S-Cool Revision Summary

S-Cool Revision Summary

External financing

This means obtaining sources of finance from outside the firm. This can be done in one of three ways: debt (such as loans), share capital, or grants from the Government.

External constraint

This is a factor outside the control of the business, which directly affects the business. The main types of external constraint include consumer tastes, competitors' actions, economic circumstances, legal constraints, social attitudes and pressure group activity.

Flotation

This is the term given to the initial launch of a company on to the stock market, by offering its shares to the general public.

Franchise

This is a business which is based upon the name, products, trademarks, logos, etc. of an existing, successful business. To obtain a franchise involves the payment of an initial fee plus the ongoing payment of a royalty based on sales revenue.

Franchisee

This is a person or company who has bought a franchise (i.e. the rights to use the name, products, trademarks, logos, etc. of another company (the franchisor).

Franchisor

This is the successful business which will sell the rights to its business name, products, etc. to suitable franchisees. This can be a far cheaper and easier way to expand the company than the alternative of opening more branches itself.

Horizontal integration

This occurs where a firm takes over or merges with another firm at the same stage of production (i.e. the two firms were in direct competition with each-other).

Internal constraint

This is a factor that restricts the business from achieving its objectives, but it is within the control of the business. The main internal constraints are finance, marketing, people and production.

Internal financing

This is the generation of cash from within the company's resources/accounts. This can be obtained from retained profits, working capital and the sale of fixed assets.

Lease

This is a way of securing and using property for a restricted period of time. When the lease runs out, the ownership of the property returns to the freeholder (the owner).

Leasing

This is a method of securing and using fixed assets (other than property) without the need for the initial cash outlays needed to purchase the asset.

Limited liability

This is the idea that the owners of a company (shareholders) are only responsible for the amount of money that they have invested into the company, rather than their personal assets. Thus if a firm becomes insolvent, the maximum that creditors can receive is the shareholders' initial investment. The word 'Ltd' or 'PLC' appear after the company's name to inform creditors that the business has limited liability.

Management buy-in

This occurs when managers from outside a company buy up the shares and take control of the company. This strategy is pursued if the managers believe that they can run the firm more efficiently than the current management.

Management buy-out (MBO)

This occurs when the managers of a business buy out the shareholders, and therefore own and control the business. The management believe that they can improve the profitability and efficiency of the business.

Merger

This is an agreement between the managements and shareholders of two companies to bring both firms together under a common board of directors. It is also referred to as amalgamation or integration.

Multinational

This is a business organisation which has its headquarters in one country, but has manufacturing plants in many other countries.

Ordinary share

These are purchased in order to have part ownership in either a Private Limited Company or in a Public Limited Company (PLC). At the end of each financial year ordinary shareholders receive a dividend per share that they own, but only after debenture holders, preference shareholders, long-term debt holders and the government (through taxes) have been paid. They are, therefore, often said to have the 'last claim' on the profits of the company. Similarly, if the company becomes insolvent and goes into liquidation, ordinary shareholders are the last group of people to receive any return, after all other debts have been paid.

Partnership

This is a business organisation where two or more people trade together under the Partnership Act of 1890. Most partners in a partnership will have unlimited liability, which means each partner is liable for the debts of the other partners. Common examples of partnerships include solicitors, doctors, veterinarians and accountants. Forming a partnership allows more capital to be used in the business than is the case with a sole trader, and the pressures and responsibilities involved in running the business are spread over several individuals.

Preference share

This is a share paying a fixed dividend, which is considerably less risky than an ordinary share. If the company becomes insolvent and goes into liquidation, then preference shareholders would be repaid in full before ordinary shareholders. This is also true of dividends, which are paid to preference shareholders before ordinary shareholders receive theirs. Preference shares therefore carry less risk than ordinary shares, but they also carry no voting rights or rights to a share of the company's profitability.

Primary sector

This is that part of the economy consisting of agriculture, fishing and the extractive industries such as oil exploration and mining.

Private limited company

This is a small to medium-sized business that is usually run by a small number of people (shareholders) and in many cases it is a family run business. The shareholders can determine their own objectives without the emphasis on short-term profits, that are so common among public limited companies.

Private sector

This is that part of the economy which is owned and controlled by private individuals and shareholders and is, therefore, out of the government's direct control. The remainder of the economy is called the public sector.

Public corporation

This is another name for a nationalised industry that is an enterprise owned by the government / state, which offers a product or service for sale.

Public sector

This is that part of the economy which is directly owned and / or controlled by the government / state. The public sector includes public corporations (nationalised industries), public services (such as the National Health Service) and local services (such as swimming pools, street cleaning, libraries, etc.).

Public limited company (PLC)

This is a company with limited liability that has over £50,000 of share capital and a very large number of shareholders. PLCs are the only type of company allowed to be quoted on the Stock Exchange. These companies have to disclose their annual accounts, are open to take-over bids.

Prospectus

This is a document which companies have to produce when they go public (ie when they wish to float on the Stock Exchange). It gives details about the company's activities and anticipated future profits. It has to conform to the Companies Act 1985 and be handed to the Registrar of Companies.

Sale and leaseback

This is a contract to raise cash by selling the freehold to a piece of property and then buying it back on a long-term lease. This ensures that the firm can stay in its premises and therefore can carry on trading as if nothing has happened. The money released through this process enables the firm to improve its liquidity position, although its owns less fixed assets than before.

Secondary sector.

This is that part of the economy involved in the making and manufacturing of goods. Over the past twenty years, the UK has seen a large decline in the number of people employed in the secondary sector of the economy, due to firstly a fall in demand for the output and secondly due to the replacement of workers by machines (mechanisation).

Sole trader

This is an individual who owns and controls his / her own business. Common examples of sole traders include corner shops, newsagents and market traders. They have unlimited liability for their debts and often have little available finance for expansion. They often employ waged workers, yet keep all the profit (after tax) for themselves.

Stock Exchange

This is a market for securities (the collective name for stocks and shares). The London Stock Exchange is one of the biggest in the world after Tokyo and New York. Its main functions are to enable firms or governments to raise capital and to provide a market in second-hand shares and government stocks.

Take-over

This involves purchasing over 50 per cent of the share capital of a company and then being able to exert full control over it. This process is also known as acquisition or integration.

Take-over bid

This is an attempt by a company to buy a controlling interest (i.e. over 50% of the ordinary shares) in another company. This is done by offering the target firm's shareholders a significantly higher price for their shares than the prevailing market price.

Tertiary sector

This is that part of the economy concerned with providing goods and services to customers. It is the largest sector in terms of employment in the UK, accounting for over two-thirds of the workforce.

Unlimited liability

This refers to the fact that the owners of certain business organisations (sole traders and partnerships) are not limited to the extent of their debts. They will have to sell off their own assets and use their own personal wealth, if necessary, to meet the debts of their business. If the business debts are greater than their own personal wealth, then the business may be forced into bankruptcy.

Vertical integration

This occurs when two firms join together (through a merger or a take-over) that operate in the same industry, but at different stages in the production chain. Backward vertical integration means buying out a supplier (e.g. a car manufacturer buying a components supplier). Forward vertical integration means buying out a customer (e.g. the car manufacturer buying up a chain of car showrooms).