In this section, you can define virtually any word you come across that you don't understand!​
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​Below, you will be able to find all of our definitions and financial formuli. Note you can search specific words with the search bar or by pressing ctrl+F on your keyboard.
Welcome to term
definitions and financial
formuli
80/20 rule (Pareto principle): States that approximately 80% of the outcomes or results come from 20% of the causes or inputs. For example, a business might find that 80% of its sales come from 20% of its customers.
Absorption Costing: A method of inventory costing in which all costs of production (both variable and fixed) are treated as product costs. For instance, if a company produces furniture, the cost of wood, labour, and factory overhead are all included in the product cost.
Accrual Accounting: The recording of revenue when it is earned and expenses when they are incurred, regardless of when the money is actually received or paid. For example, a business records sales in its books at the time the goods are shipped, not when payment is received.
Accrued Revenue: Revenue that has been earned, typically through sales or services, but has not yet been received. For instance, a consulting firm performs services in March but doesn't receive payment until April.
Advertising: A way for businesses to promote their products or services to potential customers, such as through TV commercials or online ad campaigns. For example, a new beverage company might launch an online campaign to build brand awareness.
Amortisation: The process of spreading out a loan into a series of fixed payments over time. For intangible assets, it refers to the cost of asset consumption over its useful life. For example, the amortisation of a patent valued at £10,000 over 10 years would be £1,000 per year.
Arbitrage: The simultaneous purchase and sale of the same asset in different markets to profit from unequal prices. For example, buying gold in one country at a lower price and selling it in another country at a higher price.
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Asset Depreciation Range (ADR): A method used to estimate the economic life of assets within a fixed range. An example would be estimating the usable life of company vehicles between 5-8 years based on usage and maintenance data.
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Asset Turnover Ratio: Measures how efficiently a company uses its assets to generate sales. It is calculated as follows:
Asset Turnover Ratio=Net SalesAverage Total AssetsAsset Turnover Ratio=Average Total AssetsNet Sales​. A company with £500,000 in sales and £250,000 in average total assets has an asset turnover ratio of 2.
Assets: Things that a business owns, such as cash, buildings, or equipment. For example, a manufacturer may list machinery and its factory as assets on its balance sheet.
Balance Sheet: A financial statement that shows what a business owns (assets), what it owes (liabilities), and the remaining value for the owners (equity). For example, a balance sheet might show total assets of £200,000, total liabilities of £150,000, and equity of £50,000.
Balanced Scorecard: A strategic planning and management system used to align business activities to the vision and strategy of the organisation. It often involves tracking financial measures along with customer, internal process, and learning and growth metrics.
Bankruptcy: A legal status when a person or business is unable to pay their debts. For instance, a retailer may declare bankruptcy when it cannot fulfill its financial obligations to creditors.
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Behavioural Economics: Studies the effects of psychological, cognitive, emotional, cultural, and social factors on economic decisions. For example, a study may examine how consumer purchasing is influenced by social proof and other psychological factors.
Benchmark Rate: A standard or point of reference against which things may be compared or assessed, often used in financial markets to set prices or interest rates. For example, banks might set their interest rates for loans based on the central bank’s benchmark rate.
Benchmarking: The process of comparing one's business processes and performance metrics to industry bests or best practices from other companies. For example, a company might compare its return on investment (ROI) against that of the leading competitors in its sector.
Branding: The process of creating a unique and recognisable identity for a business or its products. For example, Apple's branding focuses on innovation and high quality.
Break-even Analysis: Helps businesses determine the point at which they cover all their costs and start making a profit. The formula is Break-even Point (units)=Fixed CostsPrice per Unit - Variable Cost per UnitBreak-even Point (units)=Price per Unit - Variable Cost per UnitFixed Costs​. For example, a company with £100,000 in fixed costs, selling products at £50 each with £30 variable costs per unit, would break even at 5,000 units.
Budget: A financial plan that outlines expected income and expenses over a specific period. For example, a department may have a budget of £10,000 for marketing activities for the year.
Budgeting: The process of planning and allocating financial resources for different business activities. For example, a company may budget £20,000 for employee training for the fiscal year.
Bulk Buying: Involves purchasing large quantities of a particular product, typically to secure lower prices per unit. For example, a restaurant may buy ingredients in bulk to reduce costs.
Business Cycle: Refers to the fluctuations in economic activity that an economy experiences over a period. For example, during an economic boom, businesses expand and unemployment is low, whereas during a recession, economic activity slows and unemployment rises.
Business Ethics: Refers to the moral principles and values that guide how businesses operate. For example, a company maintaining high levels of transparency and fairness in its dealings with stakeholders is practicing good business ethics.
Business Plan: A document that outlines a company's goals, strategies, and financial projections. For instance, a startup might create a business plan to present to potential investors.
Capital: Refers to the financial resources, such as money or assets, used to start, operate, or expand a business. For example, a startup might use initial capital of £50,000 to purchase equipment and rent office space.
Capital Structure: Refers to the mix of debt and equity finance used by a company to fund its operations and finance its assets. For example, a company might use a 40% equity and 60% debt mix to finance its expansion.
Cash Flow: Refers to the movement of money into and out of a business over a specific period. For example, positive cash flow indicates that a company's liquid assets are increasing, allowing it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.
Cash Flow Forecast: Predicts the inflows and outflows of cash in a business over a specific period. For example, a retail store forecasts that it will generate £20,000 in sales and incur £15,000 in expenses over the next month.
Cash Flow Statement: A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. It helps businesses track their cash position over time. For example, it shows the cash generated from operations, investing, and financing activities.
Change Management: The process of planning, implementing, and supporting changes within a business to ensure a smooth transition. An example would be a company adopting a new IT system that requires changes in workflows and employee training.
Channel of Distribution: The path through which a product or service travels from the producer to the end consumer. For example, a manufacturer may use wholesalers, retailers, or direct online sales to distribute its products.
Collaboration: Working together with others to achieve a common goal. For example, two tech companies might collaborate on the development of a new piece of software.
Competition: Refers to the rivalry among businesses that offer similar products or services. For example, Coca-Cola and Pepsi compete in the soft drinks market.
Competitive Advantage: Something that makes a business stand out from its competitors and gives it an edge in the market. For example, a café may gain a competitive advantage by being the only one in the area to offer organic and locally sourced ingredients.
Compliance: Meeting official requirements set by legal regulations and company policies. For example, a pharmaceutical company must comply with safety standards set by healthcare regulators.
Consumer: An individual or group that purchases and uses goods or services. For example, a family buying groceries at a supermarket.
Consumer Behaviour: Refers to the actions and decisions consumers make when purchasing products or services. For example, a consumer might choose a product because of its eco-friendly packaging.
Consumer Price Index (CPI): Measures changes in the average prices of a basket of goods and services commonly purchased by households. For example, if the CPI increases by 2% over a year, it indicates that the cost of living has generally risen by that amount.
Contingency Plan: A backup strategy that businesses develop to respond to unexpected events or emergencies. For example, a business may have a contingency plan in place for IT system failures that includes backup servers and data recovery procedures.
Corporate Governance: The system of rules, practices, and processes by which a company is directed and controlled. For example, good corporate governance would ensure that a firm makes decisions that benefit all stakeholders, including shareholders, employees, and the community.
Corporate Social Responsibility (CSR): The practice of businesses acting in a socially and environmentally responsible manner. For example, a company may engage in CSR activities by reducing its carbon footprint and enhancing community engagement.
Cost: Refers to the expenses incurred in producing or acquiring goods or services. For example, the costs of a bakery include ingredients, rent, utilities, and wages.
Cost of Goods Sold (COGS): Represents the direct costs incurred in producing or purchasing the products that a business sells. For example, for a retailer, COGS includes the price paid for the goods plus any additional costs necessary to get the goods into saleable condition.
Cost-Benefit Analysis: A decision-making tool used to evaluate the potential benefits and costs of a particular course of action. For example, a business may perform a cost-benefit analysis to decide whether to buy a new piece of equipment or upgrade an old one.
Credit Control: Involves managing a business's receivables and ensuring customers pay their debts on time. For example, a company may implement credit control measures like credit checks and prompt payment discounts to manage customer payments.
Credit Terms: The payment conditions imposed by suppliers on their customers, including the time allowed to pay and possible discounts for early payment. For example, a supplier may offer terms of 30 days net, meaning the customer must pay the invoice within 30 days.
Customer Loyalty: The willingness of customers to continue buying from a particular business or brand. For example, airlines use frequent flyer programs to encourage customer loyalty.
Customer Relationship Management (CRM): A strategy and technology used by businesses to manage and analyse interactions with customers. For example, a CRM system can track customer purchase history and contact information, which helps companies personalise their marketing efforts.
Data Analysis: The process of examining and interpreting data to uncover patterns, relationships, or insights. For example, a retailer might use data analysis to determine the most popular products and the times of year they sell the best.
Debt Financing: Raising funds for a business by borrowing money. For example, a company might take out a loan to finance the expansion of its operations.
Demand: Refers to the quantity of a product or service that businesses are willing and able to provide at a given price. For example, the demand for electric cars has been increasing as technology improves and prices become more competitive.
Demand and Supply: Fundamental concepts in economics that explain how prices and quantities of goods and services are determined in the market. For example, if there is high demand for a product and supply remains constant, the price of the product will likely increase.
Demographics: Statistical data about a population, such as age, gender, income, education level, or location. For example, a company may use demographic data to target its marketing campaigns to a specific age group or income level.
Depreciation: The method of allocating the cost of a tangible asset over its useful life. For example, a company might depreciate a piece of machinery over its expected operational life of 10 years, reducing its value on the balance sheet and recognising an expense on the income statement each year.
Direct Cost: Expenses that are directly attributable to the production of goods or the provision of services. For example, the cost of raw materials for a manufacturer is a direct cost.
Diseconomies of Scale: Occur when a business expands so much that the costs per unit increase. For example, a factory might experience diseconomies of scale if it becomes too large and difficult to manage efficiently.
Dividend: A portion of a company's profits that is distributed to its shareholders as a return on their investment. For example, if a company makes a profit, it may choose to distribute some of this money to shareholders in the form of dividends.
Diversification Strategy: A corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market. For example, a company that traditionally manufactures clothing may decide to diversify into accessories.
Downsizing: Refers to the permanent reduction of a company's workforce through layoffs or other means with the aim of improving its efficiency and profitability. For example, a technology firm might downsize its marketing department in response to a prolonged period of poor sales.
Dynamic Pricing: A pricing strategy whereby a company adjusts prices for products or services in real time, based on demand, market conditions, and other factors. For example, airlines use dynamic pricing for tickets, where prices may change based on the time of booking, the number of available seats, and other factors.
E-Commerce: Refers to the buying and selling of goods and services over the internet. For example, Amazon is an e-commerce giant that allows people to buy and sell products online.
Economic Growth: An increase in a country's production of goods and services over time. For example, an annual increase in the gross domestic product (GDP) of a country indicates economic growth.
Economies of Scale: Occur when a business achieves cost savings and efficiencies as it increases its production or scale of operations. For example, a large factory may have lower per-unit costs compared to a smaller one because it can buy raw materials in bulk and spread the fixed costs of operation over more units.
Economies of Scope: Occur when producing a wider range of products or services more cheaply together than separately. For example, a restaurant may achieve economies of scope by using its kitchen to prepare both food and bakery items.
Elasticity: Measures how the quantity demanded or supplied of a good change in response to a change in price. For example, luxury goods often have high price elasticity because as the price increases, demand decreases sharply.
Elasticity of Supply: Measures the responsiveness of the quantity supplied of a good to a change in its price. For example, if the price of wheat increases, farmers may plant more wheat, thus increasing the supply in response to the price increase.
Employee: Someone who works for a business or organisation, usually in exchange for compensation. For example, a sales associate at a retail store is an employee of the store.
Employer: A person, business, or organisation that hires and pays employees. For example, Google is an employer to thousands of people around the world.
Employment: The state of having paid work. For example, a person who has a full-time job is employed.
Equilibrium Price: The market price where the quantity of goods supplied is equal to the quantity of goods demanded. For example, if the supply of a product matches exactly what consumers want to buy at a particular price, that price is the equilibrium price.
Equity Crowdfunding: A method of raising capital through the collective effort of friends, family, customers, and individual investors. For example, a startup may use a platform like Kickstarter to raise funds by offering equity to backers.
Equity: Refers to the ownership interest or the residual value in a business after deducting liabilities. For example, if a company has assets of £100,000 and liabilities of £60,000, its equity is £40,000.
Exchange Rate: The value of one currency in terms of another currency. For example, if 1 British pound can be exchanged for 1.30 US dollars, that is the exchange rate.
Export: Refers to the sale of goods or services to foreign countries. For example, a UK-based electronics company might export its products to Europe.
External Factors: Conditions or influences outside a business that can impact its operations and performance. For example, economic recessions or changes in government policy can be external factors that affect a business.
Fiduciary Responsibility: A legal obligation of one party to act solely in another party’s interests. For example, a financial advisor has a fiduciary responsibility to act in the best interests of their clients.
Financial Leverage: The use of borrowed funds to increase an investment's potential return. For example, buying a property with a small down payment and a large mortgage is an example of using financial leverage.
Financial Modelling: Involves creating a summary of a company's expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision. For example, a financial model might be used to forecast the impact of a new product launch on a company’s finances.
Financial Ratios: Calculations that provide insights into a company's financial performance and position. For example, the debt-to-equity ratio is a financial ratio that compares a company’s total liabilities to its equity.
Financial Statement: A document that provides information about the financial performance and position of a business. For example, an income statement is a financial statement that shows a company’s revenue and expenses over a specific period.
Fixed Asset: A long-term tangible piece of property that a firm owns and uses in its operations to generate income. For example, a manufacturing company's fixed assets include its factory machines.
Fixed Costs: Expenses that do not change with the level of production or sales volume. For example, rent for a factory is a fixed cost as it does not increase with the number of units produced.
Franchise: A business model in which an entrepreneur (franchisee) purchases the rights to operate a business under the established brand, systems, and support of a larger company (franchisor). For example, many fast-food restaurants like McDonald's operate on a franchise model.
Fungibility: The property of a good or a commodity whose individual units are essentially interchangeable. For example, one ounce of pure gold is considered fungible because one ounce of gold is equivalent to another ounce of gold in terms of value and features.
Gantt Chart: A type of bar chart that illustrates a project schedule and is widely used in project management to track project tasks against their allocated time. For example, a construction project manager might use a Gantt chart to schedule and track different construction activities.
Gearing: Refers to the level of a company's debt related to its equity capital. For example, a company with high gearing has a high ratio of debt to equity, which can increase its risk.
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Gearing Ratio: A financial ratio that compares some form of owner's equity (or capital) to borrowed funds. For example, if a company has £100,000 in equity and £200,000 in debt, its gearing ratio is 2:1.
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Globalisation: Refers to the increasing interconnectedness and interdependence of countries through trade, investment, technology, and cultural exchange. For example, a company might source raw materials from one country, manufacture products in another, and sell them globally.
Gross Domestic Product (GDP): The total value of all goods and services produced over a specific time period within a country's borders. For example, the GDP of the United Kingdom measures the total economic output of all sectors within the national borders.
Gross Profit Margin: A financial ratio that measures the profitability of a business by expressing gross profit as a percentage of revenue. For example, if a company’s revenue is £1,000,000 and its cost of goods sold is £600,000, its gross profit margin is 40%.
Gross Profit: The revenue a business has left after deducting the direct costs of producing goods or services. For example, if a company sells a product for £100 and the direct cost to produce it is £60, the gross profit is £40.
Green Marketing: Involves companies developing and promoting products that are environmentally responsible. For example, a company might use sustainable materials in its products and highlight this fact in its marketing campaigns.
Greenfield Investment: Investment in a new facility or the expansion of an existing facility in a foreign country. For example, a U.S. car manufacturer may decide to open a new plant in Poland to produce cars for the European market.
Hedging: An investment strategy used to reduce the risk of adverse price movements in an asset. For example, an airline company might use fuel futures contracts to hedge against the risk of rising fuel prices.
Horizontal Diversification: Adding new products or services that are often unrelated to the existing product line but appealing to the current customers. For example, a coffee shop might start selling homemade baked goods along with its regular coffee offerings.
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Horizontal Integration: A strategy where a company expands by acquiring or merging with its competitors, thus increasing its market share and reducing competition. For example, a large supermarket chain might buy a smaller competing chain to increase its market presence.
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Human Capital: Represents the economic value of a worker's experience and skills. For example, a company's investment in employee training and development is an investment in human capital.
Human Resources: Refers to the people who work for a business or organisation. For example, the human resources department of a company handles hiring, training, and employee relations.
Implicit Costs: Represent the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. For example, the time a business owner spends running their company could be considered an implicit cost because it represents the income they could have earned doing something else.
Imports: Goods and services that are purchased from foreign countries and brought into the domestic market. For example, a clothing retailer in the UK might import garments from China.
Income Statement: Also known as a profit and loss statement, it summarizes a business's revenue, expenses, and net income over a specific period. For example, an annual income statement will show how much a company earned and spent over the course of the year.
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Incremental Analysis: A decision-making technique used in business to determine the true cost difference between alternatives. For example, a company might use incremental analysis to decide whether to make or buy a component part.
Incremental Budgeting: A budgeting process where a new budget is prepared by making small changes to the existing budget. For example, a department may increase its budget by 5% from the previous year to account for expected cost increases.
Incremental Cost: The additional cost associated with producing an additional unit of output. For example, if producing one additional widget costs £10, that is the incremental cost of the widget.
Indirect Taxes: Levies imposed on the sale of goods and services, usually included in the price paid by the consumer. Examples include value-added tax (VAT) and excise duties on specific products like tobacco or alcohol.
Inflation: The sustained increase in the general price level of goods and services in an economy over time. It reduces the purchasing power of money and affects businesses and consumers. For example, if inflation is 2% per year, then a loaf of bread that costs £1.00 one year will cost £1.02 the next year.
Initial Public Offering (IPO): The process by which a private company offers shares of its stock to the public for the first time, becoming a publicly traded company. For example, a tech startup might go public to raise capital by selling shares to investors through an IPO.
Innovation: The process of developing new ideas, products, or methods that bring about positive change and create value. For example, a smartphone manufacturer might develop a new phone with a revolutionary battery life that sets it apart from competitors.
Intellectual Property: Legal rights associated with creations of the human mind, such as inventions, designs, trademarks, or copyrights. For example, a software company may hold patents on its proprietary technology.
Interest Rate: The cost of borrowing money or the return on investment, expressed as a percentage of the borrowed or invested amount. For example, if you borrow £1,000 at an interest rate of 5%, you will owe an additional £50 in interest per year.
Inventory: The stock of goods or materials that a business holds for production, sale, or use. For example, a bookstore's inventory includes all the books available for sale.
Investment: Refers to the purchase of assets or securities with the expectation of generating income or appreciation in value. For example, buying stocks or bonds is a form of investment.
Job Analysis: The process of gathering and analysing information about the duties, responsibilities, skills, and qualifications required for a specific job role. For example, a company might conduct a job analysis to determine what skills and experiences are necessary for a new marketing position.
Job Costing: A cost accounting method used to calculate the costs associated with a specific job or project, which can help in setting prices and managing efficiency. For example, a construction company uses job costing to track the costs of materials, labour, and overhead for each building project.
Job Satisfaction: Refers to the level of contentment and fulfilment an employee feels in their job. It is influenced by factors like work-life balance, job security, career growth, and positive relationships at work. For example, employees who feel valued and have good working conditions typically have higher job satisfaction.
Joint Costs: Costs that are incurred from producing two or more products where the costs cannot be distinctly and individually attributed to any of the products. For example, the costs of heating a factory where multiple products are manufactured might be considered joint costs.
Joint Venture: A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. For example, two companies might form a joint venture to develop a new piece of technology.
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Key Account Management (KAM): Involves the handling of an organisation’s most significant accounts. The manager acts as a liaison between the company and its major clients to strengthen relationships and increase revenue. For example, a pharmaceutical sales representative might be responsible for managing the relationship with a major hospital chain.
Key Performance Indicators (KPIs): Quantifiable measures used to evaluate a business's success in achieving its objectives. They can include metrics such as sales growth, customer satisfaction, or employee productivity. For example, a company might track the number of new customer sign-ups per month as a KPI.
Key Success Factors (KSF): Elements necessary for an organisation to achieve its mission. These are the main elements that influence an entity’s ability to compete in the market. For example, a key success factor for a software company could be its ability to innovate and release new products quickly.
Knowledge Economy: An economic system based on the production, distribution, and use of knowledge and information, rather than the traditional production of goods. For example, countries like Japan and Finland are considered strong examples of knowledge economies due to their investment in education and technology.
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Knowledge Management: The process of creating, sharing, using, and managing the knowledge and information of an organisation. For example, a consulting firm might use knowledge management techniques to ensure that insights gained from one project are shared across the company.
Labour Market: Refers to the supply and demand for labour, including the available workforce and job opportunities. It is influenced by factors like economic conditions, education levels, and government policies. For example, a booming tech industry may create high demand for software engineers, affecting the labour market in that sector.
Leadership: Refers to the ability to guide, motivate, and influence others to achieve common goals. Good leaders inspire their team members, make strategic decisions, and foster a positive work culture. For example, a CEO who leads by example and actively supports employee development is demonstrating effective leadership.
Legal Structure: Refers to the formal framework or entity under which a business operates. It affects aspects such as liability, taxation, and ownership. Examples of legal structures include sole proprietorship, partnership, limited liability company (LLC), or corporation.
Leverage Ratio: Any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet financial obligations. For example, a high leverage ratio could indicate that a company is heavily dependent on debt financing.
Leveraged Buyout (LBO): The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. For example, a private equity firm might use an LBO to acquire a struggling manufacturing firm.
Leveraged Recapitalisation: A corporate restructuring strategy in which a company takes on significant additional debt with the purpose of paying a large dividend or repurchasing shares to increase shareholder value. For example, a company might use leveraged recapitalisation to buy back its own shares, thus reducing the number of shares outstanding and potentially increasing the share price.
Liabilities: Obligations or debts owed by a business. They can include loans, unpaid bills, or salaries payable. Liabilities represent claims against the company's assets. For example, a business might have liabilities in the form of a mortgage on its property and accounts payable to suppliers.
Liquidity Crisis: Occurs when a financial institution or other entity lacks enough liquidity (cash or easily convertible assets) to meet its short-term obligations, such as withdrawals by depositors. For example, a bank may face a liquidity crisis if too many customers withdraw their deposits simultaneously.
Liquidity Premium: The additional yield that investors demand to invest in securities with lower liquidity. This is typically found in the pricing of securities that cannot be easily converted into cash at close to their value. For example, investors may require a higher yield to purchase bonds from a small, lesser-known corporation compared to government bonds.
Liquidity Ratio: Measures a company's ability to meet its short-term obligations with its most liquid assets. The two most common ratios are the current ratio and the quick ratio. For example, a company with a high liquidity ratio is generally considered financially healthy, as it has enough liquid assets to cover its short-term liabilities.
Liquidity Trap: A situation in which prevailing interest rates are low and savings rates are high, rendering monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings, because of the prevailing belief that interest rates will soon rise.
Marginal Benefit: The additional benefit arising from a unit increase in a particular activity. It is a crucial concept in economics and managerial decision-making as it helps to identify the level of an activity that will maximise utility. For example, the marginal benefit of hiring an additional employee might decrease as more employees are hired, if the additional output per employee starts to fall.
Marginal Cost: The cost added by producing one additional unit of a product or service. It is an important concept in economic theory and decision-making. For example, if it costs a company £500 to produce 100 units and £510 to produce 101 units, the marginal cost of the 101st unit is £10.
Marginal Revenue: The additional revenue that will be generated by increasing product sales by one unit. For example, if selling an additional widget generates £50 in revenue, that £50 is the marginal revenue.
Market Cannibalisation: Occurs when a new product or service partially or completely substitutes sales of existing products within the same company. This can affect overall market share and profitability. For example, if a car company introduces a new model that is very similar to an existing model, the new model might take sales away from the old model.
Market Capitalisation: The total market value of a company's outstanding shares. It is calculated by multiplying a company's shares outstanding by the current market price of one share. For example, if a company has 10 million shares outstanding and the current market price per share is £15, the company's market capitalisation is £150 million.
Market Penetration: Refers to the successful selling of a product or service in a specific market and is a measure of the number of sales or adoption relative to the total theoretical market for that product/service. For example, if there are 100 potential customers for a product and a company has sold the product to 90 of those customers, it has a high market penetration.
Market Segmentation: The process of dividing a market into distinct groups of consumers with similar needs, characteristics, or behaviours. It helps businesses tailor their marketing strategies and offerings to specific target segments. For example, a car manufacturer might segment the market into economy, luxury, and sports car buyers.
Marketing Mix: Refers to the combination of product, price, promotion, and place (distribution) strategies that businesses use to meet customer needs and achieve their marketing objectives. It involves determining the right product, setting an appropriate price, selecting the most effective promotional channels, and choosing the right distribution channels. For example, a company might decide to sell a premium product at a high price with exclusive distribution in luxury outlets and extensive advertising through high-end fashion magazines.
Merger: The combination of two or more companies into a single entity. It involves pooling resources, operations, and ownership to achieve strategic objectives or gain a competitive advantage. For example, the merger of two pharmaceutical companies might be aimed at combining research and development capabilities to accelerate drug development.
Microeconomics: The branch of economics that studies the behaviour and decisions of individual households, firms, or industries. It focuses on the supply and demand for specific goods and services. For example, microeconomics would study how the price of corn affects individual farmers' decisions on how much corn to plant.
Monopoly: A market structure in which a single company or entity has exclusive control over the supply of a product or service. It limits competition and gives the company significant pricing power. For example, a utility company might have a monopoly on water services in a particular region.
Motivation: Refers to the internal or external factors that drive individuals to act or achieve goals. In a business context, motivation plays a crucial role in employee performance and productivity. For example, an employee might be motivated by bonuses, job security, or personal satisfaction from completing challenging tasks.
Net Asset Value (NAV): The value of an entity’s assets minus the value of its liabilities. It is commonly used in the context of funds and represents the per-share/unit price of the fund at a specific date. For example, if a mutual fund has assets of £200 million and liabilities of £20 million, and it has 10 million shares outstanding, the NAV per share would be £18.
Net Operating Income (NOI): A calculation used to analyse the profitability of income-generating real estate investments. NOI equals all revenue from the property minus all reasonably necessary operating expenses. For example, if a rental property generates £10,000 per month in rent and has £3,000 per month in operating expenses, the NOI is £7,000 per month.
Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows over a period. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. For example, if a project requires an initial investment of £100,000 and is expected to generate cash inflows of £120,000 in today's dollars, the NPV is £20,000, indicating that the project is likely to be profitable.
Net Profit: Also known as net income or profit after tax, represents the final profit earned by a business after deducting all expenses, including taxes. For example, if a company earns £1 million in revenue and has £800,000 in total expenses, its net profit is £200,000.
Net Profit Margin: A profitability ratio calculated as net income divided by revenue, or net profits divided by sales. It shows how much of each pound earned by the company is translated into profits. For example, if a company has a net profit of £100,000 and total revenue of £1 million, the net profit margin is 10%.
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Networking: The process of building and maintaining professional relationships and connections with individuals or organisations. It allows businesses to expand their contacts, gain referrals, and access new opportunities. For example, attending industry conferences can be a valuable networking opportunity for professionals looking to meet potential clients or collaborators.
Non-compete Agreement: A contract between an employee and an employer, where the employee agrees not to enter into competition with the employer after the employment period is over. For example, a software company might require employees to sign a non-compete agreement to prevent them from working for direct competitors immediately after leaving the company.
Non-Disclosure Agreement (NDA): A legally binding contract establishing a confidential relationship. The agreement is shared between a potential buyer and seller in the preliminary stages of a business sale. For example, an NDA may be used during merger discussions to ensure that confidential information disclosed during negotiations is not used for any other purpose.
Non-operating Expense: An expense incurred that is not related to the core business operations, such as interest payments or losses from investments. For example, interest expense on debt would be considered a non-operating expense for a manufacturing company.
Opportunity Analysis: A business assessment tool that helps to identify and evaluate opportunities within the market. It considers factors such as market size, potential growth, and competitiveness. For example, a company might use opportunity analysis to decide whether to enter a new market or launch a new product.
Opportunity Cost: Refers to the benefits an individual, investor, or business misses out on when choosing one alternative over another. It’s crucial for evaluating the feasibility and potential of different business strategies. For example, if a company decides to invest £1 million in a new marketing campaign, the opportunity cost is the potential returns it could have generated by investing that money elsewhere.
Operational Efficiency: The capability of an enterprise to deliver products or services to its customers in the most cost-effective manner without sacrificing quality. For example, a manufacturing company may seek to improve operational efficiency by automating certain production processes.
Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This includes risk derived from breakdowns in internal procedures, people and systems. For example, a bank might face operational risks from a failed IT system or from fraud.
Operations Management: Involves overseeing the day-to-day activities and processes that transform inputs into outputs in a business. It focuses on efficiency, productivity, quality control, and resource allocation. For example, an operations manager in a factory is responsible for ensuring that production meets the set targets and standards.
Opportunity Cost: The value of the next best alternative forgone when deciding. It reflects the potential benefits or profits that could have been gained if a different choice had been made. For example, if a student spends time watching TV instead of studying, their opportunity cost is the potential grades they lost due to not studying.
Organisational Culture: Refers to the beliefs, ideologies, principles and values that a company's employees share. This culture impacts how the company conducts its business and manages its staff. For example, a company with a culture that emphasises customer service will likely encourage and train its employees to go above and beyond in customer interactions.
Organisational Structure: Refers to how a business is organised and structured to carry out its activities and achieve its goals. It defines the relationships, roles, and responsibilities within the organisation. Common organisational structures include hierarchical, matrix, and flat structures, each with its own advantages and disadvantages. For example, a hierarchical structure might be used in a large corporation where clear lines of authority and responsibility are needed.
Outsourcing: The business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff. For example, a company might outsource its customer service operations to a third-party provider to reduce costs and focus on its core business activities.
Overhead: The ongoing expenses of operating a business that are not directly attributed to the production of goods or services. Examples include rent, utilities, and administrative costs. For example, the monthly rent for office space is considered overhead because it does not directly contribute to the production of goods or services but is necessary for the business to operate.
Partnership: A legal structure in which two or more individuals or businesses share ownership, responsibilities, and profits or losses of a business. Partnerships can be general partnerships, where all partners have equal rights and liabilities, or limited partnerships, where some partners have limited liability. For example, a law firm might be organized as a partnership where several lawyers share ownership and responsibility for running the business.
Payback Period: The time required to recover the initial investment in a project through its cash flows. It helps assess the time it takes to recoup the costs and start generating profits. For example, if a company invests £50,000 in a new piece of equipment that saves £10,000 per year, the payback period is five years.
Payroll: Refers to the process of calculating and distributing employees' wages or salaries. It involves accounting for working hours, deductions, taxes, and other employment-related expenses. For example, the payroll department ensures that employees are paid correctly and on time, considering overtime, bonuses, and tax withholdings.
Penetration Pricing: A pricing strategy where a business sets a relatively low initial price for a new product or service to attract customers and gain market share. The aim is to encourage trial and adoption of the offering. For example, a new software company might offer a discounted subscription rate to first-time users to attract a customer base.
Performance Appraisal: The process of evaluating an employee's job performance against pre-established criteria. It assesses strengths, areas for improvement, and sets goals for development. For example, an annual performance review might assess an employee’s completion of project goals, cooperation with teammates, and customer service.
Price Ceiling: The maximum price a seller is allowed to charge for a product or service, often set by regulation to prevent prices from reaching levels deemed unreasonable or unaffordable. For example, during a natural disaster, a government might set price ceilings on necessities like water and gasoline to prevent price gouging.
Price Discrimination: The strategy of selling the same product to different customers at different prices based on factors such as willingness to pay, consumer attributes, and geographical locations. For example, a software company might charge higher prices to corporate customers than to educational institutions.
Price Elasticity of Demand: Measures the sensitivity of consumer demand to changes in price. It helps businesses understand how customers will respond to price changes. For example, if a small increase in the price of a product leads to a large drop in demand, the product is said to have high price elasticity of demand.
Price Elasticity of Supply (PES): Measures the responsiveness of quantity supplied to a change in price for a particular good. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. For example, if the price of milk goes up by 10% and the quantity of milk supplied increases by 5%, the price elasticity of supply is 0.5.
Price Floor: A government- or group-imposed price control or limit on how low a price can be charged for a product. A price floor must be higher than the equilibrium price in order to be effective. For example, a price floor might be set above the market price to ensure farmers can cover the costs of production and maintain a reasonable standard of living.
Product Development: The process of creating new or improved products or services to meet customer needs or preferences. It involves research, design, testing, and launch activities. For example, an electronics company might develop a new smartphone model that features a faster processor and improved camera.
Product Life Cycle: Describes the stages a product goes through from introduction to decline. It includes the phases of introduction, growth, maturity, and decline. Understanding the product life cycle helps businesses make strategic decisions regarding pricing, marketing, and product support. For example, a product in the growth stage might receive increased marketing investment to maximize sales growth.
Production Possibilities Frontier (PPF): A graphical representation that shows the maximum combinations of goods and services an economy can produce given its resources and technology. It illustrates the trade-offs between different production choices. For example, a PPF might show that an economy can produce either 100 units of food or 200 units of clothing, or some combination of both.
Profit and Loss Statement: Also known as an income statement, is a financial statement that summarises a business's revenues, expenses, and net income or loss over a specific period. It provides an overview of a company's financial performance and helps assess its profitability. For example, a profit and loss statement for a quarter might show that a company earned £200,000 in revenue, incurred £150,000 in expenses, and therefore had a net income of £50,000.
Profit Margin: A financial ratio that measures the profitability of a business by expressing net profit as a percentage of revenue. It indicates the portion of each pound in sales that translates into profit. For example, if a company has £100,000 in revenue and £10,000 in net profit, its profit margin is 10%.
Public Limited Company (PLC): A type of business entity that can offer shares to the public and is listed on the stock exchange. It has a separate legal identity, limited liability, and a minimum share capital requirement. PLCs are often large-scale companies with numerous shareholders and a wide ownership base. For example, British Petroleum (BP) is a well-known PLC.
Public Relations: The practice of managing and maintaining a positive image and reputation of a business or organisation. It involves building relationships with the media, stakeholders, and the public through strategic communication. For example, a company might use public relations strategies to handle a crisis or to promote charitable efforts.
Qualitative Data: Refers to non-numerical information gathered through observations, interviews, or surveys. It provides insights into people's opinions, attitudes, or experiences. For example, a market research firm might conduct focus groups to collect qualitative data about consumer preferences for a new product.
Quality Assurance: Refers to the processes and techniques used to ensure that products or services meet or exceed customer expectations. It involves monitoring and inspecting products during and after production to identify and correct any defects or deviations from quality standards. For example, a car manufacturer might have a quality assurance team that inspects each vehicle before it leaves the factory.
Quantitative Data: Refers to numerical information collected through measurements, surveys, or experiments. It can be analysed statistically to draw conclusions or identify patterns. For example, a company might collect quantitative data on the number of visitors to its website each day to evaluate the effectiveness of its marketing campaigns.
Quantitative Easing: A monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to inject liquidity directly into the economy. For example, the Bank of England might engage in quantitative easing to try to stimulate economic growth by increasing the money supply and lowering interest rates.
Quality Benchmarking: Involves comparing business processes and performance metrics to industry bests and best practices from other companies. This is a part of the continuous improvement process. For example, a manufacturer might benchmark its production times against those of industry leaders to identify areas where it can improve efficiency.
Quality Circle: A group of workers who meet regularly to discuss workplace improvements, typically related to production. These groups offer suggestions for quality and efficiency improvements. For example, a quality circle in a factory might suggest changes to the assembly line that reduce waste and increase productivity.
Quality Management System (QMS): A formalised system that documents the structure, responsibilities, and procedures required to achieve effective quality management in an organisation. For example, ISO 9001 is a standard that outlines the requirements for a QMS that can be used by any organization, large or small, regardless of its field of activity.
Real Options Valuation: A financial modelling technique for valuing strategic options in a business initiative, considering the potential upsides and downsides before making investment decisions. For example, a company might use real options valuation to decide whether to expand into a new market or invest in a new technology.
Recruitment: The process of attracting, evaluating, and selecting qualified candidates to fill job vacancies within a business. It includes activities such as job posting, screening, interviewing, and making job offers. For example, a tech company might use online job portals and recruitment agencies to find and hire software engineers.
Resource Allocation: Involves distributing the available resources of an organisation to the planned activities. This includes allocating manpower, capital, and materials across projects, departments, and units to maximise efficiency. For example, a construction firm must allocate resources such as labour and materials efficiently across its various projects to ensure they are completed on time and within budget.
Resource-Based View (RBV): A model that sees resources as key to superior firm performance. If a resource exhibits VRIO attributes (value, rarity, inimitability, organisation) the resource enables the firm to gain and sustain competitive advantage. For example, a company with a highly skilled and innovative research and development team might have a competitive advantage in a technology market that values continuous innovation.
Retained Earnings: Represent the portion of a company's net profit that is reinvested back into the business rather than distributed to shareholders as dividends. It is calculated by subtracting dividends paid to shareholders from net profit. Retained earnings contribute to the company's equity and can be used for future growth and investment. For example, if a company earns a net profit of £100,000 and pays out £20,000 in dividends, the remaining £80,000 is added to its retained earnings.
Retained Profits: Refers to the net earnings a company retains to reinvest in the business or pay debt, rather than distributing it to shareholders in the form of dividends. For example, a company may decide to retain some of its profits to fund a new research and development project rather than pay a higher dividend to shareholders.
Return on Investment (ROI): Measures the profitability of an investment and is expressed as a percentage. It is calculated by dividing the net profit from an investment by the initial investment cost and multiplying by 100. For example, if a company invests £10,000 in a project that returns £12,000, the ROI is 20%.
Return on Marketing Investment (ROMI): A measure of the effectiveness of marketing campaigns, calculated by dividing the revenue attributable to marketing by the costs of those marketing efforts. For example, if a marketing campaign costs £5,000 and generates £15,000 in sales, the ROMI is 200%.
Revenue: The income generated from the sale of goods or services. It is calculated by multiplying the price per unit by the quantity sold. For example, if a company sells 100 units of a product at £10 each, its revenue is £1,000.
Risk Assessment: Involves identifying and evaluating potential risks that could impact a business's operations, finances, or reputation. It helps businesses develop strategies to mitigate or manage risks effectively. For example, a construction company might perform a risk assessment to identify potential safety hazards at a new site.
Sales Forecast: An estimation of future sales revenue for a specific period. It helps businesses plan and allocate resources accordingly. Sales forecasts can be based on historical data, market trends, or industry analysis. For example, a retail store may forecast sales for the upcoming holiday season based on sales data from previous years.
Segmentation: The process of dividing a broad market into smaller, more defined segments based on demographic, geographic, psychographic, or behavioural characteristics. It allows businesses to target specific customer groups with tailored marketing strategies. For example, a car company might segment the market into luxury, mid-range, and economy segments to target different customer preferences.
Shareholder: Also known as a stockholder, is an individual or entity that owns shares in a company. They have ownership rights and are entitled to a portion of the company's profits. For example, shareholders of a publicly traded company may receive dividends and have the right to vote on major corporate decisions.
Social Media Marketing: Involves using social media platforms to promote products, engage with customers, and build brand awareness. It can include activities such as creating engaging content, running targeted advertisements, and responding to customer inquiries. For example, a fashion brand might use Instagram to showcase new collections and engage with followers through comments and stories.
Sole Trader: A business structure in which an individual operates and owns the business. The owner has unlimited liability for the business's debts and obligations. Sole proprietorships are relatively easy to set up and provide full control to the owner. However, the owner is personally responsible for all business-related liabilities. For example, a freelance graphic designer may operate as a sole trader, managing all aspects of the business from client relationships to financial management.
Stakeholder: Any individual or group that has an interest or is affected by a business's activities, decisions, or performance. Stakeholders can include employees, customers, shareholders, suppliers, government, and the local community. For example, when a company plans to expand its operations, it may need to consider the interests of local communities, regulatory bodies, and investors.
Strategic Alliance: An agreement between two or more parties to pursue a set of agreed-upon objectives needed while remaining independent organisations, often used to facilitate the entry into new markets or to pool resources for large projects. For example, a software company and a hardware manufacturer might form a strategic alliance to develop and market a new computing device.
Strategic Business Unit (SBU): A fully functional unit of a business that has its own vision and direction. Typically, a strategic business unit operates as a separate unit, but it is also an important part of the company. For example, a large multinational company might have several SBUs, each focused on different product lines or markets.
Supply Chain: The network of organisations, resources, and activities involved in delivering goods or services to customers. It includes sourcing, production, distribution, and customer service. For example, the supply chain for a clothing retailer involves fabric suppliers, garment manufacturers, warehouses, distribution centres, and retail stores.
Supply Chain Management: Involves the coordination and management of all activities involved in the production, distribution, and delivery of goods or services. It encompasses sourcing raw materials, manufacturing, transportation, warehousing, and inventory management. Effective supply chain management aims to optimise efficiency, reduce costs, and ensure timely delivery to customers. For example, a large retailer like Walmart uses sophisticated supply chain management practices to ensure that products are available in its stores and online.
Supply Chain Optimisation: The application of processes and tools to ensure the optimal operation of a manufacturing and distribution supply chain. This includes the optimal placement of inventory within the supply chain, minimising operating costs including manufacturing costs, transportation costs, and distribution costs. For example, a company might use software to analyse and optimise the routing of shipments to reduce transportation costs and improve delivery times.
Sustainability: Refers to conducting business in a way that meets the needs of the present without compromising the ability of future generations to meet their own needs. It involves considering environmental, social, and economic impacts. For example, a company might adopt sustainable practices like using renewable energy sources, reducing waste, and ensuring fair labour practices in its supply chain.
SWOT Analysis: A strategic planning tool used to assess a business's strengths, weaknesses, opportunities, and threats. It helps businesses identify internal factors that contribute to their competitive advantage and external factors that may pose challenges. For example, a SWOT analysis might help a business capitalize on its strong brand image (strength), address its high production costs (weakness), exploit new market trends (opportunity), and guard against new regulations (threat).
Target Market: Refers to the specific group of customers that a business aims to reach and serve with its products or services. It involves identifying the demographic, psychographic, and behavioural characteristics of the ideal customer. For example, a luxury watch brand might target affluent individuals who value exclusivity and craftsmanship.
Total Cost: Represents the sum of all costs incurred in the production or operation of a business, including both fixed costs and variable costs. It includes expenses such as raw materials, labour, overheads, and administrative costs. For example, the total cost for a manufacturer might include the costs of materials, direct labour, factory overhead, and administrative expenses.
Total Quality Management (TQM): A management approach that focuses on continuously improving product quality, customer satisfaction, and business processes. It involves the active involvement of all employees and the use of quality improvement tools and techniques. TQM aims to achieve long-term success and customer loyalty. For example, a car manufacturer might implement TQM to ensure that each vehicle meets high quality standards, leading to fewer defects and higher customer satisfaction.
Trade Union: An organisation that represents and promotes the collective interests of workers in a particular industry or occupation. Trade unions negotiate with employers on behalf of their members for better working conditions, wages, and benefits. For example, the National Union of Teachers (NUT) in the UK represents the interests of teachers and negotiates with schools and government bodies on their behalf.
Trade-Off: Refers to the decision to give up one thing in exchange for another when resources are limited. It involves weighing the benefits and costs of different options and choosing the most favourable alternative. For example, a business might face a trade-off between increasing marketing spend to drive sales and investing in research and development for long-term growth.
Turnaround Strategy: A corporate strategy implemented by a firm in financial distress to restore profitability and financial stability. This strategy typically involves restructuring corporate management, improving product quality, cutting costs, and reorganising the business. For example, a company might implement a turnaround strategy by focusing on its core products, reducing overhead, and renegotiating terms with creditors.
Unique Selling Point (USP): A distinctive feature or attribute that sets a product or service apart from competitors and makes it attractive to customers. It communicates the unique value or benefit that a business offers. For example, a mattress company might focus on its unique technology that guarantees a better night's sleep, which is not available from competitors.
Variable Costs: Expenses that change in direct proportion to the level of production or sales volume. They vary based on the quantity of goods or services produced. Examples of variable costs include raw materials, direct labour, and sales commissions. For example, for a clothing manufacturer, the fabric used to make garments would be a variable cost, as it changes with the amount of clothing produced.
Variable Costing: A method in management accounting in which variable costs are charged to cost units and fixed costs of the period are written off in full against the aggregate contribution. Its special value is in decision making. For example, variable costing might be used to determine the profitability of a particular product line, excluding fixed overhead costs to focus on the direct impact of product sales.
Venture Capital: A type of private equity and a form of financing that investors provide to startups and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. For example, a startup working on cutting-edge technology might receive venture capital to fund its development until it can generate revenue or go public.
Venture Funding: Involves investment in startups and small businesses with perceived long-term growth potential. This type of funding is typically risky and often involves equity or part-ownership in the company. For example, a new biotech company might seek venture funding to finance advanced research and clinical trials necessary to bring a new drug to market.
Vertical Integration: A strategy whereby a company expands its business operations into different steps on the same production path, such as when a manufacturer owns its supplier and/or distributor. For example, a company that manufactures shoes might vertically integrate by acquiring a leather processing plant and retail shoe stores.
Vision Statement: A concise declaration of a company's long-term aspirations and future goals. It outlines the desired future state or direction that the business aims to achieve. A vision statement helps guide decision-making and inspire employees. For example, Tesla's vision statement focuses on accelerating the world's transition to sustainable energy.
Wealth Maximisation: The ability of a company to increase the value of its stock or equity, focusing on long-term cash flows rather than short-term earnings. For example, a company may focus on projects that add long-term value even if they do not boost profits immediately, in the belief that these projects will lead to greater wealth maximisation over time.
Wholesale: Refers to the sale of goods in large quantities to retailers, businesses, or other intermediaries. It typically involves lower prices per unit compared to retail sales. For example, a wholesaler of office supplies might sell products in bulk to retail stores, which then sell the products to end consumers.
Wholesaler: A business intermediary that purchases goods in large quantities from manufacturers and sells them to retailers or other businesses. Wholesalers help distribute products efficiently and provide bulk purchasing options for retailers. For example, a food wholesaler might supply restaurants and small grocery stores with produce and other food products.
Working Capital: Represents the funds available for a business's day-to-day operations, calculated by subtracting current liabilities from current assets. It indicates the company's short-term liquidity and ability to meet its short-term obligations. For example, if a company has £100,000 in current assets and £70,000 in current liabilities, its working capital is £30,000.
Working Capital Ratio: Also known as the current ratio, measures a company's ability to cover its current liabilities with its current assets. For example, a working capital ratio of 2:1 indicates that the company has twice as much in assets as it owes in short-term liabilities.
Workforce Diversity: Refers to the range of differences and variations among employees in terms of characteristics such as gender, age, ethnicity, or background. Embracing workforce diversity promotes inclusivity, creativity, and a wider range of perspectives within a business. For example, a global company may prioritize workforce diversity to reflect the varied markets it serves and to foster a more inclusive corporate culture.
Workforce Planning: Involves analysing and forecasting an organisation's current and future workforce needs. It ensures that the right people with the required skills are available to meet business objectives. For example, a company might use workforce planning to anticipate staffing needs for a new project and to identify whether current employees have the necessary skills or if additional hiring is necessary.
X-Efficiency: Captures the effectiveness with which a firm uses its allocated inputs. This concept contrasts with ideal efficiency in a competitive market. For example, x-efficiency might be lower in a monopoly where there are fewer competitive pressures to operate efficiently.
X-Inefficiency: The degree of efficiency maintained by firms under conditions of imperfect competition, which is achieved by effective management preventing costs from rising to the maximum extent. For example, in a market with limited competition, a company might maintain x-efficiency by controlling costs and streamlining operations to prevent waste.
Year-End Dividend: Refers to a payment made by a firm to its shareholders at the end of a fiscal year, based on the earnings generated throughout the term. For example, a company with strong profits might decide to distribute a portion of those profits to shareholders in the form of a year-end dividend.
Yield Curve: A line that plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. It typically shows the relationship between short-term and long-term bond yields. For example, a normal yield curve slopes upward, reflecting higher yields for longer-term investments.
Yield Gap: Refers to the difference between the actual yield of an investment and the expected yield if the investment had been risk-free. This gap can influence investment decisions and portfolio management. For example, a higher yield gap might attract investors looking for higher returns in exchange for higher risk.
Yield Management: A variable pricing strategy based on understanding, anticipating, and influencing consumer behaviour to maximize revenue from a fixed, perishable resource, such as airline seats or hotel room bookings. For example, an airline might use yield management techniques to adjust ticket prices based on factors like booking patterns and remaining seat availability.
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Zero-Based Budgeting (ZBB): A method of budgeting in which all expenses must be justified for each new period, as opposed to only explaining the amounts requested in excess of the previous period's funding. For example, a department must justify each line item of expense as if starting from zero, rather than simply adjusting last year’s numbers.
Zero-Hour Contract: An employment arrangement where an employee is not guaranteed a fixed number of working hours. They are called in as needed, and their pay is based on the actual hours worked. For example, a retail store might employ some staff on zero-hour contracts to manage fluctuating staffing needs based on shopping trends.
Zombie Company: A term for a company that needs bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not repay the principal. For example, a company that continually needs financial support to stay afloat might be considered a zombie company.
Z-Score Analysis: A statistical method developed by Edward Altman in the 1960s to predict the probability of a company entering bankruptcy within a two-year period. The Z-score formula combines five weighted business ratios to estimate business risk. For example, a company with a low Z-score might be considered at higher risk of bankruptcy and may need to take steps to improve its financial health.