Bu 1st Module
Transcript of Bu 1st Module
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P IART
Foundations of
Business
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C 1HAPTER
N P BATURE AND URPOSE OF USINESS
LEARNING
OBJECTIVES
After studying this chapter, you should be ableto:
explain the concept and characteristics of business;
compare the distinctive features of business, professionandemployment
;
classify business activities and clarify the meaning of industryandcommerce;
state various types ofindustry;
explain the activities relating tocommerce;
analyse the objectives ofbusiness;
describe the nature of business risks and their causes;and
discuss the basic factors to be considered while starting abusiness.
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NATURE AND PURPOSE OF BUSINESS 3
Imran, Manpreet, Joseph and Priyanka have been classmates in Class X.Aftertheir exams are over, they happen to meet at a common friend Ruchikas house.
Just when they are sharing their experiences of examination days,Ruchikasfather, Mr. Raghuraj Chaudhury intervenes and asks about their well-being.Healso enquires from each one of them about their career plans. But none ofthemhas a definite reply. Mr. Raghuraj, who himself is a businessman,suggests tothem that they can opt for business as a promising and challengingcareer.Joseph gets excited by the idea and says, Yes, business is really good formakinglots of money even more than is possible by becoming an engineer or adoctor.Mr. Raghuraj opines, Let me tell you, young man, there is a lot more to
businessthan merely money. He then gets busy with some other guests. However, the
four classmates begin raising many questions: What exactly business is allabout?What else is there in business besides money? How is business differentfromnon-business activities? What does one require to start a business? And, soon.
1.1 I influence on our daily lives.It,
NTRODUCTION
therefore, becomes important that weThe conversation among the four
understand the concept, nature andclassmates is obviously focused on
thepurpose of
business.meaning, nature and purpose
ofbusiness. All human beings,wherever
1.2 C BO NCE PT O F U SIN ES Sthey may be, require different typesofgoods and services to satisfy
their
The term business is derived from
theword busy. Thus, business
meansneeds. The necessity of supplying
goodsand services has led to certainactivities
being busy. However, in aspecificsense, business refers to
anybeing undertaken by people toproduce occupation in which people regularlyand sell what is needed by
others.Business is a major economic
activity
engage in an activity with a view to
earning profit. The activity mayconsist
in all modern societies concerned as it
is with the production and saleof
of production or purchase of goodsforsale, or exchange of goods or supply
ofgoods and services required by
people. services to satisfy the needs of
otherThe purpose behind most
businessactivities is to earn money by
meeting
people
. In every society peopleundertake
peoples demands for goods
andservices. Business is central to our
lives.
various activities to satisfy their
needs.These activities may be
broadlyAlthough our lives are influenced
by classified into two groups
economicmany other institutions in
modernso ci et y s uc h a s s ch oo ls , c ol le ge s, a nd no n- ec on om ic . E co no mi c a ct iv it ie s
are those by which we can earn ourhospitals, political parties andreligiousbodies, business has the
major
livelihood whereas non-economic
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4 BUSINESS STUDIES
activities are those performed out
ofmust be either produced or
procuredlove, sympathy, sentiments,
patriotism,
by business enterprises. Thus,
everyetc. For example, a worker working
in
business enterprise either
manu-a factory, a doctor operating in
his
factures the goods it deals in or
itclinic, a manager working in the office acquires them from producers, to
beand a teacher teaching in a school further sold to consumers orusers.are doing so to earn their livelihood
and
Goo ds m ay c on si st o f
consumableare, therefore, engaged in an e conomic items of daily use such as sugar,
ghee,activity. On the other hand, a housewife pen, notebook, etc. or capital goods
likecooking food for her family or aboy
machinery, furniture, etc. Servicesmayhelping an old man cross the road are include facilities offered toconsumersperforming non-economic
activitiesin the form of transportation,banking,since they are doing so out of love
orelectricity, etc.
sympathy. Economic activities may
be
(iii) Sale or exchange of goods
andfurther divided into threecategories,
services for the satisfactionofnamely business, profession
andhuman
needs:Directly or indirectly,
employment. Business may be
definedbusiness involves transfer or
exchangeas an economic activity involving the of goods and services for value. Ifgoodsproduction and sale of goods
andare produced not for the purpose
ofservices undertaken with a motiveof
sa le b ut s ay f or i nt er na l
consumption,earning profit by satisfying
humanit cannot be called a business
activity.needs in
society.Cooking food at home for the family
isnot business, but cooking food
and1.3 C BH ARACTE RISTI CS OF U SINE SS selling it to others in a restaurantisACTIVITIES business. Thus, oneessentialcharacteristic of business is that
thereIn order to appreciate how
business should be sale or exchange ofgoods
activity is different from other
activities or services between the seller andin society, the nature of business or
its the buyer.fundamental character must be
(iv) Dealings in goods and
servicesexplained in terms of i tsdistinguishingcharacteristics, which are as follows: on a regular basis: Business
involves( i) A n eco no micactivity:
Business
is
dealings in goods or services on
aregular bas is . One s ingle
transactionconsidered to be an economic activity
because it is undertaken with theobject
of sale or purchase, therefore, doesnotof earning money or livelihood and
notconstitute business. Thus, forexample,because of love, affection, sympathy
or
if a person sells his/her domestic
radioany other senti ment al rea son. set even at a profit , it wi ll not be
(ii) Production or procurement
ofconsidered a business activity. But
ifgoods and
services:
Before goods
are
he/she sells radio sets regularly
eitheroffered to people for consumptionthey
through a shop or fromhis/her
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NATURE AND PURPOSE OF BUSINESS 5
residence, it will be regarded as
achanges in consumer tastes and
business
activity.fashions, changes in methods of
(v) Profit earning: One of the main production, strike or lockout in
thepurpose of business is to earnincome
work place, increased competition
inby way of profit. No business
canthe market, fire, theft, accidents,
survive for long without earning
profit.natural calamities, etc. NobusinessThat is why businessmen make
allcan altogether do away with
risks.possible efforts to maximiseprofits, byincreasing the volume of sales
or1.4 C B ,OMPARISO
NOF USIN ESS
reducing
costs.P ER OFE SS IO N A ND M PL OY ME NT
(vi) Uncertainty of
return:Uncertainty
As has been mentioned earlier,of return refers to the la ck of knowledge
economic activities may be divided
intorelating to the amount of money that
three major categories
viz.,the business is going to earn in a
given (i)Businessperiod. Every business investsmoney (ii)
Profession(capital) to run its activities with
theobjective of earning profit. But it is
not
(iii)
Employment
Business Functions at Enterprise
LevelBusiness includes a wide variety of functions performed by many differentkindsof organisations called business enterprises or firms. Financing,
productionmarketing and human resource management are the four major functionswhichare performed by business enterprises to carry on business.Financing isconcerned with mobilising and utilising funds for running a businessenterprise.Production involves the conversion of raw materials into finished
products orgeneration of services. Marketing refers to all those activities whichfacilitateexchange of goods and services from producers to the people who need them,ata place they want, at a time they require and at a price they are prepared to pay.
Human resource management aims at ensuring the availability of workingpeoplewho have necessary skills to perform various tasks inenterprises.
certain as to what amount of profit will Bus iness refers to those
economicbe earned. Also, there is always
a
activities, which are connected with the
possibility of losses being
incurred, in
production or purchase a nd sale
ofspite of the best efforts put intothe
goods or supply of services withthebusines
s.
main object of earning profit.
People(vii) Element of risk: R is k i s
the
engaged in business earn income in
theuncertainty associated with an form of
profit.exposure to loss. It is caused by
some
Profession includes those
activities,unfavourable or undesirable event.
The
which require special knowledge and
risks are related with certain factors
like
skill to be applied by individuals
in
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Accountants of India.
Employment refers to the
occupation in which people work for
others and get remunerated in
return.Those who are employed by others
areknown as employees. Thus, people
whowork in factories and receive wages
and
B EOF ROFESSION MPLOYMENT
a i Bn s n s r f s i E p o m n
n r p e e r s e b r h p f A p i t e t e t r
. o e f e i i n n o h r r f s i n l o yn s r i e
s a l s m n l g l o m l t e , f n c r i i a e f g e m n
n c s a y r c i e
r v s o o g o s e d r n o P r o m n w r a
2 N t r o w r a d e v c s o h p r o a i e , e s r i e o t a t
u l c x e t e v c s r u e o s r i e
x e t s a d u l f c t o a do i i u
t a n n i a r i i g s. u l f c t o q a i i a i n s
p c f c i l i a r s r b d y hn c s a y
u t m l y r
. e a d r r f t a n Ps o e s o a f S l r o w g
r dt r
C p t l n e t e ti i e c p t l
. a i a r q i e a p r e d d o N c p t l e u r d
n e t e t i e n n t r oe t b i h e t
u i e s
r f t a ee i g n r l y
n e t i a d i e a d e u a6 R s r g l r n
i r g l r r s i p y n r sc r a n s m r s
p e e t
r n f r o s b e. r n f r f
i h o e o p s i l N t o s bi t r s
f r a i i s
o m o b h v o r r f s i n l o e
o o e f o d c a d o n y h8 t C d o c n u t f o d c i t b
i p e c i e e p o e a e o eo l w d
o l w d
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NATURE AND PURPOSE OF BUSINESS 7
salaries are in the employment
ofexchange of goods and services. On the
factory owners and are employees
of
basis of these two categories, we
maythe factory. Similarly, people who
work
classify business firms into
industrialin the offices of banks, insurance a nd c om me rc ia l
enterprises.companies or government
department,Let us examine in detail the
as managers, assistants, clerks,
peons
activities relating to
business.or security guards are the
employees 1.6 Iof theseorganisations.
NDUSTRY
Industry refers to economic
activities,1.5 C BLAS SI FI CA TI ON OF U SI NESS
which are connected with conversionACTIVITIES of resources into useful goods.
Theterm industry is used for activitiesin
Various business activities may
be which mechanical appliances andclassified into two broad categoriesindustry and commerce. Industryis technical skills are involved. Theseconcerned with the production or include acti vities r elat ing t o
producingor processing of goods as well
asprocessing of goods and
materials. breeding and raising of animals.The
Commerce includes all those
activities term industry is also used tomean
which are necessary for facilitating the
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8 BUSINESS STUDIES
reproduction. For the
breedinggroups of firms producing
similar orrelated goods. For example,
cotton
of plants, the seeds and
nurserycompanies are typical
examplestextile industry refers to
all of genetic industries.In
manufacturing units producing
textile addition, activities of
cattle-goods from cotton. Similarly,
electronic breeding farms, poultry
farms,industry would include all
firms and fish hatchery come underproducing electronic goods, and so
on. t he c la ss o f g en et ic
industries.Further, in common parlance, certain
(b ) Se co ndar yindustries:
These areservices like banking and
insurance concerned with using the materials,are also refer red to as
industry, which have already been extractedsay banking indus try,
insurance at the primary stage.
Theseindustry
etc. industries process such materials
toIndustries may be divided
into produce goods for
finalthree broad categories namely
primary, consumption or forfurthers ec on da ry a ndtertiary. processing by other industrial
units.(a) Primary industries: These include
For example, the mining of aniron
all those activities, which areore is a primary industry,
butconnected with the extraction and
manufacturing of steel is
aproduction of natural resources
andsecondary indus try.Secondary
reproduction and development
of industries may be further dividedas
living organisms, plants etc.
Thesefollows
:industries may be furthersub-
( i) Manufactur ing
industries:
Thesedi vid ed a s
follows:industries are engaged
in( i) E xt ra ct ive
industries:
Theseproducing goods
throughindustries extract or draw
outprocessing of raw materials
andproducts from naturalsources.
thus creating form utilities.TheyExtractive industries
supplyturn out d iverse
finishedsome basic raw materials
thatproducts, that we consume,
are mostly products of the
soil.through the conversion of raw
Products of these industriesare
mater ials or par tlyfinishedusually transformed into
manyma teria ls in their
manufacturingother useful goods
byoperations.
Manufacturingmanufacturing
industries.industries may be
furtherImpor tant extractive
industriesdivided into four categories
oninclude farming,
mining,the bas is of method of
operationlumbering, hunting and
fishingforproduction.operations
. A na ly ti cal
industry
which
(i i) G ene ti c
industries:
These a na lyse s a nd
separatesindustries remain engaged
in
different elements from the
breeding plants and
animalssame materials, as in the case
for their use in
further
of oil
refinery.
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NATURE AND PURPOSE OF BUSINESS 9
S yn th et ic al
industry
which to trade. Buying and selling of goods
isc om bi ne s v ar io us
ingredientstermed as trade . But there are a lot of
into a new product, as in the activities that are required to
facilitatecase of cement. the purchase and sale of goods. These
Processing industry which are called services or auxiliaries to
tradeinvolves successive stagesfor
and include transport, banking,
manufacturing
finishedinsurance, communication,advertise-products, as in the case of m en t, pa cka gi ng a ndwarehousing.su ga r a nd
paper.Commerce, therefore, includes both,
Assembling industry which buying and selling of goods i.e.,
tradeassembles differentcompo-
as well as auxiliaries such
asnent parts to make a new transport, banking, etc. Commerceproduct, as in the case of provides the necessary link
betweentelevision, car, computer, etc. producers and consumers. Itembraces( ii) Construction
industries:
These all those activities, which are necessaryindustries are involved inthe
for maintaining a free flow of goods
andconstruction of buildings,
dams,services. Thus, all activities
involvingbridges, roads as well as
tunnelsthe removal of hindrances in the
and canals. Engineering and process of exchange are included inarchitectural skills are an commerce. The hindrances may be inimportant part in construction respect of persons, place, time,
risk,industries.
finance, etc. The hindrance of persons(c) Tertiary industries: These are is removed by trade thereby
makingconcerned with providingsupport
goods available to the consumers
fromservices to primary and
secondarythe producers. Transport removes
theindustries as well as
activitieshindrances of place by moving
goodsrelat ing to trade. These
industriesfrom the places of production to the
provide service facilities.
Asmarkets for sale. Storageandbusiness activities these may
bewarehousing activities remove
theconsidered part of commerce h in dr an ce o f t im e b y
facilitatingbecause as auxiliaries to
tradeholding of stocks of goods to be sold
asthey assist trade. Includedin
and when required. Goods held in stockt hi s c at ego ry a retransport,
as well as goods in course of
transportbanking, insurance,
warehousing,are subject to the risk of loss or
damagecommunication, packaging and
due to theft, fire, accidents, etc.advertisin
g. Protection against these risks
isprovided by insurance of goods.
Capital1.7 C OMMERCE
required to undertake the
aboveC om me rc e i nc lu de s t wo ty pe s o f a ct i- a ct iv it ie s i s p ro vi de d b y b an ki ng
andvities, viz., (i) trade and (ii)
auxiliaries
f inancing ins ti tu tions.
Advertising
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10 BUSINESS STUDIES
makes it possible for producers
and
or organisations operating in two
ortraders to inform consumers about
the
more countries. If goods are
purchasedgoods and services available in
the
from another country, it is called
importm ar ke t. H enc e, c om me rc e i s sa id to tr ad e. If t he y a re sol d t o ot her
countries,consist of activities of removing
the
it is known as export trade. When
goodshindrances of persons, place, time,risk,
are imported for export tootherf in an ce an d i nf or ma ti on i n t he pr oc es s c ou nt ri es , i t i s k no wn a s e n tr ep ot
trade.of exchange of goods and
services. 1.7.2 Auxiliaries to Trade
1.7.1 TradeActivities which are meant for
assistingTrade is an essential par t of commerce.
trade are known as auxiliaries totrade.I t r ef er s t o s al e, t ra ns fe r o r e xc ha nge o f T he se a ct iv it ie s a re g en er al ly ,referredgoods. It helps in making the
goods
to as services because these are in the
produced available toultimate nature of facilitating theactivitiesconsumers or users. These days
goods
relating to industry and
trade.are produced on a large scale and it
is
Transport, banking, insurance,
difficult for producers tothemselves
warehousing, and advertisingarereach individual buyers for sale of
their
regarded as auxiliaries to trade,
i.e.,products. Businessmen are engaged
in
activities playing a supportive role.
Intrading activities as middlemen to
make
fact, these activities not only
supportthe goods available to consumers
in
trade but also industry and hence, the
different markets. In the absence
of
entire business activity.
However,trade, it would not be possible
to
auxiliaries are an integral part
ofundertake production activities on
a
commerce in particular and
businesslarge scale. activity in general. These activities
helpTrade may be classified into
two
in removing various hindrances
whichbroad categories internal
and
arise in connection with the production
external . Internal or home t ra de is and distribution of goods.
Transportconcerned with the buying and sel ling facil itates movement of goods from
oneof goods and services within
the
place to another. Banking
providesgeographical boundaries of a
country.
financial assistance to the trader.
This may further be divided
into
Insurance covers various kinds
ofwholesale and retail trade. When
goods
business risks. Warehousing
createsare purchased and sold in bulk, it
is
time utility with storage
facility.known as wholesale trade. When
goods
Advertising provides information.
Inare purchased and sold in other words, these activities
facilitatecomparatively smaller quantities, itis
movement, storage, financing,riskreferred to as retail trade. External
or
coverage and sales promotion of
goods.f or ei gn t ra de c on si st s o f t he e xc ha ng e Aux il ia ri es t o t ra de a re
brieflyof goods and services between
persons
discussed
below:
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NATURE AND PURPOSE OF BUSINESS 11
(i) Transport and
Communication:banks on behalf of importers
andProduction of goods generally
takes
exporters. Commercial banks also
helpplace in particular locations.
For
promoters of companies to raise
capitalinstance, tea is mainly producedin
from the
public.Assam; cotton in Gujarat
and
(iii) Insurance: Business
involvesMah ar as ht ra ; j ut e i n W es t B en ga l a nd v ar io us t yp es o f r i sk s. Fac to ry
building,Orissa; sugar in U.P, Bihar
and
machinery, furniture etc. must be
Mah ar as ht ra an d s o o n. Bu t t he se p ro te ct ed ag ai ns t f ir e, th ef t a nd o th er
goods are required for consumption
in
risks. Materials and goods held in
stockdi ffe re nt pa rt of th e c oun tr y. The o r i n t ra nsi t a re sub je ct to the ri sk
ofobstacle of place is removed
byloss or damage. Employees are
alsotransport road, rail or
coastal
required to be protected against
theshipping. Transport
facilitates
risks of accident and occupational
movement of raw material to the place hazards. Insurance provides
protectionof production and thefinished
in all such cases. On payment of aproducts from factories to the place
of
nominal premium, the amount of
lossc on su mp ti on . A lo ng wi th th e t ra ns po rt o r d a ma ge a nd c om pe nsa ti onforfacility, there is also a need
forinjury, if any, can be recoveredfromcommunication facilities so
that
the insurance company.
producers, traders and
consumers
(iv) Warehousing: Usually, goods
aremay exchange information with one not sold or consumed immediately
aftera no th er . T hu s, po st al se rv ic es an d p ro du ct io n. Th ey ar e h el d i n s to ck to
telephone facilities may also
be
be available as and when
required.regarded as auxiliaries to
businessSpecial arrangement must be made
foractivitie
s.
storage of goods to prevent loss
or( ii ) B an king a nd
Finance:Business
damage. Warehousing helpsbusinessa ct iv it ie s c an no t b e u nd er ta ke n u nl es s f ir ms t o o ve rc om e t h e p ro bl em o f
storagefunds are available for acquiring
assets
and facilitates the availability of
goodsand meeting the day-to-day
expenses.
when needed. Prices are thereby
Necessary funds can be obtainedby
maintained at a reasonable level
businessmen from a bank.
Thus,through continuous supply ofgoods.banking helps business activities
to
(v)Advertising:
Advertising is one
ofov er co me t he pr obl em of f ina nc e. t he m ost i mp or ta nt me th od s
ofCommercial banks generally lend promoting the sale of
products,money by providing overdraft andcash
particularly, consumers goodslikecredit facilities, loans and
advances.
electronic goods, automobiles,
soaps,B an ks a lso u nd er ta ke c ol le ct io n o f d et er ge nt s et c. Mos t o f th es e go od s
arecheques, remittance of funds t o manufactured a nd s uppl ied i n
thedifferent places, and discounting of
bills
market by numerous firms big
oron behalf of traders. In foreign
trade,
small. It is practically impossible
forpayments are arranged by
commercial
producers and traders to contact each
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12 BUSINESS STUDIES
is the excess of revenue over cost.
Profitand every customer. Thus, for
sales may be regarded as an
essentialpromotion, information about
the objective of business for
variousgoods available, its features, price,
etc., reasons: (i) it is a source of incomefor
must reach potential buyers. Also
there business persons, (ii) it can be a
sourceis a need to persuade potential
buyers of f inance for meeting
expansionabout the uses, quality,prices, requirements of business,
(iii) itcompetitive information about
the indicates the efficient working
ofgoods etc. Advertising helps
in business, (iv) it can be taken as
societysproviding information about
available approval of the utility of business
andgoods and inducing customers to
buy (v) it builds up the reputation of
aparticular
items. business
enterprise.However, too much emphasis
on1.8 O BB JE CT IV ES O F U SI NE SS
profit to the exclusion of other
objectivesAn objective is the starting pointof
can be dangerous for goodbusiness.business. Every business is
directed toObsessed with profit
businessthe achievement of certain objectives, managers may neglect all otherwhich refer to all that the business responsibilities towards
customers,people want to get in return for what employees, investors and society
atthey do. It is generally believed
thatlarge. They may even be inclined to
business activity is carried on only
forexploit various sections of societytoprofit. Business persons
themselvesearn immediate profit. This may
resultproclaim that their primary objective
isin the non-cooperation or even
to produce or distribute goods
oropposition from the affected
peopleservices for a profit. Every
business isagainst the malpractices of
businesssaid to be an attempt on the part of enterprises. The enterprises mightlosebusiness people to get more than
whatbusiness and may be unable to
earnhas been spent or invested or, in other profit. That is the reason why there
iswords, to earn profit which is the
excesshardly any sizable business
enterpriseof revenue over cost. However, it
iswhose only objective ismaximisation
widely accepted nowadays thatof
profit.business enterprises are part of
societyand need to have severalobjectives,
1.8.1 Multiple Objectives of
Businessincluding social responsibility
tosurvive and prosper in the long
run.
Continuous increase in the
profitsProfit is found to be the leadingobjective
of any enterprise is possibleonlybut not the only one. through performing usefulservicesAlthough earning profit cannot be to society. In fact, objectives
arethe only objective of business,
its
needed in every area that influences
importance cannot be ignored. Every the survival and prosperity
ofbusiness is an attempt to reap
morebusiness. Since a business has
tothan what has been invested and profit balance a number of needs and
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NATURE AND PURPOSE OF BUSINESS 13
goals it requires multiple
objectives.
(c) Productivity: Productivity
iscalculated by comparing the valueIt cannot follow only one objective
of outputs with the value of
inputs.and expect to achieve excellence.
I t is used as a measure of efficiency.
Objectives have to be specific in
every I n or de r t o e nsu re
continuousarea and sphere of business.
For survival and progress,
everyexample, sales figures have to beset, enterprise must aim at
greaterthe amount of capital to be raised
has productivity by the best useof
to be estimated and the target
number available
resources.of units to be produced should
be (d) Physical and f inancial
resources:defined. The objectives define what the
Any business requires
physicalbusiness is going to do in
concrete resources l ike p lants,
machines,terms that enable the business to
offices, etc., and financial resources,analyse their own experience and as ai.e., funds to be able to produce
and
r es ul t i mp ro ve t he ir
performance. supply goods and services toits
Objectives are needed in every
area customers. The business
enterprisewhere performance and results affect
must aim at acquiring
thesethe survival and prosperity
of resources according to theirbusiness. Some of these areasare
requirements and use themdescribedbelow:
efficiently
.(a) Market
standing:
Market
standing(e) Earning profits: One of the
refers to the position of an
enterpriseobjectives of business is to earn
profitsin relation to its competitors.
Aon the capital employed.
Profitabilitybusiness enterprise must aim
atrefers to profit in relation to
capitalstanding on stronger footingin
investment. Every businessmustt er ms o f o ff er in g
competitiveearn a reasonable profit which is
soproducts to its customers
andimportant for its survival and
growth.s er vi ng t he m t o t he ir
satisfaction.(f) Manager performance
and(b)
Innovation:
Innovation is the development
:Business
enterprisesintroduction of new ideas
orneed managers to conduct and
methods in the way somethingis
coordinate business
activity.done or made. There are twokinds
Various programmes for
motivatingof innovation in every business
i.e.,m ana ger s n ee d t o be
implemented.(i) innovation in product or
service;Manager performance and
and (ii) innovation in the
variousdevelopment therefore, is
anskills and activities needed
toimpor tant objective. The
enterprisessupply them. Nobusiness
must actively work for this
purpose.enterprise can flourish in
a(g) Worker performance and attitude:
competi tive wor ld
withoutWorkers performance and
attitudesinnovation. Therefore,
innovationdetermine their contribution
towardsbecomes an important
objective.
productivity and profitability of
any
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14 BUSINESS STUDIES
enterprise. Therefore,
every
conditions including fluctuations
inenterprise must aim at improving
its
demand and supply, changes in prices
workers performance. It should
also
or changes in fashion and tastes of
try to ensure a positive attitude
on
customers. Favourable
marketthe pa rt of
workers.
conditions are likely to result in
gains(h)Social
responsibility:Social whereas unfavourable ones may
resultresponsibility refers to the
obligation
in losses. Pure risks involve only
theof bus iness f irms to
contribute
possibility of loss or no loss. The
chanceresources for solving social
problems
of fire, theft or strike are examples
ofand work in a sociallydesirable
pure risks. Their occurrence mayresultmanner. in loss whereas non-occurrence may
Thus, a business enterprise must
have
explain absence of loss, instead of
gain.multiple objectives to satisfy
different 1.9 N B R individuals and groups, for its
own
ATURE OF USINESS ISKS
sur vi va l a ndprosperity. Nature of business risks can
beunderstood in terms of their
peculiar1.8.2 Business
Risks characteristics:
The term business risks refers to
the(i) Business risks arise due
topossibility of inadequate profits or
evenuncertainties: Uncertainty refers to
losses due to uncertaintiesor
the lack of knowledge about what is
unexpected events. For
example,going to happen in the future.
Naturaldemand for a particular product
maycalamities, change in demand and
decline due to change in tastes and prices, changes in government policy,
preferences of consumers or due
toimprovement in technology, etc., are
increased competition fromother
some of the examples of
uncertaintyproducers. Decrease in demand
willwhich create risks for businessbecauseresult in lesser sales and profits.
Inthe outcome of these future eventsisanother situation, the shortage of raw not known in advance.
materials in the market may shoot
up
(ii) Risk is an essential part ofeveryits price. The firm using these
rawbusiness
:
Every business has
somematerials will have to pay morefor
risk. No business can avoidrisk,buying them. As a result, cost
of
although the amount of risk may
varyproduction may increase which, in from business to business. Risk can
beturn, may reduce
profits.
minimised but cannot be
eliminated.Bus iness enterpr ises
constantly(iii) Degree of risk depends
mainlyface two types of risk: speculativeand
upon the nature and size of
pure. Speculative risks involve both
the
business
:
Nature of business (i.e.,
typepossibility of gain as well as
the
of goods and services produced
andpossibility of loss. Speculative
risks
sold) and size of business (i.e.,
volumearise due to changes in
market
of production and sale) are the main
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NATURE AND PURPOSE OF BUSINESS 15
factors which determine the amount of power failure, strikes,
riots,r isk in a bus iness. For
example, amanagement inefficiency, etc.
business dealing in fashionable
items(iii) Economic causes: These include
has a high degree of risk. Similarly,a
uncertainties relating to demand
forlarge-scale business has a higher
riskgoods, competition, price, collection
ofthan what a small scale has. dues from customers, changeof(iv) Profit is the reward for risk technology or method of production,
taking: No risk, no gain is an age-
oldetc. Financial problems like rise
inprinciple, which applies to all types
ofinterest rate for borrowing, levy of
higherbusiness. Greater the risk involved
intaxes, etc., also come under these type
a business, higher is the chance of of causes as they result in
higherprofit. An entrepreneur
undertakesunexpected cost of operationofrisks under the expectation of
higherbusines
s.profit. Profit i s thus t he reward
for
(iv) Other causes: These are
risktaking.
unforeseen events like
politicaldisturbances, mechanical failures such1.9.1 Causes of Business
Risksas the burst ing of boiler,
fluctuationsBusiness risks arise due to a varietyof
in exchange rates, etc., which lead to
causes, which are classified asfollows:
the possibility of businessrisks.
Methods of Dealing with
RisksAlthough no business enterprise can escape the presence of risk, therearemany methods it can use to deal with risk situations. For instance, theenterprisemay (a) decide not to enter into too risky transaction; (b) take preventive measures
like firefighting devices to reduce risk; (c) take insurance policy totransfer riskto insurance company; (d) assume risk by making provisions in thecurrentearnings as is the case of provision for bad and doubtful debts; or (e) shareriskswith other enterprises as manufacturers and wholesalers may do by agreeingtoshare losses which may be caused by falling
prices.
1.9.2 Starting a Business
Basic(i) Natural causes: Human
beings Factorshave little control over natural
calamities l ike f lood,
earthquake,Starting a business enterprise is
similarlightning, heavy rains, famine, etc. They to any other human effort in whichresult in heavy loss of life, property
andresources are employed to
achieveincome in
business.certain objectives. Successful results
in(ii) Human causes: Human causes business depend largely upon
theinclude such unexpected events like ability of the entrepreneurs or
thedishonesty, carelessness or
negligencestarters of a new business to
anticipateof employees, stoppage of work due
to
problems and solve them
with
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16 BUSINESS STUDIES
minimum cost. This is especially
true
business, he will start the operation
atof the modern business world
where
a large scale. If the market conditions
competition is very tough and risks
are
are uncertain and risks are high, a
high. Some of the problems,
which
small size business would be
betterbusiness firms encounter, are of a
basic
choice.
nature. For example, to start a
factory,
( ii i) C ho ice o f f orm o f
ownership:plans must be made andimplemented
With respect to ownership, the
about such problems as the location business organisation may taketheof the business, the possible
number
form of a sale
proprietorship,of customers, the kind and amount
of
partnership, or a joint stock
company.equipment, the shop layout, purchasing Each form has its own merits and
and financing needs, and hiring of demerits. The choice of the suitable
workers. These problems become
more
form of ownership will depend on
suchcomplex in a big business.However,
factors as the line of business,capitalsome of the basic factors, which must requirements, liability ofowners,be considered by anybody who is
to
division of profit, legal
formalities,start the business are as
follows:
continuity of bus iness,
transferability( i) Selection of l ine of business:
Th e of i nt er est a nd s o
on.first thing to be decided by
any
( iv) Location of bus iness
enterprise:entrepreneur of a new business is
the
An impor tant factor to be
considerednature and type of business tobe
at the start of the business is the place
undertaken. He will obviously like
to
where the enterprise will be located.
enter that branch of i ndustry and Any mistake in thi s regar d ca n
resultcommerce, which has the possibility
of
in high cost of production,
greater amount of profits. The
decision
inconvenience in getting right kind of
wi ll be in fl uen ced by t he c ust om er pr od uc ti on i np ut s or s er vi ng
ther eq ui re me nt s in the ma rke t a nd a lso cu st om er s i n t he be st p os si bl e
way.the ki nd of techni ca l knowledge and Ava ilability of rawmaterialsinterest t he ent repreneur has for and l abour; p ower s uppl y
andproducing a particular
product.
s er vi ce s l ik e b an ki ng ,
transportation,(ii) Size of the firm: Size of the
firm
communication, warehousing, etc., are
or scale of its operation is
another
important factors while making
ai mp or ta nt de ci si on to be ta ken at th e ch oi ce of loc at io n.
start of the business. Some
factors
( v) F in an cing t he
proposition:favour a large size whereas otherstend
Financing is concerned withprovidingto restrict the scale of operation . If the the necessary capital for star ting as well
entrepreneur is confident that the as for continuing the
proposeddemand for the proposed product
is
business. Capital is required
forl ik el y t o b e g oo d o ve r t im e a nd h e c an i nv es tm en t i n f ix ed a ss et s l i ke
land,arrange the necessary capital for building, machinery and
equipment
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NATURE AND PURPOSE OF BUSINESS 17
and in current assets like raw
materials,
to perform various activities so
thatbook debts, stock of finished goods,
etc.
physical and financial resources are
Capital is also required for
meeting
converted into desired outputs.
Sinceday-to-day expenses. Proper
financial
no individual entrepreneur can
doplanning must be done to
determine
everything himself, he must identify
the(a) the requirement of capital, requirement of skilled and
unskilled( b) s ou rc e f ro m whi ch c ap it al w il l b e wor ke rs a nd m an ag er ia l s ta ff .Plansraised and (c) the best ways of
utilisingshould also be made about howthethe capital in the firm. employees will be trained and
motivated(vi) Physical facilities: Availability
of
t o gi ve t he ir b est
performance.physical facilities including
machines
(ix) Taxplanning:
Tax planning has
and equipment, building
and
become necessary these days
becausesupportive services is a very
important
there are a number of tax laws in the
fa ct or to be co ns id er ed at th e s ta rt of c ou nt ry an d t he y i nf lu en ce a lm os t
the business. The decision relatingto
every aspect of the functioning of
t hi s f ac to r w il l d ep en d o n t he n at ur e m od er n bu si ne ss . Th e fo un de r of
theand size of business, availability
of
business has to consider in
advancefunds and the process of
production.
the tax liability under various tax
laws(vii) Plant layout: Once the and its impact on business
decisions.requirement of physical facilities
has
( x) L au nching t he
enterprise:After
been determined, the entrepreneur the decisions relating to theaboveshould draw a layout plan showing the mentioned factors have been taken,
arrangement of these facilities.
Layout
the entrepreneur can go ahead with
m ea ns th e p hy si ca l a rr an ge me nt of a ct ua l l au nc hi ng of th e e nt er pr is e
ma ch ine s a nd e qui pme nt ne ede d t o w hi ch wou ld m ea n mo bi li sin g
variousmanufacture a product. resources, fulfilling necessary
legal(viii) Competent and
committedformali ties , s tart ing the
productionworked force: Every enterpriseneeds
process and initiating thesalescompetent and commi tt ed wor k force promotion
campaign.
Key Terms
Business Profession Primary InnovationWarehousingProfit Employment Secondary Insurance SocialresponsibilityRisk Industry Tertiary MiningManufacturing
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18 BUSINESS STUDIES
SUMMAR
Y
Concept and characteristics of
business:
Business may be defined asaneconomic activity involving the production and sale of goods and
servicesundertaken with the motive of earning profit by satisfying human needsinsociety. Its distinguished characteristics are: (i) an economicactivity,(ii) production or procurement of goods and services, (iii) sale orexchangeof goods and services for the satisfaction of human needs, (iv)dealings ingoods and services on a regular basis, (v) profit earning, (vi) uncertaintyofreturn, and (vii) element ofrisk.Comparison of business, profession and
employment:
Businessrefersto those economic activities which are connected with the production
orpurchase and sale of goods or supply of services with the mainobject ofearning profit. Profession includes those activities, which requirespecialknowledge and skill to be applied by individuals in their
occupation.Employment refers to the occupation in which people work for othersandget remunerated in return. The three can be compared on the basis of
mode of establishment, nature of work, qualification required, rewardorreturn, capital investment, risk, transfer of interest and code ofconduct.Classification of business
activities:
Business activities may beclassifiedinto broad categories: industry and commerce. Industry refers to
economicactivities which are connected with conversion of resources intousefulgoods. Industries may be: primary, secondary or tertiary. Primaryindustriesare connected with the extraction and production of natural resourcesandreproduction and development of living organisms, plants, etc.Primaryindustries may be: extractive (like mining) or genetic (like poultryfarms).Secondary industries are concerned with using the materials whichhavealready been extracted at the primary stage. These industries could
be:manufacturing or construction. Manufacturing industries may befurtherclassified into analytical, synthetical, processing and assemblingindustries.Tertiary industries are concerned with providing support services to
primaryand secondary industries as well as activities relating totrade.Commerce includes activities relating to trade a nd auxiliaries totrade.Trade refers to sale, transfer or exchange of goods. It could be classifiedasinternal (domestic) and external (foreign) trade. Internal trade may be
wholesale trade or retail trade. External trade could be import, export or
entrepot trade. Auxiliaries to trade are activities which assist trade.Theseinclude transport and communication, banking and finance,insurance,wa re ho us in g, a ndadvertising.O bj ec ti ve s o f
business:
Although earning of profit is considered to betheprimary objective, objectives are needed in every area where
performanceresults affect the survival and prosperity of business. Some of theseareasare: market standing, innovation, productivity, physical andfinancial
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NATURE AND PURPOSE OF BUSINESS 19
resources, earning profits manager performance and development,workerperformance and attitude, and socialresponsibility.Business
risks:
The term risk refers to the possibility of inadequateprofitsor even losses due to uncertainties or unexpected events. Its nature can
beexplained with the help of its peculiar characteristics whichare:
(i) Business risks arise due touncertainties,(ii) Risk is an essential part of every
business,(iii) Degree of risk depends mainly upon the nature and size ofbusiness,and
(iv) Profit is the reward for risk taking. Business risks arise due to avarietyof causes including natural, human, economic and other
causes.Starting a business basicfactors:
Some of the basic factors whichmustbe considered by anybody who is to start the business are: selection of
lineof business, size of the firm, choice of form of ownership, location ofbusinessenterprise, financing the proposition, physical facilities, plant
layoutcompetent and committed workforce, tax planning and launchingtheenterprise.
EXERCISE
S
M ul ti pl e C ho ic e
Questions1. Which of the following does not characterise businessactivity?(a) Production of goods (b) Presence of
risk andservices(c) Sale or exchange of (d) S alary or wages
goods andservices
2. Which of the broad categories of industries covers oil refinery andsugarmills
?(a) Primary (b) Secondary
(c) Tertiary (d) None of them
3. Which of the following cannot be classified as an auxilliary totrade?( a) M in in g ( b)
Insurance(c) Warehousing (d)Transport
4. The occupation in which people work for others and get remuneratedin return is known
as( a) B usi nes s (b )Employment(c) Profession (d) None ofthem
5. The industries which provide support services to other industriesare known as
(a) Primary industries (b) Secondaryindustries(c) Commercial industries (d) Tertiaryindustries
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20 BUSINESS STUDIES
6. Which of the following cannot be classified as an objective ofbusiness?( a) I nv es tm en t ( b)
Productivity(c) Innovation (d) Profitearning
7. Business risk is not likely to arise dueto (a) Changes in government policy (b) Good management
(c) Employee dishonesty (d) Powerfailure
Sh or t A ns we r
Questions1. State the different types of economicactivities.2. Why is business considered an economicactivity?3. Explain the concept of
business.4. How would you classify businessactivities?
5. What are various types ofindustries?6. Explain any two business activities which are auxiliaries totrade.7. What is the role of profit in
business?8. What is business risk? What is itsnature?
Lo ng Ans wer
Questions1. Explain the characteristics of
business.2. Compare business with profession andemployment.3. Explain with examples the various types ofindustries.4. Describe the activities relating tocommerce.5. Why does business need multiple objective? Explain any fivesuch objectives
.6. Explain the concept of business risk and itscauses.7. What factors are important to be considered while starting a
business?Explain.
Projects/Assignme
nts1. Choose a locally operated trading or business unit. Find out thekind ofrisks it faces in business and the way it deals with
them.2. Select a local business enterprise and find out the objectives it
pursues.Check why it does not pursue otherobjectives.
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