Business Definitions You Need To Know

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Business Definitions You Need To Know

In todays article we are going to cover some of the most important business definitions you should know when it comes to dealing with business. Whether that's either in the corporate world or in the entrepreneurial world these definitions are a must know. Many of these definitions range from well know terms to rarely used terms. So that way you have information on these business terms ranging from the well known to the not so well known. So with that all being said lets get into todays informative article.

Business Definitions

Accounting Period: This refers to the duration for which profits are calculated, typically in months, quarters or years.

Accounts Payable: This refers to the amounts of money that your company owes to external suppliers.

Accounts Receivable: This refers to the money that customers owe to your company.

Acquisition: This is when one company purchases another company or its resources.

Actuary: An actuary is an individual who works for pension providers and insurance companies. Their job is to calculate accident rates, life expectancy and the corresponding payouts.

Annual Equivalent Rate (AER): This is a quote of the interest that would be paid on savings and investments. It is calculated by adding each interest payment to the original deposit and then calculating the next interest payment, compounding the interest.

Annual Percentage Rate (APR): This is the rate of interest that you agree to pay on borrowed money. The higher the rate, the more you will pay.
Annuity: This is a type of insurance policy. Upon retirement, a lump sum is paid into it and the insurance company then provides a regular income.

Arbitrage: This is the process by which an individual or business takes advantage of the difference in price of a share or currency.

Audit: This is an official inspection of a company’s or individual’s accounts.

B2B: This stands for Business to Business.

B2C: This stands for Business to Consumer.

Balance Sheet: This is a snapshot of a company’s assets, liabilities, and capital at a specific point in time.

Base Rate: This is the country’s base rate of interest that is set each month by the Bank of England. It influences financial products and services when they set their own cost of borrowing.

Benchmarking: This involves checking your company’s standards by comparing them with certain criteria, such as a competitor’s activities.
Bid-Offer Spread: This refers to the buying (offer) and selling (bid) price of shares, bonds or currency. The spread is the difference between these two prices.

Black Swan: These are financial events that are difficult to predict. The term originates from the fact that before people discovered Australia, swans were assumed to only be white. No one had seen a black one until then.

Bootstrapping: There are two definitions for this term. One refers to building a start-up company with very little money, often relying on personal savings and striving for the lowest possible operating costs while implementing cost-saving systems such as fast inventory turnaround. Second It can also refer to making a forecast beyond a certain period by using the forecasted data for that period.

Break-Even Point: This is the point in time when you will have paid back all your debts or when revenues exactly match expenses.
Business Angel: Also known as an angel investor. This is an individual who provides capital for a business start-up in exchange for a stake in the company.

Business Cycle: This refers to the tendency for economies to experience peaks and troughs that follow a cyclical pattern, commonly known as ‘boom and bust’. Governments are responsible for smoothing out these peaks and troughs and limiting their impact on consumers and businesses.

Capital: This is money invested into a company or project by its owners or shareholders.

Capital Expenditure (CAPEX): This is money spent to create future benefits. Capital expenditure is money spent by a company either to buy fixed assets or to add value to existing fixed assets with a useful life that extends beyond the taxable year. For tax purposes, capital expenditure cannot be deducted in the year the money is paid. This is in contrast to operating expenditure (OPEX), which refers to ongoing costs to run a product, service or system.

Cash Flow: This refers to the movement of cash into and out of a business.

Collateral: This is something that lenders can use as security against a loan. Often, this is a major asset such as a house.

Copyright: This is the exclusive legal right owned by the individual or group who created a work, or by an individual or group assigned by the originator, to use certain material and to allow others the right to use it.

Creditor: This is a person or firm that has lent your business money or to whom you owe money.

Critical Success Factor: This is an element that must occur in order for a business to achieve its ultimate goal.

Debtor: This is a person or firm that owes money to you or your business.

Depreciation: This refers to the reduction in value of assets over time, usually due to wear and tear.

Diversification: This is when new products, services, customers or markets are added to your company’s portfolio. Diversification typically occurs as a risk reduction strategy.

Dividend: This is money paid regularly by a company to its shareholders.

Enterprise Value: This is the market value of a business. It is calculated by multiplying market capitalization by the current share price, subtracting cash and adding debt.

Equity: Equity is used by analysts to determine how financially healthy a company is. It also represents what would be left if all of a business’s assets were liquidated and its debt paid off.

Ethical Investment: These are investments made in companies that are specifically chosen for their environmental or moral credentials. Defense contractors or companies known to use contentious labor practices are generally avoided by ethical investors.

Ethical Trade: Ethical trade can refer to many different things but is most often used as an umbrella term for any business practices that promote socially and/or environmentally responsible trading.

Exit Strategy: This is a plan to enable you to leave your business, either after achieving your goal or deciding you would like to move on to do something else while recouping any capital you invested when starting the company.

Financial Management: This involves planning, analyzing, monitoring, organizing, reviewing and controlling an organization’s monetary resources. Responsibility for financial management often falls to the finance director and, by extension, the financial department.
Fiscal Year: Also known as a financial year, the fiscal year is a set period used to calculate financial statements. The period used varies between countries and between businesses.

Fixed Cost: This is any cost that remains the same in the short-term, despite changes in volume. Fixed costs usually include rent, interest and salaries.
Futures: These are financial contracts that secure a predetermined future date and price for an asset. The assets used in futures contracts include commodities, stocks and bonds.

Golden Hello: This is an attractive package (typically a bonus or stock options) offered to a senior employee as an incentive to join the company.
Golden Share: A golden share in a company can outvote all other shares in a specified circumstance.

Grey Knight: During a business takeover, this is a bidder who has no clearly stated intentions.

Gross: This is the total amount of money you have earned in a period of time before deductions such as taxes.

Half Year: This term is used to describe six months into the financial year when British listed companies must produce profit figures.

Hedge Funds: These investments are only open to professional investors, pension funds and insurance companies. They are considered risky bets although their aim is to beat falling markets. There are four main types of hedge funds: 1 Market-neutral or relative value, which attempt to exploit market inefficiencies. 2 Event-driven, which invest in anticipated mergers, bankruptcy or corporate reorganizations. 3 Long/short, which allow fund managers to buy some assets but sell others they do not yet own. 4 Tactical trading, which involves speculation on the future direction of markets.
Horizontal Merger: This is when two companies within the same industry and at the same stage in production merge together.

Hostile Takeover: This is a takeover bid of a company that is deemed unacceptable or has unwelcome terms as determined by the company’s board.
Import: This refers to buying goods or services from overseas and bringing them into the country.

Income Statement: This determines the net income/profit of a business. It is an annual summary of both income and expenses.
Inflation: This term is used when prices rise.

Insider Trading: This refers to the trading of shares based on knowledge that no one else has.

Insolvency: This occurs when a company becomes unable to pay off its creditors or when its liabilities exceed its assets.

Institutional Investor: This is a professional money manager who works for private investors and invests via pension and life insurance funds.
Intellectual Property: This refers to any works or inventions that are original creative designs. The individual or company responsible for the designs is entitled to apply for a copyright or trademark on them.

Interim Profit Statement: This updates shareholders on a company’s unaudited profits for the first half of the financial year.

Investment Trust: This is a company on the stock exchange that only invests in other companies.

Invoice Factoring: This involves a business selling its invoices to a third party, who will then add their own fee to the charges and seek the money from the debtor. Key Performance Indicator: A key performance indicator (KPI) is a measure of performance used to assess the success of a company or a specific activity it is undertaking.

Leveraged Buyout: This is when a company is acquired using borrowed funds. The debt is usually repaid using money made by the acquired company.
Liquid Asset: This is any asset that can be easily converted into cash.

Liquidity: This refers to the ease with which a company’s assets can be converted into cash.

Managed Fund: There are two ways in which a fund can be controlled: 1 Actively, where a fund manager buys and sells to maximize gains and minimize losses. 2 Passively, where a computer program tracks the performance of a market. Margin: A profit margin is the amount of money a company made.
Market Segmentation: A market segment is a division of a market with similar characteristics (e.g. age, gender, religion) that cause them to demand similar products and/or services.

Market Share: This refers to the percentage or portion of the overall market controlled by one company.

Marketing Mix: This is the combination of marketing elements used by a company to encourage consumers to purchase its product or service.

Merger: This is when two or more companies are combined into one.

Negative Equity: This occurs when the value of an asset you have already bought becomes worth less than what you initially paid.

Net: This is the amount of profit remaining after deductions such as tax have been made.

Net Asset Value: This is a way of measuring investment trusts. It is calculated by taking the total number of its assets minus its liabilities.

Nominal Interest Rate: This is an interest rate that isn’t adjusted for inflation.

Nominal Values: These values do not take inflation into account.

Non-Executive Director: This is a director who helps the company and offers an independent view on strategies and performance but is not actively involved in its day-to-day operations.

Offshore Account: These are funds that are managed outside of the company’s home country.

Patent: This is an official legal document that confirms that an individual or company has the sole right to make, use or sell a particular invention.
Philanthropy: This involves making donations to charities in order to improve human wellbeing.

Present Value: This is a comparison of the money available to the company in the future with the value of money it currently holds, for example, due to interest.

Private Limited Company: This is a type of legal company structure that, among other features, limits the personal liability of the company owners so that they can’t be made bankrupt by company debts.

Privatization: This is the process of transferring state-owned assets into the private sector.

Product Elasticity of Demand (PED): This refers to the degree to which demand for products or services changes with their price. Essential goods, such as food, do not experience an increase in demand when their price changes and are deemed “inelastic,” while non-essential goods do.
Profit and Loss Account: This is a financial statement that shows any incomes or outgoings of a company over a certain period of time in order to show the net profit or loss for that time.

Rate of Return: This is represented as a percentage and is the annual income an investment makes back.
Real Interest Rate: This is the rate of interest minus the current rate of inflation.

Revenue: This refers to the amounts of money received by (or owed to) a company for goods or services provided.
Share Index: This tracks the value of shares on the exchange to demonstrate their performance.

Share Options: This is a right to buy shares in a company in the future at a favorable price, in addition to a regular salary if the person meets specific performance targets or predetermined criteria.

Shareholder: This is an owner of shares in a company.

SMEs: This stands for Small and Medium-sized Enterprises. A small business has fewer than 50 staff and a medium-sized business has fewer than 250 staff. Micro-businesses, with fewer than 10 staff, would also fall under the term ‘SME’.

Social Enterprise: These are social mission-driven businesses with social and/or environmental aims that use market-based strategies to achieve their goals. Social enterprises can be both non-profit and for-profit.

Stakeholders: These are any individuals or parties that have an interest in or may be affected by a business and/or its activities. This can include anyone from shareholders to residents of the local community.

Supply Chain: This refers to the different elements that make up the process involved in producing and distributing an item or items.
Sustainability: This involves using natural resources with minimal impact on the environment, such as no depletion of resources. For example, a company that manufactured paper would be sustainable if it only made 100% recycled paper or planted a new tree for each one it cut down.
Takeover: This is when one company buys out another.

Trademark: This is a logo, brand name or phrase legally registered by one company to represent them.

Triple Bottom Line: This refers to People, Planet and Profit. The bottom line was originally considered as just profit. In recent years, with the growth in popularity of corporate social responsibility, businesses are increasingly measuring project success not only in monetary terms but also by examining their social and environmental performance.

Turnover: This refers to the total sales of a business or company during a specified period.

Unit Trust: This is a trust that invests money in the stock market on behalf of a group of private investors who have pooled their money together to be managed by a fund manager.

Unquoted Shares: Some companies choose not to be listed on the stock market or may not meet the listing requirements. In this case, their shares are ‘unquoted’.

Venture Capital: This is capital invested into projects with higher risks, usually start-up businesses.

Vertical Merger: This is a merger between companies that are in the same industry but are not at the same production stage. For example, if a car manufacturer buys a tire company. They are part of the car manufacturing industry but now the car maker can reduce the cost of tires.

Volume: This refers to the number of shares traded in a day on the London Stock Exchange.

Without-Profits Policy: This is an insurance policy that does not share in the profits of the business that issued it.

Working Capital: This is the capital a business uses in its day-to-day trading. It is the difference between current assets and current liabilities. It provides an indication of liquidity and the business’s ability to meet its current obligations.

Work-Life Balance: This refers to the balance between demands of both work and personal life.

Yield: This is the income from an investment. It is calculated by taking the annual dividend or interest payment, multiplying it by 100 and dividing it by the current market price.

Zombie Funds: These are more formally known as closed funds. It is a name given to a closed with-profits fund that no longer accepts new business until existing policies mature.

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