Section 1, Lecture 1

Class X1 – BS – Chapter 1 : Nature and Purpose of business

Introduction

As an individual what all products and services you would like to have to  settle down in new place

  • Good Surrounding area – Buildings, Roads and Parks
  • Shopping Facility – Daily Essentials – Food Grains, Toiletries, Personal Grooming
  • Services – Hospitals, Education, Banks, Entertainment

To Meet all the above needs set of people will be engaged in producing and supplying above services and goods.

Business is a major Economic Activity in modern societies

The term business derived from word “Busy”.  In General,  business means being busy

Definition of Business

“Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods” – LH Hanry

“Business is an organization entity involved in the provision of goods and services to consumers” – David A

In specific sense business includes

  • Purchase of Goods and Services
  • Production of Goods and Services
  • Sale of Goods and Services

Aim of Business is “Earning Profit”

Human Activities are divided into t; wo parts – Economic Activities and Non Economic Activities

Characteristics of Business

An Economic Activity: Business will be undertaken with the aim of earning profit and livelihood.  Not because of love, sentiment etc.

Production of Procurement of Goods and Services : Before offering to customer business person either has to produce the goods  or procure it from wholesaler

Sale / Exchange of Goods and Services: Essential characteristics of business there should be transfer of goods or services to other party for economic consideration

Dealing in Regular Basis: Business activity should be continuous and regular activities. One of kind buy and sell activity cannot be considered as business

Profit Earning: Basic purpose of the business must be “Earning Profit”

Uncertainty of Return: Return on Investment in business should be uncertain. If there is a fixed percentage of return, then it will be called as investment activity and not business.

Element of Risk: Every business associated various risks, there may be adverse impact on business results and business may end up with Loss.  – Such risks include change in customer tastes, Government Policies etc

Classification of Business Activities

Industry

Group of manufacturers or businesses that produce a particular kind of goods or services.

Example : Cotton Industry, Steel Industry etc

Primary Industry

Concerned with Land. Aims in providing Raw Material to various other industries

 

Extraction: Extracting product from natural resources

Eg. Farming, Fishing, Mining etc

Genetic: This is connecting with breeding plants and animals

Eg. Cattle farms, Poultry Farms, etc

 

Secondary Industry

Industry which uses inputs from primary industry and produces goods

Manufacturing: Deals with process of production of goods using raw material

Analytical – Eg. Oil refinery

Sythetical – Eg. Cement

Processing – Eg. Steel, Sugar

Assembling – Eg. Automobile

Construction

Construction of building, dams, roads etc

 

Tertiary Industry

These industries provide support to Secondary Industry.

Eg. Packaging, Transportation, Banking etc.  These are also considered as part of Commerce classification

Commerce

Commerce is the activity of buying and selling of goods and services, especially on a large scale

It can also be defined as a component of business which includes all activities, functions involved in transferring goods from producers to consumers

Trade

Buying and Selling of Goods

  • Internal Trade: Trade within the boundary of the country
    • Retail: Where product sold to end customer
    • Wholesale : Goods are purchased and sold in bulk. Buying from manufacturer / distributor and selling it to Retaier.
  • External Trade: Trade with foreign countries
    • Import: Buying of Goods from foreign countries
    • Export : Selling of Goods to foreign countries
    • Entrepot: Goods are imported for the purpose exporting to other countries

Auxiliary to Trade

Supports the function of Buying and Selling of Goods

Aim is to remove the hindrances to trade – like movement of goods, financing, protection of goods, reaching to customers etc.

  • Transportation – Movement of Goods
  • Warehousing – Storage of Goods
  • Insurance —  Eliminates the risks in business
  • Banking and Finance – Financing the business needs
  • Advertising – Helps in reaching end customer.

Objectives of Business

Business objectives are the results entrepreneur hope to achieve and maintain as to run and grow business

Economic Objectives: Business is an economic activity, So primary objective of every business would be economic in nature.

  • Earning Profits
  • Creating Customers
  • Innovation
  • Growth
  • Increase Productivity
  • Survival

 

Social / Human Objectives: Business is part of society, and it is necessary for every business help surrounding society to grow

  • Supplying Quality Goods
  • Adoption of fair trade practices
  • Social Welfare
  • Labour Welfare
  • Knowledge development

National Objectives: Every business contributes to growth of country’s GDP

  • Optimum Utilization of resources
  • Development of backward areas
  • Development of Industries
  • Reduce Import
  • Employment Generation

Business Risk

Business risk is the possibility a company will have lower than anticipated profits or experience a loss rather than taking a profit.

Strategic Risk: Strategic risk arises when the implementation of a business does not go according to the business model or plan. A company’s strategy becomes less effective over time, and it struggles to reach its defined goals

Compliance Risk: This type of risk arises in industries and sectors highly regulated with laws. The wine industry, for example, must adhere to the three-tier system of distribution, where it is a requirement for a wholesaler to sell wine to a retailer, who in turn sells it to the end consumer. Wineries cannot sell directly to retail stores.

Operational Risk: Operational risk summarizes the risks a company undertakes when it attempts to operate within a given field or industry. Operational risk is the risk not inherent in financial, systematic or market-wide risk..

Nature of Business Risk

  • Risk exist in every business
  • Risk arises because of uncertainties
  • Degree of risk depends mainly upon the nature and size of business

 

Causes of Business Risk

  • Natural Causes à Flood, Earthquake, Famine etc.
  • Human Causes à Dishonesty, Carelessness, Strikes
  • Economic Causes à Changes in demand due to competition, price , technology advancement etc.
  • Other Causes à Political Disturbance, exchange price, bursting of boilers etc

 

 

Starting a business basic factors

Selection of Line of business

Depends on entrepreneur’s risk taking capacity, investment available, technical knowledge etc

Size of the firm

Identification of production capacity, it depends on market demand, fund available, risk etc. If Risk is high then low investment,

Form of ownership

Decision depends on Capital requirement, line of business, liability of owners, Legal formalities etc

Location

Availability of Labour, raw material, power supply, transportation facility, banking, communication, waare housing etc are important factors

Financing

Deals with identification of capital required, Sources of fund – Capital and Loan          and Utilisation plan

Physical Facilities

Facilities required in plant – Machinery, building, and other services.  Decision depends on nature of business and fund available

Plant Layout

Arrangement of physical facilities to support easy movement of goods and people

Workforce

Every business requires competent and committed workforce.  Both skill / Non skill workforce needed

Tax Planning

Detail analysis of Tax benefits available, and taxes applicable for every business activity need to be carried out

Launching the business

Once all the above factors covered, entrepreneur can start the business

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