The few business words we use, in everyday language

Turnover

Total sales in a period, usually a year. It says how much passed through your hands, not how much you kept.

Margin

What you keep from each sale after paying for the goods, as a share of the selling price. If you buy at ₹96 and sell at ₹100, your margin is ₹4, or 4% of the sale. Strictly this is the gross margin, before rent, salaries and other expenses.

Markup

The same ₹4, measured as a share of the cost instead. ₹4 on a cost of ₹96 is a markup of about 4.2%. Markup is always a bigger percentage than margin for the same sale, so be clear which one a supplier or brand is quoting.

Dealer and distributor

A distributor buys in bulk from a manufacturer and sells on to other businesses, such as retailers or dealers. A dealer sells to the final customer, usually with the brand's authorisation. On this site's ladder, a brand-authorised dealer is Level 2; a multi-brand distributor or wholesaler of everyday goods is Level 1.

Drop shipping

Selling without keeping the goods: when a customer orders from you, you pass the order to a supplier who ships it straight to the customer. Almost no investment and no stock, but thin margins, and you depend on the supplier's stock, quality and delivery. On this site it is the first sub-level of the trader level.

Contribution and break-even

Contribution is the selling price of a unit minus its variable costs (purchase price, delivery, commission). Break-even is the quantity, or rupees of sales, at which total contribution just covers fixed costs such as rent and salaries. See break-even for traders.

Credit days

How many days a customer takes to pay you, or how many days your supplier gives you to pay them.

Cash cycle

How many days your money is stuck between paying for goods and getting paid for them: stock days plus customer days minus supplier days. Accountants call it the cash conversion cycle. Shorter is better. Explained in the first trader article.

Money stuck in the business

Money tied up in stock and in payments customers still owe you, less what you owe your suppliers. It is real money, even though you cannot spend it. The standard accounting term is working capital: short-term assets (cash, stock, customer dues) minus short-term liabilities (supplier bills, short-term loans). For a dealer's version, see working capital for a brand's minimum stock.

Dues, or receivables

Money customers owe you for goods already delivered.

OEM

Short for "original equipment manufacturer": the brand whose name is on the final product, such as a vehicle maker or a phone company like Apple. Factories that make parts to the OEM's design are its suppliers. People loosely call them "OEM suppliers"; on this site, "OEM supply" means making to an OEM's design and specification.

Commodity

A product that is the same whoever makes it, so buyers choose mostly on price and delivery. Rice, cement, standard boxes, steel bars.

Tooling

The moulds, dies and fixtures that give a part its exact shape. Whoever owns the tooling can often move production to another factory.

Technology transfer

Moving a technology from the people who developed it, often a government lab or institute, to a business that will use it commercially, together with the know-how to use it. Licensing is the most common way; a technology can also be sold outright (called assignment) or shared through a joint project.

Licence and royalty

A licence is written permission to use someone's technology, patent or design while they keep ownership of it. A royalty is a continuing payment for that permission, usually a percentage of your sales or a fixed amount per unit sold. Worked examples: licence fees and royalties.

Patent

A legal right, granted by the government, that lets the owner stop others from making, using or selling an invention without permission. The invention must be new, not obvious to someone skilled in the field, and usable in industry. In India a patent lasts at most 20 years from the date the application was filed, and yearly renewal fees must be paid to keep it in force.

Value chain

Strictly, the series of activities inside one company that add value to a product, from buying inputs to making, selling and after-sales service. The chain of separate businesses a product passes through, from raw material to final customer, is more precisely called the industry value chain. This site uses the industry meaning when it talks about how the levels connect.

Aftermarket

The market for replacement parts and accessories after a product has been sold, as opposed to parts fitted when it is first made. In vehicles, aftermarket parts reach customers through spare-parts distributors, shops and mechanics as well as through the brand's dealers. See the two-wheeler part chain.

Kinds of business within each level

Commission agent

Someone who sells goods on the owner's behalf and earns a commission, without ever owning the goods. In a mandi, a kacha arhtiya sells a farmer's produce this way; a pacca arhtiya, by contrast, buys the produce on his own account. On this site, commission agents are in Trader sub-level 1.1.

Platform and marketplace

A platform (or online marketplace) is a business that brings buyers and sellers together on its app or website, takes the orders and payments, and keeps a fee or commission, usually without owning the goods or running the service itself. Selling through one is quick to start but makes you depend on its rules.

Wholesaler, sub-stockist and super stockist

A wholesaler buys in bulk and resells to other businesses, often the goods of many companies. A sub-stockist supplies shops in smaller towns from a distributor's stock. A super stockist buys in bulk from a company, owns that stock and resells it to distributors across a region.

C&F agent

A carrying and forwarding agent runs a warehouse for a company and dispatches its goods to distributors in a region, usually without owning the stock, and is paid a commission.

Importer Exporter Code (IEC)

The code issued by the Directorate General of Foreign Trade (DGFT) that a business in India needs to import or export goods, unless it is exempt.

Sub-dealer

A dealer who sells a brand's products but buys them from the brand's main (authorised) dealer or distributor, not from the brand itself, usually in a smaller town.

3S dealership

A dealership that offers sales, service and spare parts under one roof, the usual format for vehicle brands.

Franchise and master franchise

A franchisee runs a business under a brand's name and business system, in return for fees. A master franchisee holds the right to develop the brand across a region, including appointing and supporting other franchisees (sub-franchisees) there.

Job work

Under GST, any treatment or process done on goods that belong to another registered person, such as plating, machining or stitching. The goods stay the owner's; the job worker is paid for the work.

Contract manufacturing, ODM and EMS

A contract manufacturer makes products that another company sells under its own brand, to that company's design. An original design manufacturer (ODM) sells products of its own design for other brands to sell under their names. Electronics manufacturing services (EMS) is contract manufacturing in electronics. In each case the brand that sells the product is the OEM.

Tier 1 and Tier 2 supplier

A Tier 1 supplier sells parts, modules or systems directly to the OEM (for example, a vehicle maker). A Tier 2 supplier sells parts to a Tier 1 supplier. The same company can be Tier 1 for one customer and Tier 2 for another.

Deep tech

A business built on new scientific or engineering knowledge. India's DPIIT describes a deep tech startup as one that spends most of its money on research and development, owns or is creating significant new intellectual property, and faces long development times, high capital needs and large technical uncertainty.

Sub-level

On this site, a step within one of the four levels, ordered roughly by money needed, risk, control and value added. The sub-levels are a first draft, being refined. They are listed on each level's page.

Dealer math words

Scheme, rebate and credit note

A scheme is a payment from the brand linked to sales or purchases, often per unit. A rebate is a refund of part of what you paid, usually a percentage of a quarter's or year's purchases. Both usually reach you as a credit note: a document from the supplier that reduces what you owe them. See targets, schemes and effective margin.

Target slab

A band of target achievement, such as 100% to 109%, that earns a set incentive rate. In a retrospective slab the rate applies to all your volume once you reach it; in an incremental slab it applies only to the volume inside that band.

Effective margin

Your margin after adding scheme, rebate and similar income linked to the goods, as a share of sales. It is usually higher than the invoice margin, but it arrives later.

Channel finance

Credit from a bank or finance company, arranged with the brand, that pays for a dealer's stock; the dealer repays it with interest, sometimes after an interest-free period. See stock financing.

Inventory days

How many days stock sits, on average, before it is sold: average stock ÷ cost of goods sold × 365.

Bay utilisation

The share of a workshop's available bay hours actually used for paid work. See workshop revenue per bay.

Return on investment (ROI) and payback period

ROI is yearly net profit as a percentage of all the money put in. Payback is how many years the cash coming in takes to repay that money. See dealership ROI.

Factory math words

Fixed and variable costs

A variable cost rises with every unit made (material, piece-rate pay). A fixed cost stays the same for the period whatever you make, within normal capacity (rent, salaries). Direct material + direct labour + direct expenses is called the prime cost. See unit costing.

Absorption and marginal costing

Two standard ways to cost a product. Absorption (full) costing gives each unit a share of fixed factory overheads, charged at an overhead absorption rate. Marginal (variable) costing gives units only their variable cost and charges fixed overheads to the period.

Capacity utilisation

Actual output as a percentage of what the plant could make. See capacity and yield.

Yield, rejection rate and first pass yield

Yield is good output as a share of input. Rejection rate is the share of inspected units that fail. First pass yield counts only units that pass the first time, without rework; multiplying the first pass yields of all stages gives rolled throughput yield.

Machine hour rate

What it costs to run a machine for one productive hour: its yearly fixed costs ÷ productive hours, plus running costs such as power per hour. See machines.

Depreciation (straight line and WDV)

Spreading a machine's cost over its useful life. Straight line charges the same amount each year; written down value (WDV, or reducing balance) charges a fixed percentage of the remaining book value. Tax law and company law set their own rates and lives, which vary; ask a chartered accountant.

Make or buy

Deciding whether to make a part or buy it, by comparing the buy price with the relevant cost of making: variable cost, avoidable fixed costs and any opportunity cost (the contribution you give up by using the capacity). See pricing and decisions.

Price-down and annual price reduction

A cut in a part's price demanded by the customer, often an OEM. An annual price reduction repeats every contract year and compounds: 3% a year for three years is about 8.73%, not 9%.

Operating leverage

How strongly operating profit moves when sales move, because of fixed costs. The degree of operating leverage (DOL) is contribution ÷ operating profit: with a DOL of 3, a 10% fall in sales cuts operating profit by about 30%.

New-product math words

Unit economics

Revenue and costs per unit, or per customer, before fixed costs. Contribution per unit is price minus all the costs that come with that unit. See unit economics.

CAC, CAC payback and lifetime value

Customer acquisition cost (CAC) is sales and marketing spend ÷ new customers won. CAC payback is how many months of a customer's contribution recover it. Lifetime value (LTV) is the total contribution expected from a customer.

Value-based pricing and EVC

Setting a price from the customer's side: the price of their best alternative plus the extra value your product gives them. That total is called the economic value to the customer (EVC).

NPV and IRR

Net present value (NPV) converts each future year's cash into today's money at your required rate of return, adds them, and subtracts the investment; positive means the project beats that rate. Internal rate of return (IRR) is the rate at which NPV is zero. See investment math.

Minimum guarantee

The least royalty a licensee must pay for a period, whatever the sales. See licence fees and royalties.

Contingency, burn rate and runway

Contingency is an amount added to a budget for surprises. Burn rate is cash spent per month; runway is how many months the cash will last at that rate. See R&D budgets.

TAM, SAM and SOM

Standard start-up terms for market size: total addressable market (all yearly spending on the category), serviceable available market (the part your product and channels can reach), and serviceable obtainable market (the part you can realistically win in a few years).

Words from the ideas pages

Gross profit and overheads

Gross profit is sales minus the cost of the goods sold; as a percentage of sales it is the gross margin. Overheads are the running costs that do not rise with each sale, such as rent, salaries and interest. Gross profit has to pay the overheads before there is any profit, so the sales you need to cover overheads are overheads ÷ gross margin. See Gross margin, not turnover.

Viable

A business is viable when it can pay its own bills from the money it brings in, without fresh money from its owners or lenders.

Current assets, current liabilities and the current ratio

Current assets are cash and things that should turn into cash within a year, such as stock and dues from customers. Current liabilities are what you must pay within a year, such as suppliers' bills and short-term loans. The current ratio is current assets ÷ current liabilities; below 1 means you owe more in the short term than you can soon raise. See the current ratio.

Ageing of dues

A list of what customers owe you, sorted by how long each bill has been unpaid, for example not yet due, up to 30 days overdue, 30 to 60 days, and over 60 days. Older dues are less likely to be paid.

Customer concentration

How much of your sales come from your biggest customer, or your biggest few, usually given as a percentage of total sales. The higher it is, the more one customer's decisions affect your business. See One big customer.

More words will be added as more articles are written. Business-math refreshers with worked examples and quizzes: trader, dealer, manufacturer and new products.