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Business Terms

Accounts Receivable
Money owed to your company by customers.

Administration
There are two meanings relating to this word in business.
(1) The organisation and running of a business.
(2) A business going into administration, meaning that a business has gone bankrupt and its creditors can get in touch to try and claim any money they are owed.

Affiliate Marketing
A retailer or service provider advertising its goods or services via a third party in return for a commission on any sales.

APR (Annual Percentage Rate)
This is the annual rate of interest charged on money borrowed

Assets
Property that has value owned by a company. Apart from buildings this includes, stock, machinery, equipment, IP (Intellectual Property

Audit
An official inspection of a company’s, or individual’s, accounts.

B2B
Business to business.

B2C
Business to consumer.

Balance sheet
A ‘snapshot’ of a company’s assets, liabilities and capital at a particular point in time

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

Benchmarking
Checking your company’s standards by comparing them with certain criteria, e.g. a competitor’s activities.

Blue Chip
This term originates from poker as blue chips are traditionally the highest-valued. Therefore, a blue-chip company is one that is large and considered to be safe or prestigious.

Bootstrapping
(1) Building a start-up company with very little money, often relying on personal savings and pushing for the lowest possible operating costs, while implementing cost-saving systems such as fast inventory turnaround.
(2) Making a forecast beyond a certain period by using the forecasted data for that period.

Break-even
The point in time when gross profits exactly match expenses.

Business Angel
Also known as an angel investor. An individual who provides capital for a business start-up in return for a stake in the company.

Business Cycle
The tendency for economies to experience peaks and troughs that follows a cyclical pattern – known colloquially as ‘boom and bust’. Governments are tasked with smoothing the peaks and troughs and limiting the effect of these cycles on consumers and businesses.

Capital
Money invested into a company or project by its owners.

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

Cash Flow
The movement of cash into and out of a business

Collateral
Assets that bowers can use as security against a loan.

Commodity
This is any item which can be freely bought and sold. Examples include gold, food products and coffee beans.

Copyright
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 the material.

Corporate social responsibility (CSR)
A form of self-regulation, where companies integrate social, environmental and ethical policies into their overall business strategy. Companies embracing CSR should take responsibility for their actions and take a proactive approach to having a minimal negative impact on the world.

Creditor
A person or firm that has lent your business money or to whom you owe money.

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

Debtor
A person or firm that owes money to you or your business.

Depreciation
The reduction in value of assets over time, usually due to wear and tear. Accountants will use this to amortise out the cost of an asset over time.

Diversification
When new products, services, customers or markets are added to your company’s portfolio. Diversification usually occurs as a risk reduction strategy.

Dividend

Money paid regularly by a company to its shareholders.

Economic growth

This is the term used to describe an increase in the amount of goods and services produced by the county, known as gross domestic product (GDP).

Economies of scale

The cost advantages obtained by a business when buying an item in bulk. The price of an item usually decreases as the amount bought increases.

Enterprise value

This is the market value of a business. It is calculated by market capitalisation times current share price, minus cash, plus debt.

Equity

Equity is used by analysts to work out how financially “healthy” a company is. It also represents what would be left if all of a businesses’ assets were liquidated and the debt paid off.

Ethical investment

Investments made in companies that are specifically chosen for their environmental or moral credentials. Defence contractors, or companies known to use contentious labour practices, will generally be 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

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.

Export

Selling your goods or services overseas.

Fairtrade

An organised movement enabling producers in developing countries to receive a fair price for the items they produce. Fairtrade certification is becoming much more common in many sectors, particularly food, with several large brands now stating that their products are ‘certified Fairtrade’ on their packaging.

Financial management

Planning, analysing, monitoring, organising, reviewing and controlling an organisation’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 differs between countries and between businesses, although in the UK the year between 6th April and 5th April is most often used for personal taxation. The ‘official’ period for corporation tax runs from 1st April to 31st March, however companies can adopt any yearly period for corporation tax.

Fixed cost

Any cost that remains the same in the short-term, despite changes in volume. Fixed costs usually include, for example, rent, interest and salaries.

FTSE 100 index

This list is made up of the 100 most highly capitalised blue-chip companies on the London Stock Exchange.

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

An attractive package (typically a bonus, or stock options) that are offered to a senior employee as an incentive to join the company.

Golden share

A golden share in a company is able to 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

The total amount of money you have earned in a period of time before deductions such as taxes.

Gross domestic product (GDP)

GDP is the sum of all goods and services produced in the country’s economy. If it is up on the previous three months, the economy is growing. If GDP is down, the economy is contracting.

Gross national product (GNP)

GNP is another way to measure the economy, but also the welfare of British citizens. This is GDP plus the profits, interest and dividends received from British residents abroad and minus those profits, interest and dividends paid from the UK to overseas residents.

Half year

This is a term 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 fund:

  • Market-neutral or relative value. These attempt to exploit market inefficiencies.
  • Event-driven. Invested on anticipated mergers, bankruptcy or corporate reorganisations.
  • Long/short. Allow fund managers to buy some assets but sell others they do not yet own.
  • Tactical trading. Speculation on the future direction of markets.

Horizontal merger

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 deemed by the company’s board.

Hyperinflation

This is inflation that is rapid or out of control. It usually only occurs during wars or during severe political instability.

Import

Buying goods or services from overseas and bringing them into the country.

Income statement

Determines the net income/profit of a business. An annual summary of both income and expenses.

Industrial output

This is an indicator of future economic growth as it is the manufacturing output of the nation.

Inflation

The term used when prices rise.

Insider trading

The trading of shares based on knowledge that no one else has. It was made illegal in the UK in 1980.

Insolvency

When a company becomes unable to pay off its creditors, or its liabilities exceed its assets.

Institutional investor

A professional money manager who works for private investors and invests via pension and life insurance funds.

Intellectual property

Any works or inventions that are original creative designs. The individual or company responsible for the designs will be entitled to apply for a copyright or trademark on the designs.

Interim profit statement

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

Investment trust

A company on the stock exchange that only invests in other companies.

Invoice factoring

Invoice factoring involves a business selling its invoices on 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 to assess the success of a company or a certain activity the company is taking part in.

Leveraged buyout

When a company is acquired using borrowed funds. The debt is usually repaid by money made by the acquired company.

Libor rate

Libor stands for the London interbank offered rate and provides the average interest rate at which major global banks borrow from one another. It is based on five currencies:

  • US Dollar
  • Euro
  • British Pound
  • Japanese Yen
  • Swiss Franc

Libor is also the basis for consumer loans in countries worldwide. It impacts both consumers and financial institutions.

Liquid asset

Any asset which can be easily converted into cash.

Liquidity

The ease with which a company’s assets can be converted into cash.

Macroeconomics

This is a part of economics that seeks to simplify and show the progress of whole economies rather than focus on individuals or groups (which is microeconomics).

Managed fund

There are two ways in which a fund can be controlled:

  • Actively. A fund manager buys and sells to maximise gains and minimise losses.
  • Passively. A computer programme tracks the performance of a market.

Margin

A profit margin is how much money a company made. For example, a gross profit of £1m on sales of £10m is a 10% profit margin. Companies can compare profit margins with others to see how they are doing.

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. For example, in an area with a large Jewish community, kosher foods are likely to be in greater demand.

Market share

The percentage or portion of the overall market controlled by one company.

Marketing mix

The combination of marketing elements used by a company to encourage consumers to purchase its product or service. Also known as the seven Ps: product, price, promotion, place, people, process, physical evidence.

Merger

When two or more companies are combined into one.

Microeconomics

This is a part of economics that concentrates on the actions of individuals and groups, rather than of whole economies (which is macroeconomics).

National insurance

National insurance is a form of tax which everyone currently employed must pay in order to qualify for benefits, including the state pension.

Negative equity

When the value of an asset you have already bought becomes worth less than what you initially paid.

Net

The amount of profit remaining after deductions such as tax have been made.

Net asset value

A way of measuring investment trusts. Take the total number of its assets minus its liabilities.

NIESR

National Institute of Economic and Social Research.

Nominal interest rate

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 the day-to-day running.

Offshore account

Funds which are managed outside of the UK.

Oligopoly

A market where only a few firms control the percentage of total sales.

Operating expenditure (OPEX)

On-going costs for running a business, service or system that includes day-to-day expenditure such as sales and administration. Compare with capital expenditure, which is money spent on fixed assets or extensions to already-owned fixed assets. A photocopier, for example, would involve capital expenditure whereas toner and paper for the photocopier would be operating expenditure.

Operating profit/loss

The profit or loss a company makes. These figures reflect how the business is performing.

Ordinary share

Also known as common shares, this is one unit of a businesses share capital.

Overheads

Costs that do not vary regardless of the level of production and are not usually directly involved with the cost of production, such as rent.

Patent

An official legal document confirming that an individual or company has the sole right to make, use or sell a particular invention.

PAYE

Pay as you earn. A method of collecting income tax on behalf of the Government by taking it directly from your employees’ weekly/monthly pay.

Philanthropy

Making donations to charities in order to improve human wellbeing.

Present value

Comparison of the money available to the company in the future with the value of money it currently holds, e.g. due to interest.

Private limited company

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.

Privatisation

The process of moving state-owned assets into the private sector.

Producer price index

A measure of inflation in goods bought and manufactured by British-based industry.

Product elasticity of demand (PED)

The degree to which demand for products or services changes with the price. Essential goods, such as food, do not experience an increase in demand when the price changes, and are deemed “inelastic”, but non-essential goods do.

Profit and loss account

A financial statement that shows any incomes or outgoings of a company over a certain period of time so as to show the net profit or loss for that time.

Quantitative easing

This is a policy used by authorities in extreme circumstances to ease pressure placed on banks. The authorities buy bonds from the banks and from the commercial sector to make sure banks have enough cash to continue operating.

Quota

This is a limit set by a government on how much of a product can be imported and exported.

Rate of return

This is represented as a percentage and is the annual income an investment makes back.

Real interest rate

The rate of interest minus the current rate of inflation.

Real values

Real values show how relative particular prices are to prices in general. They are adjusted according to inflation.

Recession

A period of severe economic decline. Defined by a contraction of GDP for six months or longer.

Return on investment

The earning power of an asset or activity measured as a ratio of the net income of the activity to the operational cost. Return on investment (ROI) lets a company know whether an activity is profitable enough to continue.

Revenue

Amounts of money received by (or owed to) a company for goods or services provided.

Share index

Tracks the value of shares on the exchange to demonstrate their performance.

Share options

A right to buy shares in a company in the future, at a favourable price, in addition to a regular salary if the person meets specific performance targets or predetermined criteria.

Shareholder

An owner of shares in a company.

SMEs

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 come under the term ‘SME’.

Social enterprise

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

Any individual or party that has 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

The different elements making up the process involved in producing and distributing an item or items.

Sustainability

The use of natural resources with a minimal impact on the environment; e.g. no depletion of resources. For example, a company that manufactured paper would be sustainable if it only made 100 percent recycled paper or planted a new tree for each one it cut down.

Takeover

The buying out of one company by another.

Trade balance

Only taking visible trade into account (the import and export of physical goods) the trade balance shows a county’s trade position.

Trademark

A logo, brand name or phrase legally registered by one company to represent them.

Triple bottom line

People, planet, 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

The total sales of a business or company during a specified period.

Unit trust

A unit trust invests money in the stock market on behalf of a group of private investors that have put all their money together to invest and be managed by a fund manager.

Unquoted shares

Some companies choose to not be listed on the stock market, or they may not meet the listing requirements. Therefore the shares are ‘unquoted’.

Venture capital

Capital invested into projects with higher risks, usually start-up businesses.

Vertical merger

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 tyre company. They are part of the car manufacturing industry, but now the car maker can reduce the cost of tyres.

Volume

The number of shares traded in a day on the London Stock Exchange.

Without-profits policy

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’s the difference between current assets and current liabilities. It provides an indication of liquidity and the businesses ability to meet its current obligations.

Work-life balance

The balance in demands of both life at work and personal life.

Yield

The income from an investment. Calculated by taking the annual dividend or interest payment, multiplying by 100 and dividing by the current market price.

Zombie funds

More formally these are called closed funds. It’s a name given to a closed with-profits fund that no longer accepts new business until the existing policies mature.