Glossary

At the Money
The strike price of the option is equal to the underlying security of the market
price of the security.

Actual Return
It is the return or yield from an investment. It is the actual amount the investors
receive from their investment. Actual return is measured against the expected return to
determine the actual amount of risk.

Asset allocation
Investments are allocated towards various portfolios such as stocks, bonds to
balance the risk and reward from various alternatives. It helps to diversify risk among
various investments. Provide investors with diversified risk and consistent return.

Asia-Pacific Economic Cooperation (APEC)

It is an organization that seeks to enhance economic growth and prosperity
throughout the Asia-Pacific region. They help to reduce tariffs and trade barriers among
the Asian region thereby promoting domestic exports. It facilitates economic growth, free
trade investment and liberalization among Asian countries.

Adaptation
It is the process of adapting towards various risk and technological environment
that surrounds the business.

Absorption costing
All manufacturing costs incurred in producing the product is absorbed. It covers
direct and overhead costs associated with manufacturing a product. It is useful for
external financial reporting and income tax reporting. Absorption costing is also called as
full absorption costing.

Acceleration clause
Normally included in loan documents, mortgage agreements and other debt
instruments (such as bonds and notes). It gives the lender the right to demand the entire
loan amount (principal plus interest) to be paid at once, if the borrower fails to make the
payments.

Arbitrage pricing theory (APT)

It is based on the law of one price: two identical assets cannot sell at different
prices. It states that the market price (which reflects the associated risk factors) of an
asset represents the value that prevents an investor from exploiting it to make a risk-free
profit.
Accumulated Earnings Tax
Tax imposed by the federal government upon companies with reasonable retained
earnings. It helps to deter investors from negatively influencing a company's decision to
pay dividends. It persuades to issue dividends, rather than retaining the earnings.

Accrued expenses
Expenses for which no payment is made. It is shown as a current liability in the
balance sheet. It is also called accrued liabilities.

Analytics
It is the field of data analysis, involves studying past historical data to research
potential trends, and to analyze the effects of certain decisions or events, or to evaluate
the performance of a given tool or scenario.

Accounting concepts
Rules of accounting that should be followed in the preparation of financial
statements and accounts. There are four fundamental accounting concepts such as (1)
Accruals concept (2) Consistency concept (3) Going concern and (4) Prudence concept.

Avoidable cost
Variable cost which can be avoided if a particular course of action is not taken.
Fixed costs are usually unavoidable in the short run.

Accounting Rate of Return - ARR

Method of estimating the Rate of Return from an investment using a straight-line
approach (not discounted or compounded). The profit is divided by the number of years
invested, then by the investment cost, to estimate an annual rate of return.

Abandonment
Disclaim of right or interest (without transferring it to anyone else) in a property,
accompanied by a clear act of abandoning that property. It includes continuous lack of
use and/or maintenance, and failure to pay property taxes.

Activity based costing (ABC)

Accounting approach concerned with matching costs with activities (called cost
drivers) that cause those costs. Sophisticated kind of absorption-costing and replaces
labor based costing system.

American option
Option that may be exercised at any time before, and up to, its expiration date..
The payoff of an American option depends on the average price of the underlying asset as
on a specific date and not over a period
American Depository Receipt (ADR)
Issued by US bank for the common stock. Denominated in US dollars, it is a
negotiable-instrument and gives the holder the benefit of a share holder. It can be traded
on US stock exchanges.

Accelerated depreciation
Computing depreciation at a rate that is faster than the rate of straight line
depreciation. Two main methods employed in accelerated depreciation are (1) Declining
balance depreciation and (2) Sum of the years' digits depreciation.

Acid-test ratio
Ratio of current assets less inventories to total current liabilities. It is the most
stringent measure of how well the company is covering its short-term obligations,
considers only short term cash which can be converted into cash immediately.

Activity ratios
Financial ratios which measure how effectively a firm is using its assets. Example
accounts receivables turnover etc.,

Automated clearing house

Computerized facility used by banks to exchange (clear and settle) credit card and
other electronic payments.

Business combination
Agglomeration of the assets of two or more firms for their consolidation under
single ownership.

Black Scholes option-pricing model

Formula for estimating the value of European (exercisable only on the expiration
date) calls options, primarily for equities. It incorporates factors such as underlying
stock's price volatility, the relationship of its current price to the option's exercise price,
expected dividends, expected interest rates, and option's time to expiration.

Bid and asked

Bid refers to the highest price the buyer wants to pay, and 'asked' refers to the
lowest price the seller will accept. Difference between two is called as bid and asked
spread or just a spread.

Breakeven point
Point at which the cost equal the revenue. This is the point at which a business,
product, or project becomes revenue neutral.
Bailout Payback Method Payback Period
It is the method in which the salvage value is added along with the investment
cash flows to recover the cost of the project.
Fro example the cost of the machine is 30,000, the annual cash flow for four years
is 5,000 and the salvage value for the year 1 is 3,000 and year 2 is 4,000 and year 3 is
5,000 and year 4 is 6,000. Calculate the Bailout payback for the machine

Year Cash Flow Salvage Value Cumulative Cash

Savings ( Cash Flow
+ Salvage Value)
1 10,000 5,000 15,000
2 10,000 15,000 25,000
3 10,000 20,000 30,000

The bailout period for the machine is 3 years as the original investment is
recovered.

Brainstorming
It is a group creativity technique which generates large number ideas and
solutions to a problem. Every participant participates and generates their ideas through
intensive group discussion. Brainstorming comprises of four rules to be followed they
are:
• Producing greater number of ideas to have a greater solution
• Criticism of ideas should be avoided
• Welcome unusual ideas to find a solution
• Combine all good ideas into one to generate a possible solution

Bankers' acceptance
Negotiable instrument created by a non financial firm and accepted by a bank It is
issued by the customer and an order to the bank to pay a certain amount of money at a
predetermined date. It is a money market instrument which occurs during international
trade. It is used in international trade in which the credit worthiness of one trading partner
is not disclosed to the other.

Bullwhip effect
It is the tendency of the customers to buy more for the future during the season of
short supply. Bull whip effect may be caused by demand variability, strike and other
quality problems.

Brand equity
It is the marketing effects that add to a brand. Brand equity signifies the
association of the consumer with the product. It is created through mass marketing
campaigns. Example of Brand Equity is Coco Cola, Pepsi have a strong logo and brand
name that is recognized worldwide.
Brand extension
Same brand name is used for a different product category targeting different
segment with distinct features and benefits Brand extension is used by consumer product
companies in order to gain shelf space and market share. Example: Videocon with home
appliances and mobiles.

Business risk
Inadequate cash flow to meet its operating expenses. Business risk may be
affected by the changing overall economic environment. It affects both the shareholders
and the lenders as they may not be paid with their dividend or interest. It is associated
with the circumstances of the company as they affect the price of the securities.

Beta Coefficient
It is the measure of systematic risk of a stock or portfolio. Relative volatility of
the security is compared with that of the market as a whole. If Beta Coefficient is 1 it
indicates that the asset is approximately at the same volatility as that of the market. If it is
greater than one it indicates that the asset is more volatile and if beta is less than one it
indicates that asset moves less than the market share.

Bond
It is a debt security. The holder owes a debt and asked to repay the interest and the
principal amount at a predetermined upon maturity. It helps to finance long term
investments and current expenditure.

Bond ratings
Bonds are graded based on their credit quality. Ratings may AAA for higher
grade bonds and D for lower grade/worst bonds. It indicates that the debt issuer will be
able to meet their interest and principal payments.

Bounded rationality
It is based on the decision taken with limited information, capacity and time. They
seek a satisfactory solution with the limited constraints rather than arriving at an optimal
solution.

Business process reengineering (BPR)

It is a fundamental rethinking and radical redesign of business process to have a
dramatic improvement in speed, quality and service. Strategy of promoting and method
of improving business is combined to become stronger and a successful competitor in the
market.

Benchmarking
It is the process of comparing business performance and processes with that of the
quality standards which is widely considered to be best in the industry. It is also referred
to as best practice benchmarking or process benchmarking. Based on the comparison
results the organization develops strategy to improve or adapt best practices to improve
the performance of the organization.
Balanced scorecard (BSC)
Performance measurement tool which measures the smaller scale operational activities
with that of the larger scale activities. It includes four perspectives such as

o Customer Perspective
o Financial Perspective
o Learning and growth perspective
o Internal process perspective

Best practice
It is a technique process or activity that delivers a particular outcome with fewer
problems and applications. Best practice can be applicable to a particular condition or
outcome and modified one can be used for similar circumstances or situations.

Backward integration
It is a type of integration in which the ownership acquires the supply chain in order
to reduce dependency and costs.

Bargaining power
Relative ability or capacity of one party to another based on influence of its
power, size or status.

Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm,
which assists large corporations on how to allocate cash among business units. The
business units may be considered as Stars, Cash Cow, Dogs and Question Marks.

Behavior segmentation
Segmentation of market based on the behavioral styles of the consumers such as
lifestyle, buying attitudes, buying practices etc., It define niches based on customer wants
and preferences.

Buffer
Temporary location to store data. It helps to operate data without being held up by
each other. They are optimized in size based on the efficient work they perform.

Bottleneck
Performance of an entire system is limited by a single or limited number of
resources. Bottleneck’s limited capacity reduces the capacity of the whole chain.

Business process outsourcing

It is the contracting of information and activities to a third party service provider.
Business process outsourcing (BPO) may be back office outsourcing which outsource
internal business functions such as human resources and front office services, and
offshore outsourcing which contacts with a company outside the country.
Brand identity
It is the elements of the brand which is visualized in order tot distinguish form the
other brand. Strong brand identity creates a long lasting knowledge about the brand in the
minds of the consumer. Brand identity need to focus on authentic qualities and attributes
associated with the brand.

Corporate Strategy
It is the strategy developed for the proper utilization of resources in order to achieve the
company’s objectives. It is the overall strategy developed by the firm asking questions
such as how does the business help in achieving the overall objective and how does it add
to the competitive advantage of the business and the overall organization as a whole.

Competitive Strategy
Strategy formulated mainly for the competitive advantage over the competitors. It
also gives a strategic advantage by strongly positioning against its competitors.

Core competencies
It is the cluster of company’ abilities and benefits that is differentiated from its
competitors and cannot be imitated. It is a competitive advantage which a firm gives in
creating and delivering value products to its customers, It is also called as Core
capabilities or distinctive competencies.

Critical success factors (CSF)

It is the activity ensured for the successful running of the business. It is the key
area which helps the company to achieve its mission of objectives. It is also called as Key
success factors or Key result areas.

Capital budget
It is the budget for long term. They help to analyze long term capital investments.
Techniques used in capital budget may be net present value, internal rate of return and
payback period..

Compound interest
Interest is calculated on the principal and accrued interest. Compound interest
may be calculated annually or monthly or quarterly. It is different from single interest
where simple interest is calculated on the principal sum.

Cost of capital
It includes cost of debt and equity. Cost of capital is the rate of return the
company would earn on the capital invested. It also determines how a company can raise
funds either through stocks or through borrowing.
Capital structure
It is the financing capacity of an organization for its operations and the use of
debts. It is a combination of long term debt short term debt and equity. Debt may be bind
issues, long term notes payable. Equity may be common stock or preferred stock. Short
term debt comprising of working capital also form a part of capital structure.

Capacity planning
Determination of production capacity in order to meet the changing demands.
Capacity planning is determined to meet the discrepancy that occurs between the capacity
of the organization and demand of its customers.

Credibility
It is the capability of believing the objective and subjective components of a
source or message

Capital requirements
Amount of money needed to operate its business. It is a set of framework set by
the bank or institutions on how to handle their capital

Cash budget
Estimate the amount of receipts and payments over a specific period of time. Cash
budget consists of four sections such as: (1) Receipts – Cash balance and collections, ( 2 )
Payments – disbursement of cash payments, ( 3 ) Cash surplus or deficit difference
between cash balances and ( 4 ) Financing section – detailed amount of the borrowings
and repayments.

Contingency planning
Plan devised for specific situations when things go wrong. It is to minimize the
effects of disruption in the organization. Disruption may be in the form of security
violation, natural or man made events.

Continuous improvement
It is the improvement of process and products in order to reduce the wastage and
quality. Objective is to eliminate waste and reduce the response time to simplify the
design of products and services and to improve the quality and service of the customer. .

Continuous replenishment program

It is a vendor managed inventory where the vendor has a regular contact with the
customer inventory and monitors the customer supply in order to maintain the customer
inventory at an agreed level. .

Co-sourcing
It is a service performed by both the person inside the organization and also from
external service provider. It mainly focuses on the internal audit function of the
organization.
Computer aided design (CAD)
It is the use of computer technology for the design of objects. CAD involves
shapes.

Computer integrated manufacturing (CIM)

It is the combination of Computer aided engineering, computer aided design and
computer aided manufacturing. Entire production process of the system is controlled by
the computer. It allows to exchange information among each other allow to take actions.
Main object is to stream line the process and integrate with the business functions.

Cash flow
It is the movement of cash in and out of the business. Incoming of cash is known
as cash inflow. Cash inflow arises from financing and operating activities. Outgoing of
cash is called as cash outflow. Cash outflow arise from investments. Cash flow is positive
when the closing balance is higher than the opening balance and negative when the
opening balance is higher than the closing balance.

Competitive forces
It involves the factor influencing the competitive forces influencing the
competitive position of the firm. Forces include
• Bargaining power of the buyer and suppliers
• Threat of new entrants
• Rivalry among existing firms

Cost driver
It is a factor determining the cost of an activity. It is a part of activity based
costing. Cost driver may be of two types such as (1) Resource driver – refers to the
contribution of the resources and (2) Activity driver – refers to the cost incurred by the
activities required to complete a particular task or project.

Customer costs
Cost according to the number of customers for the product. Example: Customer
service department costs.

Cost structure
It is the distribution of costs. Cost structure covers the expense incurred in
manufacturing a product. Cost structure of the firm may be ratio of fixed costs to variable
costs.

Cost leadership
Concept used in business strategy. It is the strategy adopted in producing products
at a cost lower than the competitors. It is driven by company efficiency, size, scale scope
and cumulative experience.
Conscious parallelism
Used in competition law describing price fixing between competitors. One
competitor may raise the price others will follow based on a mutual understanding. There
is no written agreement between them.

Counterfeit
It is an imitation of the product. This is done with the main intention to bypass
monopoly and take advantage of the established previous product. It describes forgery of
currency, documents, company logos and brands.

Cash cow
It is one of the business units used in Boston Consulting Group matrix. Cash cow
requires little investment and positive cash flow. Cash flow may be used to buy shares
and pay dividends to shareholders. It helps the business to experience high market share
and low market growth..

Competitive position
It is the organization roe in the market place. Competitive position helps the firm
to rank its place with industry size and business strength. Competitor may be classified as
market nicher, market follower, market leader or market challenger..

Customer value added

Organization creates competitive advantage by creating, sustaining and
maintaining customer value. It helps to identify their needs and prioritize it. The needs
may then be satisfied by producing products, services and processes.

Customer satisfaction
It is a business term, used to satisfy or surpass the needs of the customers.
Customers may be satisfied based in the quality and service of the product produced.
Measurement of customer satisfaction indicates the success of the organization in terms
of the product or service produced or rendered.

Customer value
It is the difference between the benefits received and cost incurred to acquire the
products and services.

Core business
It is the central or focused activity of an organization that differentiates it from the
other firms and a key success to the organizational improvement. Core business also
depends on how the organization coordinates its management oriented activities such as
• Market Sensing Process
• Customer acquisition process
• Customer relationship management process
• Fulfillment management process