BUSINESS MANAGEMENT UNIT ONE GLOSSARY

 Intangible – Unlike goods, services are not physical in their nature.

 Inseparable – The service received is attached to the people who deliver the
service and the processes used to deliver the service.
 Perishable – Services do not last but are usually consumed at the time of
purchase.
 Variable – services are heterogeneous, i.e., each customer experience is unique.
 The primary sector refers to business activity involved with the extraction of natural
resources.
 The quaternary sector refers to business activity involving the creation or sharing
of knowledge and information.
 The secondary sector refers to business activity involved with the manufacturing
or construction of finished products.
 The tertiary sector refers business activity that involves providing services to
customers, i.e., consumers and business clients.
 The private sector of the economy consists of businesses owned and run by
private individuals and organizations that usually aim to earn a profit for their
owners.
 The public sector consists of those organizations controlled by a regional and/or
national government, with the main aim being to provide essential goods and
services for the general public.

(a) Define the term sole trader. [2 marks]

A sole trader (or sole proprietor) is a type of business structure that is owned and run
(controlled) by one person, although s/he can employ staff. Hence, all profits made by the
business (if any) belongs to the owner. There is no legal distinction between the owner and
the business itself, so the owner has unlimited liability (legal and financial responsibility for all
losses and debts).

(b) Explain one advantage and one disadvantage of establishing Flowers by Cam as a sole
trader. [4 marks]
The advantages of setting up the business as a sole trader could include:
 It is the quickest and easiest type of business for Cam Tran to set up. She can
avoid complicated and costly set-up procedures, especially because at the time
she had to also care for her three young children.
The disadvantages of setting up the business as a sole trader could include:

 She must accept all the risks of owning and running her own business,
including any losses made or even the possible collapse of the business (given
the aftermath of the coronavirus pandemic on local, small businesses).
  Companies (also known as corporation) are commercial for-profit businesses
owned by shareholders.
 A Deed of Partnership (or partnership deed) is a formal partnership agreement or
contract between the owners, which includes legal agreements such as the formal
responsibilities of each owner, their voting rights, and how profits are to be shared
between the partners.
 An initial public offering (IPO) occurs when a company sells its shares on a public
stock exchange for the first time.
 An ordinary partnership has a minimum of 2 partners and up to 20 owners
(although this does vary from one country to another).
 Partners are the co-owners of a partnership business.
 A partnership is a commercial (for-profit) business that strives to earn a profit for its
owners.
 Privately held companies are limited liability companies owned by shareholders
but the shares in the business cannot be advertised or traded on a stock
exchange.
 Publicly held companies (or joint-stock companies) are limited liability
companies owned by shareholders with the shares in the business being traded
(bought and/or sold) on a public stock exchange (or stock market).
 Shareholders are the owners of a limited liability company.
 Silent partners (also known as sleeping partners) are inactive owners of a
partnership business, who provide additional capital without having any role in the
actual running of the organization.
 A sole trader (or sole proprietor) is the single owner of a business organization,
so makes all the decisions and takes all the risks in running the enterprise.
 A stock exchange (or stock market) is a marketplace where shares in publicly
held companies can be bought and/or sold, such as the New York Stock Exchange
(NYSE).
 Unlimited liability means that if the sole proprietorship fails, the sole trader is
personally held responsible for all the debts of the business. As there is no limit to
the amount of losses, this means that the sole trader could lose their personal
possessions to pay for the organization's debts.

Charities Social enterprises Traditional businesses

Mission driven Purpose driven (social Vision driven (commercial vision)
(charitable mission) purpose)
Funded by donations Funded by internal and Funded by owners, investors, and
external sources internal and external sources
Surplus reinvested Profits reinvested Profits distributed to owners
and/or redistributed
Purely charitable Focus on social benefits Corporate social responsibilities* (NOT
MAIN DRIVE)
Focus on societal gains Focus on social impact and Focus on financial returns
financial gains
o Cooperatives are for-profit social enterprises that are owned and managed by their
members.
o for-profit social enterprise uses commercial business practices in order to
achieve social goals, such as improving the environment, building better
communities and developing social wellbeing.
o Microfinance providers are for-profit social enterprises that offer a financial
service to those without a job or on very low incomes.
o Public-private partnerships (PPP) are jointly established by a government and
one or more private sector businesses.
o Objectives are the clearly defined and measurable targets or goals of a
business, used to to achieve its organizational aims.
o Tactics are the actions required to achieve the short term objectives of an
organization.
o Strategies are the actions required to achieve the long term objectives of an
organization.
o Competitors are the organization’s rival businesses competing in the same
industry.
o Customers are the firm’s clients who pay for the goods and/or services of the
business.
o Directors (or executives) are the group of senior managers who run a
company on behalf of their shareholders (the legal co-owners of the company).
o Employees are the workers within an organization. They are an internal
stakeholder group with a vested interest in the survival and financial prosperity of
the organization that they work for.
o External stakeholders are people or organizations not part of the business but
have a direct interest in its decisions, actions, and performance. Examples
include customers, competitors, suppliers, financiers, the local community,
pressure groups, and governments.
o Financiers (or lenders) are banks, investors, insurance companies and other
financial backers that provide finance for businesses.
o The government is an external stakeholder of all organizations operating within
the country.
o Internal stakeholders are individuals or groups who are part of the organization,
including employees, managers, directors (executive), and shareholders.
o The local community is an external group of stakeholders consisting of the
general public and local businesses (not necessarily competitors though) that
have a direct interest in the activities of the business in question.
o Managers are people hired to be responsible for overseeing certain functions,
operations or departments within an organization.
o Pressure groups consist of individuals or organizations who have a common
interest or cause that they collectively pursue. These external stakeholders have
particular interests such as the protection of small-scale and local businesses, the
natural environment and ecosystems, human rights, and fair trade.
o Shareholders (or stockholders) are people or other organizations that buy
shares in the company. They own a part of the business.
o Suppliers are the organizations that provide the goods and support services for
other organizations.
o Arbitration is a method of conflict resolution used to resolve stakeholder conflict by
considering the perspectives of all parties involved in the dispute. All stakeholder
groups in conflict agree to accept the decision or judgment of the arbitrator.
o Compromise is a method of conflict resolution that involves stakeholders
deliberately making considerations for other stakeholders, despite their differences.
o Conciliation is a method of conflict resolution that involves using a third party to
align the incompatible interests of different stakeholder groups. Conciliators support
 both parties in a dispute to better understand each other’s interests and needs,
which can help to resolve stakeholder conflicts.
o Conflict refers to the mutually exclusive and incompatible interests of different
stakeholder groups.
o Pressure groups are organizations consisting of like-minded individuals who come
together for a common cause or concern.
o Share ownership schemes are a method of conflict resolution that enables
workers to purchase shares in the company at a discounted price, thereby granting
them part ownership of the business and aligning their interest in the firm’s financial
performance and success.
o Worker participation (or industrial democracy) is a method of conflict resolution
that involves employees having a direct say in how things are done in the
workplace. This enables workers to have some degree of decision-making power,
which can help to minimise potential conflict between employees and employers.
1. Dividends - Companies listed on a public stock exchange usually pay dividends to
their shareholders biannually (twice a year). The dividends represent a share of the
company's profits paid on each share that the shareholder owns, so the more
shares held the higher the total dividend payment.
2.
3. Capital growth - Stock brokers and investment bankers argue that over the
medium to long term, shares outperform the return from savings in an ordinary
bank account. Over time, the market price of shares can increase, so shareholder
can sell their shares at a higher price, thereby making a financial gain (known
as capital growth or capital gain). However, due to the volatility of stock markets,
share prices can indeed fall sharply without any prior warning. Hence, holding
shares can be a risky strategy for investors.
4. Voting power - Shareholders who hold enough shares in a limited liability company
can become a major influence in the management and operations of the
organization. These people tend to be expereienced risk takers and possess high
entrepreneurial spirit, such as the senior directors of a company.

External growth is the method of expansion that involves a business merging with or
taking over another organization.
Internal growth (or organic growth) refers to the expansion of an organisation's existing
business activities and operations.
(a) Define the term organic growth. [2 marks]
(b) Describe two ways in which the market size of the ball bearings industry in Austria
might be measured. [4 marks]

Globalization is the process of greater interaction and integration of goods, services,

cultures, languages, social behaviours among people, business operations, and
governments worldwide. It is an all-encompassing concept of cultural, political, social,
technological, and economic exchange of goods and services. It also signifies the growing
degree of interdependence of the world’s economies.

Type Explanation
Financial economies Banks and other lenders charge lower interest to larger
businesses for overdrafts, loans and mortgages because they
represent lower risk.
Marketing Larger businesses can spread their fixed costs of marketing by
economies promoting and advertising a greater range of brands and
products.
Managerial Larger businesses can afford to hire specialist functional
economies managers, thus improving the organization’s efficiency and
 productivity.
Technical economies Cost savings by greater use of large-scale mechanical
processes and specialist machinery (such as mass production
techniques).
Purchasing Larger firms can gain huge cost savings by buying vast
economies quantities of stocks (raw materials, components, semi-finished
goods and finished goods).
Risk Large businesses can bear greater risks than smaller ones due
bearing economies to a greater product portfolio. Hence, inefficiencies will harm
smaller firms to a greater extent.
Specialization Larger firms can afford to hire and train specialist workers, thus
economies helping to boost output, productivity and efficiency (thereby
cutting average costs of production).

 An acquisition (also called a takeover) involves one company buying a controlling

interest (majority stake) in another company.
 A backwards vertical M&A occurs if the purchaser buys a company at a later
stage in the chain of production.
 Conglomerate integration (also known as diversification) is a form of external
growth that occurs when a business merges with or takes over another business
that operates in a completely different industry.
 A forwards vertical M&A occurs if the purchaser buys a company at an earlier
stage in the chain of production.
 Franchising is a hybrid growth method that involves two parties, with the franchisor
giving the legal rights to a franchisee to buy, own and sell goods and services using
the franchisor’s brand.
 A joint venture (JV) is an external growth method that involves two or
more organizations agreeing to create a new business entity, usually for a finite
period of time.
 A merger is similar but the two companies agree to form a single, larger company
thereby benefiting from operating on a larger scale. By contrast, takeovers are
almost always hostile in nature.
 A strategic alliance is created when two or more organizations join together to
benefit from external growth without having to set up a new separate entity or to
make major changes to their own business models.
 A vertical merger or vertical takeover occurs when an acquisition occurs between
two companies operating in different stages of the production process.

Partnerships can benefit from specialization and the division of labour. For example, a law
firm might have partners who specialize in different specialisms, such as criminal law, civil
law, business law and tax law.
As the business has more than one owner, this can easily lead to disagreements and
conflict between the owners, which can seriously damage the running of the partnership.

FEATURES: The vast majority of partnerships are unincorporated businesses, so at least

one of the owners must have unlimited liability. In practice, it is usual for all the partners to
share responsibility for any liabilities made by the partnership
 o Capital expenditure refers to business spending on non-current assets or
capital equipment of a business. It is regarded expenditure on the long-term
investment of an organization on assets that offer gains in efficiency and
productivity (ej.-buildings)
o Revenue expenditure refers to business spending on its everyday and regular
operations. These expenses have to be paid in order to keep the business
operational, including routine expenditure on maintaining the firm's non-current
assets. (ej.-delivery costs)
o
Key term Definition
Capital Refers to business spending on fixed assets or capital equipment of a
expenditure business.
Finance Refers to the various available money that an organization has to fund its
business activities.
Revenue Refers to business spending on its everyday and regular operations.
expenditure

INTERNAL SOURCE OF FINANCE

o Personal funds: Sole traders and partners, as types of business entities,
usually rely on personal funds from their own savings to finance their
start-up businesses.
- By investing their personal funds, sole traders and partners have a better chance of being
able to borrow money if they need to, as it shows greater commitment to the business
venture.

o Retained profit: Retained profit is an internal source of finance that

comes from having a financial surplus. These funds are reinvested in the
business, rathe than being distributed to the owners (shareholders)
- Retained profit is rarely enough as a sole source of finance for most businesses in their
pursuit of growth and evolution.
o Sales of assets: When a business is in need of cash, it can sell off some
of its fixed assets. Fixed assets are items a business owns and:
uses for a period of more than 12 months
can be used repeatedly
generates income for the organization
-A large sum of money can be raised. For example, selling a fleet of old motor vehicles or a
redundant (unused) office building can raise much needed finance for a business.
-The option of asset sales is only available to established businesses; new businesses are
unlikely to be in such a position.

An asset is anything that a business owns and has a marketable value, such as buildings,
vehicles, computers, equipment and intellectual property.

EXTERNAL SOURCE OF FINANCE

 o Share capital: finance raised through the issuing of shares via a stock
exchange (or stock market). It is a long-term source of finance for
limited liability companies, obtained by selling shares in the company.
- It is permanent capital as it does not need to be repaid (shareholders sell their
shareholdings to other buyers via the stock exchange)
- Shareholders need to (at some point) be paid dividends if the company earns a profit.

o Loan capital, also known as debt capital, refers to borrowed funds from
financial lenders, such as commercial banks. It is typically a long-term
source of external finance, and is usually for the purchase of non-current
assets (sometimes referred to as fixed assets).
- It enables the borrower to repay in regular instalments, making loan capital more
accessible and affordable for many businesses as it is not burdened by having to pay a
large lump sum of money.
- Interest is charged on the amount of borrowed funds. The interest rate can be a fixed or
variable rate

o overdraft is a banking service that enables customers (personal and

business customers) to withdraw more money from their account than
exists in the account. This can help businesses to meet their short-term
liquidity needs, especially in emergency situations.
- Overdrafts are quite easy to obtain, so are an important source of external finance for
small businesses in particular.
- Interest is charged on the amount overdrawn, usually at rates higher than those charged
for ordinary bank loans.

o Trade credit enables a customer to purchase and obtain goods and

services but to pay for these at a later date. The supplier provides the trade
credit to the customer (another business organization), which helps the
purchaser’s cash flow as they can obtain supplies without having to pay for
these immediately.
o Crowdfunding is an external source of finance that involves raising small
amounts of money from a large number of people to fund a particular business
project or venture. This is typically done via online platforms
o equity crowdfunding involves the sale of a stake in a business to a number of
investors in the crowd
- As each individual lends a relatively small amount of money to the fundraiser, this limits the
risks and impacts should the business project fail to succeed.
- There are legal challenges and considerations, such as transparent disclosure of legal
documents, holding annual general meetings with investors, and publication of annual reports.
This adds to the costs of the business.
o Leasing involves the business or customer (known as the lessee) drawing
up a contract with the leasing company (known as the lessor) to use
particular fixed assets for an agreed fee.
- The lessor does not have to purchase the expensive equipment, machinery, vehicles or
other type of capital. Instead, its money can be used for revenue expenditure purposes.
-With leasing, the lessee never owns the asset. Ownership remains with the lessor (the
leasing company) before, during and after the leasing contract.
o Microfinance providers are for-profit social enterprises that offer a
financial service to those without a job or on very low incomes.
-Microfinance can help many people to get out of poverty by making them become
financially independent.
- Some people regard the practice of microfinance providers as being unethical as they
earn profits from low-income individuals and households.
 o Business angels (or angel investors) are wealthy and successful private
individuals who risk their own money in a business venture that has high
growth potential.
-Business angels provide an essential source of finance for start-ups and small businesses
that are unable to secure finance from conventional providers of finance, such as
commercial banks and other financial institutions.
- For the business angels, such business ventures are extremely high risk, especially as
they risk losing their personal money. Hence, the amount of finance available is often not
easily available for start-ups and small businesses.

Current These are the short-term debts of a business, which need to be repaid within
liabilities twelve months of the balance sheet date. Examples include bank overdrafts,
trade creditors, and other short-term loans.
Debtors A type of current asset, referring to individual or business customers that
owe money to the organization as they have bought goods or services on
trade credit, i.e., they need to pay within 30 and 60 days.
Depreciation The fall in the value of a fixed asset over time, mainly due to wear and tear
(usage) and obsolescence.
Dividends These are the payments from a company’s profit (after interest and tax) paid
to the shareholders (owners) of the company. The amount of dividends paid
to an individual shareholder depends on the number of shares held by the
individual.
Equity Refers to the value of the owners' stake in the business, i.e., what the
business is worth at the time of reporting the balance sheet.
Expenses These are a firm’s indirect costs of production, e.g., rent, management
salaries, marketing campaigns, accountancy fees, bank interest charges,
travel expenses, utilities, repairs and maintenance, and general insurance.
Final accounts These are the published accounts of an organization, made available to and
used by different stakeholders, e.g., managers, employees, shareholders,
sponsors, financiers, and investors.
Finished goods These are the final products of a business, ready to be sold to customers.
Fixed assets The long-term assets (possessions) of an organization that have a monetary
value and are used repeatedly but are not intended for resale within the next
twelve months, e.g. property and equipment.
Goodwill The reputation and established networks (know-how) of an organization,
which adds to a firm’s monetary value.
Gross profit This refers to the profit from a firm’s everyday trading activities. It is
calculated by the formula: Sales revenue – Cost of sales.
Illiquid assets These items of value, owned by the business, cannot be sold quickly, are
difficult to sell, and/or cannot be sold easily without incurring a significant
loss in value.
Intangible Non-physical fixed assets that are valuable to a firm’s survival and success,
assets such as brand value, goodwill, copyrights, trademarks, and patents.
Intellectual Abbreviated as IPRs, these are a firm's fixed, intangible assets with a
property rights monetary value, comprised of goodwill, patents, copyrights and trademarks.
Liabilities The debts of a business, i.e., the money owed to others, e.g., money owed to
financiers, trade creditors, and the government (for tax).
Net assets Refers to the overall value of an organization’s assets after all its liabilities are
deducted. It is calculated by the formula: total assets minus current
liabilities minus non-current liabilities.
Non-current Also known as fixed assets, this refers to the long-term assets or possessions
assets of an organization with a monetary value but are not intended for resale
within the next twelve months of the balance sheet date.
Non-current Also known as long-term liability, this refers to debt owed by a business
liability which will take longer than a year (from the balance sheet date) to repay.
Overdrafts This financial service allows customers to temporarily take out more money
than is available in their bank account.
Patents The official rights given to a business to exploit an invention or process for
commercial purposes.
Profit and loss Also known as the income statement, this shows a firm’s profit (or loss) after
account all production costs have been subtracted from the organization’s revenues,
each year. It is also known as the statement of profit or loss or income
statement.
Profit after Also referred to as profit for period, this section of the P&L account shows
interest and tax the actual value of profit earned by the business after all costs have been
accounted for.
Profit before This section of the P&L account shows the value of a firm’s profit (or loss)
interest and tax before deducting interest payments on loans and taxes on corporate profits.
Raw materials These are the natural resources used in the production process to create
goods and provide services to customers.
Residual value Also known as the scrap value, this is the value of a fixed asset at the end of
its useful life before it is replaced.
Retained profit Also referred to as retained earnings, this refers to the value of a firm’s
earnings after all costs are paid (including interest and tax) and shareholders
have been compensated (dividends).
Sales revenue Shown on the profit and loss account, this refers to the money an
organization earns from selling goods and services.
Share capital The value of equity in a business that is funded by its shareholders, either
through an initial public offering (IPO) or via a share issue.
Short-term These are advances (loans) from a financial lender, such as a commercial
loans bank, that needs to be repaid within 12 months of the balance sheet date.
Stocks Also known as inventories, these are the goods that a business has available
for sale, per time period.
Straight line A method of depreciation that spreads the depreciation of a fixed asset
depreciation evenly over its useful life, i.e., the value of the asset falls by the same amount
each year.
Tax Refers to the compulsory deductions paid to the government as a proportion
of a firm’s profits.
Total assets The sum of a firm’s non-current assets and its current assets.
Total liabilities These are simply the sum of current liabilities and non-current liabilities, i.e.,
the sum of all the monies owed by the business.
Trade creditors Suppliers may give trade credit, which needs to be repaid at a future date
(typically 30 to 60 days).
Trademarks A form of intellectual property or intangible asset which gives the listed
owner the legal and exclusive commercial use of the registered brands,
logos, and/or slogans (corporate catchphrases).
Units of Method of depreciation that apportions an equivalent value of depreciation
production to a non-current asset based on each physical unit of output. Depreciation is
method based on the units of usage rather than time (as used for the straight-line
method).
Window Also known as creative accounting, this is the legal manipulation of financial
dressing statements based on the accounting principles and rules in the country in
order to make the figures look more flattering (in the same way that people
clean and tidy their homes before guest are due to arrive).
Work-in- Also referred to as semi-finished goods, these are parts and components
progress used in the production process.
Working capital The money available for the day-to-day running of a business. It is calculated
by subtracting current liabilities from current assets.