means giving a subordinate the authority to perform particular tasks.
Leadership styles are the different approaches to dealing with people and making
decisions when in apposition of authority - autocratic, democratic and laissez-
faire.
Autocratic leadership is where the manager expects to be in charge of the business
and to have their orders followed.
Democratic leadership gets other employees involved in the decision-making process.
Laissez-faire leadership makes the broad objectives of the business known to
employees, but then they are left to make their own decisions and organise their
own work.
Recruitment is the process of identifying that the business needs to employ someone
up to the point at which applications have arrived at the business.
Job analysis identifies and records the responsibilities and tasks relating to a
job.
A job description outlines the responsibilities and duties to be carried out by
someone employed to do a specific job.
Job specification is a document which outlines the requirements, qualifications,
expertise, physical characteristics, etc., for a specified job
Internal recruitment is when a vacancy is filled by someone who is an existing
employee of the business
External recruitment is when a vacancy is filled by someone who is not an existing
employee and will be new to the business
induction training is an introduction given to a new employee, explaining the
business's activities, customs and procedures and introducing them to their fellow
workers
On-the-job training occurs by watching a more experienced worker doing the job
Off-the-job training involves being trained away from the workplace, usually by
specialist trainers.
Workforce planning is establishing the workforce needed by the business for the
foreseeable future in terms of the number and skills of employees required.
Dismissal is when employment is ended against the will of the employee, usually for
not working according to the employment contract.
Redundancy is when the employee is no longer needed and so loses their job. It is
not due to any aspect of their work being unsatisfactory.
A contract of employment is a legal agreement between an employer and an employee,
listing the rights and responsibilities of workers.
Communication is the transferring of a message from the sender to the receiver, who
understands the message.
A message is the information or instructions being passed by the sender to the
receiver
Internal communication is communication between members of the same organisation
External communication is communication between the organisation and other
organisations or individuals.
The transmitter or sender of the message is the person starting off the process by
sending the message.
The medium of communication is the method used to send a message; for example, a
letter is a method of written communication, and a meeting is a method of verbal
communication.
The receiver is the person who receives the message
Feedback is the reply from the receiver which shows whether the message has
arrived, been understood, and, if necessary, acted upon
One-way communication involves a message which does not call for or require a
response
Two-way communication is when the receiver gives a response to the message, and
there is a discussion about it
Formal communication is when messages are sent through established channels using
professional language
Informal communication is when information is sent and received casually using
everyday language
Communication barriers are factors that stop the effective communication of
messages

Marketing
Marketing is identifying customer wants and satisfying them profitably
A customer is a person, business or other organisation which buys goods or services
from a business
Customer loyalty is when existing customers continually buy products from the same
business
Customer relationships are communicating with customers to encourage them to become
loyal to the business and its products
Market share is the percentage of total market sales held by one brand or business
Consumer buys goods or services for personal use- not to re-sell
Mass market is where there is a large number of sales of a product
Niche market is a small, usually specialised, segment of a much larger market
Market segment is an identifiable sub-group of a whole market in which consumers
have similar characteristics or preferences
Market research is the process of gathering, analyzing and interpreting information
about a market
A product-orientated business is one whose main focus of activity is on the product
itself
The market-orientated business carries out market research to find out what
consumer wants before a product is developed and produced
The marketing budget is a financial plan for the marketing of a product or product
range for some specific period of time. It specifies how much money is available to
market the product or range so that the Marketing department may know how much it
may spend
Primary research is the collection and collation of original data via direct
contact with potential or existing customers
Secondary research uses information that has already been collected and is
available for use by others
A questionnaire is a set of questions to be answered as a means of collecting data
for market research
Online surveys require the target sample to answer a series of questions over the
internet
Interviews involve asking individuals a series of questions, often face-to-face or
over the phone
A focus group is a group of people who are representative of the target market
A sample is a group of people who are selected to respond to a market research
exercise, such as a questionnaire
A random sample is when people are selected at random as a source of information
for market research
A quota sample is when people are selected on the basis of certain characteristics
(such as age, gender or income) as a source of information for market research
The marketing mix is a term which is used to describe all the activities which go
into marketing a product or service. These activities are often summarized as the
four Ps - product, price, place and promotion
The USP is the special feature of a product that differentiates it from the
products of competitors
The brand name is the unique name of a product that distinguishes it from other
brands
Brand loyalty is when consumers keep buying the same brand again and again instead
of choosing a competitor's brand
Brand image is an image or identity given to a product which gives it a personality
of its own and distinguishes it from its competitors' brands
Packaging is the physical container or wrapping for a product. It is also used for
promotion and selling appeal.
The product life cycle describes the stages a product will pass through from its
introduction, through its growth until it is mature, and then finally, its decline
Extension strategy is a way of keeping a product at the maturity stage of the life
cycle and extending the cycle
Cost-plus pricing is the cost of manufacturing the product plus a profit mark-up
Competitive pricing is when the product is priced in line with or just below
competitors' prices to try to capture more of the market
Penetration pricing is when the price is set lower than the competitors' prices in
order to be able to enter a new market
Price skimming is where a high price is set for a new product on the market
Promotional pricing is when a product is sold at a very low price for a short
period of time
Dynamic pricing is when businesses change product prices, usually when selling
online, depending on the level of demand
Price elastic demand is where consumers are very sensitive to changes in price
Price inelastic demand is where consumers are not sensitive to changes in price
A distribution channel is the means by which a product is passed from the place of
production to the consumer
An agent is an independent person or business that is appointed to deal with the
sales and distribution of a product or a range of products
Promotion is where marketing activities aim to raise customer awareness of a
product or a brand, generating sales and helping to create brand loyalty
Advertising means paying for communication with potential customers about a product
to encourage them to buy it
informative advertising is where the emphasis of advertising or sales promotion is
to give full information about the product
Persuasive advertising is advertising or promotion which is trying to persuade the
consumer that they really need the product and should buy it
Target audience refers to people who are potential buyers of a product or a service
Sales promotions are incentives such as special offers aimed at consumers to
achieve short-term increases in sales
Marketing budget is a financial plan for the marketing of a product or a product
range for a specified period of time
Social media marketing is a form of internet marketing that involves creating and
sharing content on social media networks in order to achieve marketing and branding
goals. It includes activities such as posting text and image updates, videos, and
other content that achieves audience engagement as well as paid social media
advertising
Viral marketing is when consumers are encouraged to share information online about
the products of a business
E-commerce is the 'online' buying and selling of goods and services using computer
systems linked to the internet and apps on mobile (cell) phones
A marketing strategy is a plan to combine the right combination of the four
elements of the marketing mix for a product or a service to achieve a particular
marketing objective(s)

Operations Management
Productivity is the output measured against the inputs used to create it
The buffer inventory level is the inventory held to deal with uncertainty in
customer demand and deliveries of supplies
Lean production is a term for those techniques used by businesses to cut down on
waste and, therefore, increase efficiency, for example, by reducing the time it
takes for a product to be developed and become available for sale.
Kaizen is a Japanese term meaning 'continuous improvement through the elimination
of waste.
Just-in-time is a production method that involves reducing or virtually eliminating
the need to hold inventories of raw materials or unsold inventories of the finished
product.
Job production is where a single product is made at a time
Batch production is where a quantity of one product is made, and then a quantity of
another item will be produced
Flow production is where large quantities of a product are produced in a continuous
process. It is sometimes referred to as mass production
Fixed costs are costs which do not vary in the short run with the number of items
sold or produced. They have to be paid whether the business is making any sales or
not. They are also known as overhead costs.
Variable costs are costs which vary directly with the number of items sold or
produced.
Total costs are fixed and variable costs combined.
Average cost per unit (unit cost) is the total cost of production divided by total
output.
Economies of scale are the factors that lead to a reduction in average costs as a
business increases in size.
Diseconomies of scale are the factors that lead to an increase in average costs as
a business grows beyond a certain size.
The break-even point is the level of sales at which total costs = total revenue.
The revenue of a business is the income during a period of time from the sale of
goods or services.
Quality means to produce a good or service, which means customer expectations.
Quality control is checking for quality at the end of the production process; it
uses quality inspectors to find any faults.
Quality assurance is the checking for quality standards by employees throughout the
production process.
Financial Information and Decisions
Start-up capital is the finance needed by a new business to pay for essential non-
current and current assets before it can begin trading.
Working capital is the finance needed by a business to pay for its day-to-day
activities.
Capital expenditure is money spent on non-current assets which will last for more
than one year.
Revenue expenditure is money spent on day-to-day expenses which do not involve the
purchase of a long-term asset, for example, wages or rent.
Internal finance is obtained from within the business itself
External finance is obtained from sources outside of and separate from the business
Micro-finance is providing financial services - including small loans - to poor
people not served by traditional banks
Crowdfunding is funding a project or venture by raising money from a large number
of people who each contribute a relatively small amount, typically via the internet
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
A cash flow cycle shows the stages between paying out cash for labour, materials,
and so on, and receiving cash from the sale of goods
Profit is the surplus after total costs have been subtracted from revenue
A cash flow forecast is an estimate of future cash inflows and outflows of a
business, usually on a month-by-month basis. This then shows the expected cash
balance at the end of each month
Net cash flow is the difference, each month, between inflows and outflows.
Closing cash (or bank balance) is the amount of cash held by the business at the
end of each month. This becomes next month's opening cash balance.
Opening cash (or bank balance) is the amount of cash held by the business at the
start of the month.
Working capital is the finance needed by a business to pay for its day-to-day
expenses.
Accounts are the financial records of a firm's transactions
Final accounts are produced at the end of the financial year and give details of
the profit or loss made over the year and the worth of the business
An income statement is a financial statement that records the income of a business
and all costs incurred to earn that income over a period of time. It is also known
as a profit and loss account
The revenue is the income to a business during a period of time from the sale of
goods and services
The cost of sales is the cost of producing or buying the goods actually sold by the
business during a time period
A gross profit is made when revenue is greater than the cost of sales
A trading account shows how the gross profit of a business is calculated
Net profit is the profit made by a business after all costs have been deducted from
revenue. It is calculated by subtracting overhead costs from gross profits
Depreciation is the fall in the value of a fixed asset over time
Retained profit is the net profit reinvested back into the company after deducting
tax and payments to owners, such as dividends
The statement of financial position shows the value of a business's assets and
liabilities at a particular time
Assets are those items of value which are owned by the business. They may be non-
current (fixed) assets or current assets
Liabilities are debts owed by the business. They may be non-current liabilities or
current liabilities
Non-current assets are items owned by the business for more than one year
Current assets are owned by the business and used within one year
Non-current liabilities are long-term debts owed by the business, repaid over more
than one year
Current liabilities are short-term debts owed by the business, repaid in less than
one year
Capital employed is shareholders' equity + non-current liabilities and is the total
long-term and permanent capital invested in a business
Liquidity is the ability of a business to pay back its short-term debts
Profitability is the measurement of the profit made relative to either the value of
sales achieved or the capital invested in the business
Illiquid means that assets are not readily convertible into cash
External Influences on Business Activity
Gross Domestic Product (GDP) is the total value of the output of goods and services
in a country in one year
A recession is when there is a period of falling GDP
Inflation is the increase in the average price level of goods and services over
time
Unemployment exists when the people who are willing and able to work cannot find a
job
Economic growth is when a country's GDP increases- more goods and services are
produced than in the previous year
Balance of payments records the difference between a country's exports and imports
Real income is the value of income, and it falls when prices rise faster than money
income
Exports are goods and services sold from one country to another country
imports are goods and services bought by one country from other countries
The exchange rate is the price of one currency in terms of another
Exchange rate appreciation is the rise in the value of a currency compared with
other currencies
Exchange rate depreciation is the fall in 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, eg, income tax or profits tax
indirect taxes are added to the prices of goods, and taxpayers pay the tax as they
purchase the goods, eg-VAT
Disposable income is the level of income a taxpayer has after paying income tax
An import tariff is a tax on an imported product
Monetary policy is a change in rates by the government or central bank
Supply-side policies aim to increase supply and make the economy more efficient
Private costs of an activity are the costs paid for by a business or the consumer
of the product
Private benefits of an activity are the gains to a business or the consumer of the
product
External costs are costs paid for by the rest of society, other than the business,
as a result of business activity
External benefits are the gains to the rest of society, other than the business, as
a result of business activity
Social cost = external costs + private costs
Social benefit = external benefits + private benefits
Globalisation is the term used to describe increases in worldwide trade and
movement of people and capital between countries
Free trade agreements exist when countries agree to trade imports/exports with no
barriers, such as tariffs or quotas
An import tariff is a tax placed on imported goods when they arrive in the country
An import quota is a restriction on the quantity of a product that can be imported
Protectionism is when a government protects domestic businesses from foreign
competition using tariffs and quotas
Multinational businesses are those with factories, production or service operations
in more than one country