AP Business Glossary

Every defined term from the AP Business with Personal Finance course framework, rewritten in plain language. Pick a unit and lesson to see its terms, with related terms linked under each one.

274 terms across all five units.

terms

1.1 What Is a Business?

Business: An organization that makes and delivers products — goods, services, or both — to the people it serves. Businesses range from a one-person shop to a global firm and can serve customers in person or online.
Consumer: The individual who actually uses a good or service, whether or not they were the one who bought it.
Customer: A person or business that pays for a good or service.
Problem-solution fit: The point at which a product genuinely answers a real customer problem, need, or want. Since no business can serve everyone, firms pick which problems and customers to focus on.
Value: How much worth or benefit a product gives the customer who uses it.
Value capture: When a business sells a product for more than it cost to produce, keeping the difference.
Value creation: What happens when a business offers something that genuinely meets customers' problems, needs, or wants.

1.2 Markets and Competitive Advantage

Barriers to entry: Obstacles — patents, regulations, high startup costs, or large-scale low pricing — that make it hard for new firms to break into a market.
Commodity: A largely identical product — common in farming and raw materials — sold in markets so competitive that a business's best shot at an edge is producing it as efficiently and cheaply as possible.
Competitive advantage: A business's ability to outperform rival firms in the same market, which can win it more market share and higher profits.
Differentiated products: Products set apart from rivals by distinctive features, quality, or service.
Market: Any setting — physical or online — where sellers and buyers come together to trade. Markets can be local, regional, or worldwide.
Market price: The going price a good or service settles at when sellers seeking higher prices and buyers seeking lower ones meet in a competitive market.
Monopoly: A market served by just one business offering a unique product, with no direct competition.

1.3 PESTEL Factors and the Business Environment

Economic factors: Conditions of the economy — growth, household income, inflation, unemployment, interest rates — that influence market activity.
Environmental factors: Outside physical and ecological conditions — geography, resource access, waste rules, and consumer attitudes toward the environment — that help or limit a market.
Legal factors: Specific laws and regulations — employment, consumer protection, safety, environmental, intellectual property, antitrust — that govern how a market operates.
PESTEL factors: The six outside forces — political, economic, social, technological, environmental, and legal — that shape a market and decide which businesses can succeed there.
PESTEL framework: A structured way for a business to weigh each relevant PESTEL factor and judge how attractive or risky a market is for its idea.
Political factors: Government policies and political conditions — trade rules, taxes, subsidies, mandates, bans, stability — that affect activity in a market.
Social factors: Cultural and societal trends — demographics, norms, lifestyles, population change — that shape what consumers want.
Technological factors: Anything about a market's available technology, such as internet access, automation, and the pace of innovation.

1.4 How Do Business Ideas Originate?

Design-thinking process: An idea-generating approach that starts by observing, interviewing, or surveying potential customers to confirm a real problem before building a solution.
Entrepreneur: Someone who launches a new business, taking on its risks in hope of its rewards.
Minimum viable product (MVP): The most stripped-down version of a product — just its core features — used to gather early feedback. It might be a sketch, a description, or a rough model.
Validation: Collecting evidence that a problem, need, or want is real, clearly defined, and shared by several potential customers.

1.5 Vision

Core competencies: The skills, capabilities, and expertise that let a person or business outdo rivals.
Core values: The guiding beliefs and principles that steer how a person or business acts — things like honesty, creativity, or reliability.
Mission statement: A statement describing what a business does and how it plans to reach its long-term goals.
Nonprofit organization: An organization that works for the public good rather than owner profit; by law, any surplus goes back into the organization.
Social enterprise: A business that aims to earn a profit while also tackling a social problem through its products, operations, or funding model.
Vision statement: A short statement of a business's core values and long-term aspirations.

1.6 Business Ethics

Code of conduct: A business's written ethical guidelines, backed by employee training and consequences for breaking the rules, meant to steer people toward honest behavior.
Ethical dilemma: A situation where one core value — say fairness or transparency — clashes with another value or with a business goal.
External stakeholders: People outside a business who still have a stake in its choices, like customers, government agencies, and community members.
Internal stakeholders: People directly involved in running a business, such as owners, managers, and employees.

1.7 Organization, Roles, and Responsibilities

Board of directors: A group elected by a corporation's shareholders to oversee its executive leaders and its biggest decisions — the body owners answer to once they hand over day-to-day control.
Corporation: A business owned by shareholders and run under a board of directors. It has stronger access to funding, but owners give up direct control, and the company itself holds profits and liability.
Limited liability company (LLC): A structure that lets owners keep control while shielding their personal assets from the business's debts.
Outsourcing: Hiring an outside business to handle a function, usually to cut costs or get skills the business lacks.
Partnership: A business owned by two or more people who share control and responsibility, usually splitting roles by strength; partners are personally liable for the business's debts.
Shareholder: Someone who owns shares of a corporation's stock, giving them a claim on its profits and, together with the board of directors, a say in how it's run.
Sole proprietorship: A business owned and run by one person, who keeps control and profits but is personally responsible for its debts.
Specialized departments: Teams within a larger business that each focus on one function — sales and marketing, R&D, operations, accounting, finance, or HR — building expertise in their area.

1.8 Supply Chains

Artisan process: A way of making goods that relies on skilled labor and careful attention to detail rather than large-scale machinery.
Mass-production process: Making large quantities of goods using technology, assembly lines, and machinery.
Supply chain: Every person and business linked across a product's journey, from raw materials to final delivery. It can be local, regional, or global and differs for goods versus services.

2.1 Marketing to Customers

Customer acquisition cost: The average cost of winning one new customer — total marketing, advertising, and sales spending divided by the number of customers gained.
Customer profile: A made-up portrait of a typical target customer, built from demographic and psychographic data plus that person's needs and wants.
Demographic characteristics: Measurable traits of a population, such as age, sex, race, ethnicity, income, and location.
Lifetime value of a customer: The estimated total a single customer will spend on a business's products over the whole relationship.
Market segmentation: Grouping potential customers into segments that share demographic and psychographic traits, so a business can better match products to each group.
Marketing: Everything a business does to figure out what customers need and to promote, sell, and deliver products to them.
Psychographic characteristics: The mindset and behavior side of a population — interests, activities, values, and lifestyles.
Target customers: The buyers most likely to want a specific product because of their needs, wants, and preferences.

2.2 Consumer Behavior

Authority principle: Cialdini's idea that people tend to follow credible authority figures; marketers use experts to endorse products.
Consensus principle: Cialdini's idea that people follow what their social group does; marketers highlight positive reviews to suggest everyone likes a product.
Consistency principle: Cialdini's idea that people stick to actions that fit their self-image; marketers appeal to a customer's identity.
Liking principle: Cialdini's idea that people are swayed more by those they like or relate to; marketers feature relatable people and build rapport.
Personal factors: Traits like age, income, education, occupation, and lifestyle that shape what a consumer needs, wants, and can afford — and so steer what they buy.
Principles of influence: Psychologist Robert Cialdini's set of mental triggers that make people more likely to say yes; marketers build tactics around them.
Psychological factors: Internal drivers — values, perceptions, past experience, and personal motivation — that shape how a consumer feels about a product and how willing they are to buy it.
Purchasing pattern: A consumer's usual buying habits — when, how often, and how much they purchase.
Reciprocity principle: Cialdini's idea that people feel they owe something back after receiving a gift; marketers offer free trials and samples to prompt a purchase.
Scarcity principle: Cialdini's idea that people want something more when it seems rare; marketers use 'limited time' or 'only one left' to create urgency.
Situational influences: Temporary, in-the-moment conditions — a store's layout, timing, or whether an item is even in stock — that can nudge a purchase decision one way or the other.
Social and cultural factors: Pressure from peers, family, social status, cultural norms, and media that shapes what a consumer sees as acceptable, desirable, or appropriate to buy.
Unity principle: Cialdini's idea that people are more influenced by groups they feel part of; marketers build a sense of community among customers.

2.3 Market Research

A/B testing: An experiment that shows two viable options to real customers to see which they prefer.
Bar chart: A chart best suited to comparing individual data points side by side, like a business's sales totals across several years.
Business hypothesis: A testable assumption about a customer, product, or market that a business checks before committing to a plan.
Data visualization: Turning data into charts — bar charts, stacked bars, line graphs, pie charts — so patterns and trends are easy to read.
Desirable: A product is desirable when it creates real value for customers by solving their problem.
Experiments and observations: A primary-research method that studies what customers actually do rather than what they say, by watching behavior in either a controlled setting or a natural one.
Feasible: A product is feasible when the business can actually make and deliver it within its resources, technology, expertise, and time.
Focus groups and interviews: A primary-research method that draws in-depth, qualitative insight from a small group of engaged customers, using follow-up questions to pull out detailed answers.
Line graph: A chart best suited to showing how a number, like customer count, trends over time.
Market research: Gathering detailed information about markets, products, and customer behavior to guide marketing choices.
Pie chart: A chart best suited to showing how a whole splits into parts, like each rival's slice of a market's total share.
Primary-source research: Collecting fresh data directly, through surveys, interviews, focus groups, experiments, observations, or A/B tests.
Qualitative data: Descriptive, non-numerical information in words or images — answering why and how.
Quantitative data: Numerical information you can measure and count — answering how many, how much, how often.
Secondary-source research: Pulling existing data from outside sources — government, commercial, or academic publications and databases — rather than collecting it firsthand.
Stacked bar chart: A bar chart that splits each bar into its subcategories, so it can show total yearly sales and each product line's contribution to that total at once.
Survey: A primary-research tool for gathering a large amount of quantitative data reflecting a whole population's views, used to test a business hypothesis.
Viable: A product is viable when it has a genuine shot at being profitable in its market.

2.4 Product

Brand identity: The name, symbol, design, or mix of elements that expresses a brand — often protected by a trademark.
Branding: Building an identity for a business or product so it stands out from rivals, gets noticed, and earns loyalty.
Decline stage: The final life-cycle stage, when sales and revenue fall as customers drift to rivals or substitutes, pushing a business to cut costs, redesign the product, or discontinue it.
Design stage: The product-development stage where a business sources materials, builds prototypes, and settles on features like function and quality — gathering feedback along the way to see who responds to what.
Growth stage: The life-cycle stage where sales and revenue climb at a faster pace, rivals start showing up, and marketing shifts toward differentiating the product and building the brand.
Ideation stage: The first stage of product development, where a business generates ideas for a new or improved product through market research, R&D, and brainstorming.
Introduction stage: The opening stage of a product's life cycle, right after launch, when sales and revenue are still low and marketing focuses on building brand awareness to spark demand.
Launch stage: The final product-development stage, where a business starts taking orders, delivering the finished product, and marketing it to its target customers.
Maturity stage: The life-cycle stage where sales and revenue level off in a crowded market, so a business focuses on holding onto its share through brand loyalty, differentiation, and lower prices.
Messaging stage: The product-development stage where a business builds its marketing strategy, shaping a value proposition and deciding how it wants customers to see the product next to rivals.
Product development: The work of creating or improving a product through research and repeated iteration, usually across six stages: ideation, validation, design, messaging, production, and launch.
Product life cycle: The stages a product moves through as demand changes over time: introduction, growth, maturity, and decline.
Product-market fit: The point where customer demand for a product is strong enough to turn a profit.
Production stage: The product-development stage where a business actually builds the product, folding in earlier design feedback and lining up its production process and supply chain with expected demand.
Validation stage: The product-development stage where a business tests its idea on potential customers, often with an MVP, to see whether demand looks strong enough to reach product-market fit.
Value proposition: A clear statement of who a product is for, what problem it solves, and why it beats the alternatives.

2.5 Price

Collusion: Rival firms secretly agreeing on a price, usually to push it above the competitive level — illegal in the U.S. and many countries.
Competitive pricing: Setting a price by reference to rivals' prices — matching them, undercutting them, or charging a premium if the product stands out.
Cost-based pricing: Setting a price to hit a target profit on top of per-unit cost, rather than on customer value or rivals' prices.
Penetration pricing: Launching at a deliberately low price — sometimes below cost — to grab market share fast, then raising it later.
Per-unit cost: What it costs a business to produce and deliver a single unit of its product; pricing at or below this line means the product can't turn a profit.
Price discrimination: Charging different customers different prices for the same product; illegal when based on race, sex, nationality, or other protected status.
Price elasticity of demand: A measure of how strongly customers react to price changes. Elastic demand reacts a lot; inelastic demand barely moves.
Price gouging: Sharply raising a product's price during a crisis-driven spike in demand — illegal in many U.S. states and countries.
Pricing power: How freely a business can raise prices without losing customers; greater when its product is differentiated or competition is light.
Pricing strategy: A method for deciding how much to charge for a product — a choice central to attracting customers and earning profit.
Value-based pricing: Setting a price around how much customers think the product is worth; common for highly distinctive products.

2.6 Place and Channels

Business-to-business (B2B): Selling to other businesses through channels like industrial distributors.
Business-to-consumer (B2C): Selling to individual consumers through channels like websites and retail stores.
Direct channel: A path that connects a business straight to its customers with no middlemen.
Indirect channel: A path that reaches customers through intermediaries such as wholesalers and retailers.
Marketing channel: The final stretch of a supply chain: all the people and businesses needed to get a finished product to the customer.
Place: Where and how customers can get a product — retail stores, company-owned shops, memberships, or online.

2.7 Promotion and Marketing Communications

Big data: The large volume of customer-response information digital tools can collect to learn what makes people buy.
Digital marketing: Using internet tools — websites, email, social media, apps — to reach and serve customers, often more cheaply and precisely than traditional ads.
Direct marketing: Sending a targeted message straight to many potential customers, for example through flyers or brochures.
Marketing campaign: A coordinated push to promote a product using some or all of the tools in the promotional mix.
Media advertising: A promotional-mix tool — TV, radio, newspaper, or billboard ads — used to put the same message in front of a large audience all at once.
Personal selling: One-on-one selling that gives a customer detailed information or a demonstration, often with a sales pitch.
Promotional mix: The five communication tools a business can combine: media advertising, personal selling, sales promotion, direct marketing, and public relations.
Public relations: Earning favorable coverage — through press releases or interviews — to build a good public image rather than push a specific sale.
Sales promotion: Short-term incentives like discounts and coupons used to speed up buying or clear inventory.

3.1 Saving for Future Purchases

Automated savings plan: A setup that moves a fixed amount into savings every pay period, making it easier to save consistently.
Certificate of deposit (CD): An insured deposit that pays higher interest in exchange for locking up the money for a set term, from a month to several years.
Inflation: A general rise in prices that eats away at the buying power of money over time, so savings buy less later.
Interest rate: The percentage a saver earns or a borrower owes on their money; it's one of several inputs - alongside how much is saved or borrowed, the type of account or loan, and the state of the economy - that together determine the size of an interest payment.
Money market account: An insured deposit account like a savings account, often with a higher minimum balance and higher interest but easier cash access.
Saving: Setting aside part of current income for future goals or emergencies. Savings become a personal asset and can earn interest.
Savings account: A deposit account that usually pays interest and is federally insured up to a set limit, so depositors don't lose their money if the bank fails.

3.2 Borrowing, Credit, and Debt

Bankruptcy: A legal process that wipes out or restructures debts a borrower can't repay and sets up a plan for the rest.
Credit bureau: An agency that gathers information every time a consumer deals with a financial institution and compiles it into a credit report.
Credit report: A record of how a consumer has used credit, shareable with lenders, employers, landlords, insurers, and agencies; it includes a credit score.
Credit score: A number on a credit report that reflects how a consumer has handled credit in the past.
Creditworthiness: A lender's read on how likely a borrower is to repay, based on their income, savings, existing debt, and credit history.
Debt (liability): Money owed after borrowing; a personal liability that must be repaid with interest.
Default: Failing to repay a loan as agreed — the main risk lenders try to avoid.
Down payment: An upfront portion of a purchase price paid from savings, which can secure better loan terms on big buys like homes and cars.
Secured loan: A loan backed by collateral, such as a car or house, which usually carries a lower interest rate than an unsecured loan.
Unsecured loan: A loan with no collateral behind it, which typically charges a higher interest rate.

3.3 Accounting and Financial Management

Accounting department: The team that records a business's financial transactions during a period and turns them into financial statements.
Finance department: The team that analyzes the financial data accounting compiles and recommends strategies for maintaining or improving the business's financial performance.
Financial accountant: An accountant who reports financial information mainly to outsiders — shareholders, investors, and lenders.
Financial statements: Reports that summarize a business's financial performance, used to track health, guide decisions, inform investors and lenders, and meet legal rules.
Generally accepted accounting principles (GAAP): Rules requiring public corporations to disclose all financial information consistently each reporting period.
Managerial accountant: An accountant who supplies financial information and analysis to a business's managers and other insiders for planning and decisions.
Owners' equity: The value of a business to its owners — what's left of assets after liabilities are subtracted.

3.4 Business Expenses

Cost of goods sold (COGS): The direct costs of producing goods, including raw materials, production wages, and factory operation.
Cost of sales: For service businesses, the direct costs of delivering the service — labor, travel, and materials.
Direct costs: Costs tied directly to making or delivering a specific product.
Fixed expenses: Costs that stay the same no matter how much a business produces or sells.
Initial expenses: The part of startup costs — like early occupancy, R&D, marketing, insurance, and inventory — that keeps recurring once the business actually opens, unlike a one-time launch expense.
One-time expenditures: The part of startup costs — legal, incorporation, and licensing fees, and sometimes equipment — paid just once to get a new business or product off the ground.
Operating expenses (indirect costs): Indirect costs of running the business as a whole — rent, office salaries, marketing, utilities, insurance — usually fixed.
Startup costs: The one-time and early expenses of launching a new business or product, such as legal and licensing fees and initial inventory.
Variable expenses: Costs that rise and fall with how much a business produces or sells.

3.5 Financial Capital

Bond: A loan from an investor to a business; the business pays the bondholder interest.
Bootstrapping: Funding a startup from personal resources — savings, personal loans, or personal credit — rather than outside money.
Break even: The point at which sales cover all of a period's costs, with no loss and no profit.
Business loan: Borrowed money a business repays with interest; the interest counts as a business expense.
Capital gain: The profit from selling an asset for more than you paid for it.
Dividends: A shareholder's cut of a business's profits, though some firms reinvest earnings instead of paying them out.
Equity financing: Raising money by selling ownership shares, which gives investors part of the profits and some say over decisions.
Financial capital: The cash a business needs; entrepreneurs seek it externally when personal funds can't cover startup and operating costs until break-even.
Rate of return: The yearly return on an investment, found by dividing total gains (income plus any capital gain) by the asset's price.
Risk tolerance: How much financial risk a person or institution is willing to take; higher-risk bets are expected to pay a higher return.
Secondary market: A market where existing financial assets — stocks and bonds — are resold between investors.
Stock: An ownership share in a business, which can be sold privately or to the public.
Valuation: An estimate of what a business is worth, used to judge what an ownership share is worth or whether a loan can be repaid.

3.6 The Income Statement

Budget: A plan that maps expected income against planned saving and spending for a period; for consumers it's built around net pay.
Gross profit: Revenue minus the direct cost of making the product (COGS).
Gross profit margin: Gross profit divided by revenue — a gauge of how well a business prices products and controls direct costs.
Income statement: A financial statement, also called a profit and loss statement, that sets total revenue against total costs over a period to find net profit or loss.
Interest expense: The cost of borrowing money through loans or bonds, subtracted from operating profit to get pretax income.
Net profit: The bottom line: what's left after taxes are subtracted from pretax income — the owners' earnings for the period.
Net profit margin: Net profit divided by revenue — the share of revenue that ends up as owner income, a measure of overall profitability.
Operating profit: Profit after subtracting both COGS and operating expenses — income before interest and taxes.
Operating profit margin: Operating profit divided by revenue — a gauge of how well a business runs and controls operating costs.
Percentage change: A formula — the change in a value divided by its starting value — businesses use to track how much a figure like revenue, cost, or profit margin has risen or fallen.
Pretax income: Operating profit minus interest expense — income before taxes are taken out.
Projected income statement: A forward-looking income statement that estimates revenues, costs, and profit for a future period.
Revenue: The income a business earns from its core activities, like selling goods and services.
Tax expense: The taxes a business owes on its pretax income, listed on the income statement and subtracted to arrive at net profit.

3.7 The Balance Sheet and Net Worth

Balance sheet: A financial statement showing, at a single point in time, a business's assets against its liabilities and owners' equity.
Balance sheet equation: The rule a balance sheet must obey: assets equal liabilities plus owners' equity.
Current assets: Highly liquid assets — cash, short-term investments, receivables, inventory — used for day-to-day operations.
Current liabilities: Debts due within a year, like accounts payable, short-term debt, and unpaid operating expenses.
Intangible assets: Non-physical assets — patents, brand names, trademarks — that carry value because they can generate revenue.
Liquidity: How easily an asset can be turned into cash.
Long-term assets: Less-liquid assets, such as fixed assets and long-term investments, used to run operations over time.
Long-term liabilities: Obligations due beyond a year, such as mortgages, bank loans, and long-term bonds.
Personal net worth: A household's assets minus its liabilities; lenders and retirement planners pay attention to it.
Retained earnings: A business's accumulated profits that were kept and reinvested rather than paid out as dividends.
Working capital: The cushion for daily operations — present when current assets meet or exceed current liabilities.

3.8 The Cash Flow Statement

Cash flow statement: A financial statement tracking how cash coming in and going out changes a business's cash balance over a period.
Cash inflows: Cash coming into a business — customer payments, investment income, asset sales, or new financing.
Cash outflows: Cash leaving a business — payments to staff and suppliers, interest, taxes, asset purchases, debt repayment, and dividends.

3.9 Ethics and Financial Reporting

Auditing: An independent review of a company's financial records; U.S. law requires public corporations to submit to it each year.
Bribery: Offering or accepting payment to improperly sway a business or financial decision — unethical, and illegal in most countries.
Embezzlement: Stealing or misusing money entrusted to you — a form of financial fraud.
Fraud: Deception for financial gain, including falsifying figures on financial statements.
Lack of transparency: Deliberately hiding or distorting how a business's finances really look, sometimes to sway its stock price, loan terms, or tax bill.
Misuse of funds: Spending a business's money for something other than its intended purpose — made possible by access to large sums of company cash and pursued for personal gain.
Tax evasion: Illegally misrepresenting a business's finances to the government in order to pay less tax than is actually owed.

4.1 Management and Leadership

Communication skills: Abilities like expressing ideas clearly, persuading, listening with empathy, and acting on feedback.
Compensation schemes: The ways employees get paid — hourly wage, salary, commission, piece rate, or profit sharing — chosen to fit the role and market.
Employee benefits: The non-wage parts of an employee's pay package, such as health insurance contributions, retirement savings, disability coverage, tuition help, and paid time off.
Employee training: The postsecondary education, apprenticeships, on-the-job coaching, or continuing education a business provides so employees have the skills to do their jobs well.
Employment types: The different ways a business can hire someone — full time, part time, temporary, or contract — chosen to fit different staffing needs.
Incentives: Rewards like raises, promotions, bonuses, flexibility, or recognition used to motivate and keep good employees.
Leadership skills: Abilities like casting a vision, building teams, resolving conflict, and motivating people.
Management: The work of planning, organizing, leading, and evaluating a business's people, money, and physical resources to hit its goals.

4.2 Evaluating Performance Using KPIs

Benchmark: A reference point — internal history or industry standard — that KPI data is compared against to judge performance.
Financial KPIs: KPIs — like revenue, gross profit, operating profit, and cash flow — that a business tracks to monitor its financial health.
Key performance indicator (KPI): A data point that measures how a business is performing against its goals and strategy.
Nonfinancial KPIs: KPIs that track progress outside pure dollars-and-cents — like customer acquisition cost, satisfaction, market share, or on-time delivery rate — to gauge marketing and operations performance.

4.3 Strategy and Decision Making

Decision-making criteria: The costs and benefits weighed in a decision, both measurable (profit, sales) and intangible (reputation, mission).
PACED model: A structured decision process — Problem, Alternatives, Criteria, Evaluation, Decision — for working through major choices.
Return on investment (ROI): The extra profit from an investment divided by its cost.
Strategic frameworks: Structured tools that let a business weigh internal and external factors against its goals when choosing among options.
Strategy: A plan for reaching a goal; business strategy lays out how a firm will win advantage, grow revenue, cut costs, or fulfill its mission.
Tactics: The specific actions taken to carry out a strategy.

4.4 Strategic Frameworks: Porter's Five Forces and SWOT Analysis

Competitive rivalry: The intensity of competition among existing firms — usually the strongest of the five forces — driven by rival count, differentiation, and pricing power.
Customer power: Buyers' leverage to push prices down, shaped by their number, acquisition costs, and switching costs.
Opportunities: Outside factors a business doesn't control that could help it, like market growth or favorable new regulation.
Porter's Five Forces: Michael Porter's framework for sizing up a market's competitiveness and profit potential through five forces.
Strengths: Internal advantages, such as core competencies, brand recognition, intellectual property, funds, or efficient supply chains.
Supplier power: Suppliers' leverage to raise the prices they charge for materials and parts.
Switching costs: The money and hassle a customer faces when changing to a different product or brand.
SWOT analysis: A framework that weighs a business's internal strengths and weaknesses against external opportunities and threats.
Threat of new entrants: How easily new firms can enter a market, set by its barriers to entry.
Threat of substitute products: How readily customers can meet the same need with a different kind of product.
Threats: Outside factors a business doesn't control that could hurt it, like rising costs, disasters, or disruptive innovation.
Weaknesses: Internal disadvantages, such as missing skills, weak brand, product flaws, thin funds, or supply-chain risk.

5.1 Taxes, Net Income, and Budgeting

Capital gains tax: Tax on a capital gain, filed with the income tax return but usually charged at a lower rate.
Gross income: Total earnings in a pay period before any deductions.
Income tax: A share of income paid to the government; for employees, part of each paycheck is withheld, with a yearly return settling the balance.
Mandatory deductions: Withholdings required by law, such as income taxes and certain payroll taxes.
Net income (net pay): Take-home pay — what's left after every deduction comes out of gross income.
Payroll taxes: Taxes withheld from paychecks to fund programs like Social Security and Medicare; employers cover half for employees.
Pretax deductions: Amounts taken out before tax is figured, which lowers taxable income and can encourage saving.
Progressive tax: A tax that charges higher rates on higher incomes, like the U.S. federal income tax.
Property tax: A tax based on the value of property you own, such as a home, land, or car.
Sales tax: A tax on an item's sale price, usually collected by the seller and passed to the government.
Tax credit: An amount that cuts the tax owed directly, like a child tax credit or education credit.
Tax deduction: An amount that lowers taxable income — and thus tax owed — such as mortgage interest or charitable gifts.
Voluntary deductions: Optional withholdings an employee chooses, like health insurance, retirement savings, or union dues.

5.2 Managing Personal Risk

Beneficiary: The person or people a life insurance policy names to receive its payout when the insured person dies.
Claim: A request to an insurer for reimbursement after a covered loss.
Coverage: The amount and scope of protection an insurance policy promises to pay out for, set by how much premium the buyer chooses to pay.
Deductible: The amount a policyholder pays out of pocket before insurance kicks in; higher deductibles usually mean lower premiums.
Health insurance: Coverage that reimburses policyholders for necessary medical care, sometimes provided as an employee benefit.
Insurable risk: A risk of loss from chance — like an accident or storm — that an insurer can price because it's measurable and predictable.
Insurance fraud: Lying on a claim or policy — by a buyer or a seller — which is a crime.
Liability risk: An insurable risk of harming someone else's property or health, like damage from reckless driving.
Life insurance: Coverage that pays designated beneficiaries when the insured dies, often to replace income or cover final expenses.
Personal risk: An insurable risk to a person's own health and well-being, such as injury or illness.
Phishing: A scam that tricks people into handing over personal or financial information, often leading to identity theft.
Predatory lending: Deceptive or high-pressure lending tactics that put borrowers at risk.
Premium: The recurring payment made for an insurance policy in exchange for coverage.
Property risk: An insurable risk of loss to the insured's own property, like a damaged home or car.

5.3 Saving and Investing for Education, Housing, and Retirement Goals

Asset allocation: The choice of how to divide savings among different financial assets, weighed against how much is needed, time horizon, risk tolerance, and each asset's expected return.
Behavioral biases: Mental tendencies — like overconfidence or loss aversion — that can lead investors into poor decisions.
Compounding: The way savings grow faster over time as returns themselves start earning returns, rewarding those who start young.
Discount brokerage: A brokerage that charges lower fees and offers less advice than a full-service firm.
Diversification: Spreading money across assets with different risk and return levels to chase higher long-term returns without taking on too much risk.
Mortgage: A loan used to buy a home, repaid over time at a fixed or adjustable interest rate; payments depend on loan size, term, and rate.
Mutual fund: An investment that pools money from many people to buy a mix of stocks and/or bonds.
Time horizon: How long an investor plans to hold before needing the money; longer horizons allow riskier, higher-return assets.