The Role of Business

The Economic and Social Importance of Business

Producing Goods and Services Prime Function – core

activity of business for profit

Inputs + outputs = value added

Supply and demand Production must

work with legal frameworks

Accountability and ethics important

Profit

Sales revenue>operating costs = profit

Profitability crucial to long term survival of business to meet business expensesReturn on investment Rewarding investor for the risk

of possibly losing money by starting a business.

May take a while to generate profit after start up.

Profit

Return on investment – level of profit investor received based on the amount they invested.

Example One Don puts in $200,000

into a cafe and receives a net profit of $50,000 in the first year.

Don’s return on his investment is 25%

Example Two Cheryl invested

$100,000 in a children’s clothing store and earned a net profit of $50,000.

Cheryl’s return on her investment is 50%

Business expenses > sales revenue = negative profit

Profit

For example: Cafe businesses

usually have a net profit return of 12%pa

Don achieved double that amount at 25% which is an excellent return on investment for this industry.

For a true indication of profitability you must compare return on investment with that of competing business.

This is known as a comparative ratio analysis

Activity

Calculate which of the

following businesses made a profit Sally’s pet shop:

expenses $2000/wk

revenue $3500/wk

Ben’s gardening supplies:

revenue: $6000/wk = $24000/mth (4 weeks)expenses: week 1: $7000

week 2: $8000 week 3: $8000 week 4: $3000

Wealth Creation

Increasing sales + brand awareness = increases in production, income and return on investment for businesses.

Generates wealth for the community through taxes and then government funded projects

Long term wealth creation does not always happen.

Distribution of Wealth

Employment

Generated by business 11 million jobs

annually Small to medium

enterprises (SMEs) provide 64% of private sector employment = 5.3 million people.

Competition and demand for product will drive or reduce employment

Employment

Globalisation is having a detrimental impact on employment

Increased competition will drive down unemployment to maintain profitability = downsizing, retrenchment and redundancy

Example: 2000 Telstra

reduced it staff by 35000 because of increasing competition from Vodafone and Sing tel Optus

Incomes

Individuals: income is the return or

amount of money for an employee’s productivity or labour.

need income to buy goods and services for quality of life

Wage or salary

Incomes

Business Owners: sales revenue =

money from sales or return on investment or profit

sales > operating costs = increased income

Generates wages, salaries, profits and dividends

Shareholders: People who invest

money into a company

Dividend= a payment that is a share of a business’s profit that is divided amongst shareholders.

IncomesGovernment: Employers and

employees pay taxes

Taxes used to fund essential services and to create business opportunities

In 2010-2011 the Federal government received approximately $60 billion in company tax alone and then spent $210 billion on services.

Choice

Freedom of choice = being able to select from a range of alternative products and services

Ability to “shop around” Increased competition =

greater choice and reduced prices

Encourages innovation to remain competitive

Innovation and Invention

Innovation = an improvement on an established product

Invention = creating a new product to meet a need that is not being satisfied

Research and development key process in designed more cost effective and efficient products

Innovation and Invention

Example: Music distribution

Phonograph

Cylinders

Phonograph

Discs

331/3rpms

Albums:LP’s

331/3rpm

EP’s/Singles45rpm

8 Track Tapes

Cassette Tapes

Compact Discs and

Laser DiscsWalkman

Digital - MP3

Players, iPods and

iTunes

Quality of Life

Overall well being of an individual and is a combination of material and non material benefits

High standard of living

Entrepreneurship and Risk

Entrepreneurs = people who starts, operates and assumes the risk of starting a business in the hope of making a profit

Must take risks of turning dream into reality

Usually going into unchartered areas of business eg: Steve Job and Apple, Mark Zuckerberg and Facebook

Mark Zuckerberg Interview

Assess your entrepreneurial abilityEntrepreneurial Ability Ye

s No

Are you willing to take moderate risks?

Are you easily motivated?

Do you get on well with people?

Is your health excellent?

Do you set realistic goals?

Can you tolerate failure?

Do you have a positive self-image?

Are you well organised?

Are you a hard worker

Structured Responses

Complete the importance of Social and Economic Roles of Business structured response sheet.