chapter-1
nature and purpose of business
complete notes
Concept of Business
Business refer to those economic activity which are connected with production, purchase and sale of goods or supply of service with the main object of earning profit.
For Example, a worker working in a factory, a doctor operating in his clinic, a manager working in an office and a teacher teaching in a school are doing so to earn their livelihoods and are, therefore, engaged in an economic activity.
CHARACTERISTICS OF BUSINESS ACTIVITIES
- An economic activity: – A business is economic activities which include the purchase & sale of goods or rendering of services to earn money. It is not concerned with the achievement of social and emotional objectives.
- Profit Earning: – No business can last for long, without making a profit. The purpose to conduct the business is to earn profits and minimize the cost.
- Production or procurement of goods and services: – Before goods are offered to people for consumption, these must be either produced or procured by business enterprises. Thus, every business enterprises either manufacture the goods it deals in or acquires them from producers, to be further sold to consumers or users.
- Uncertainty of return: – The possibility of earning profit or loss is very uncertain and can’t be anticipated by the entrepreneur. Hence no Business can totally do away with risks.
- Element of Risk: – Risk is the uncertainty associated with an exposure to loss. It is caused by some unfavorable or undesirable event. Risk is related with factors like changes in consumer taste and fashion, etc. No business can altogether do away with risks.
CONCEPT OF PROFESSION
Profession includes those activities, which require special knowledge and skill to be applied by individuals in their occupation to earn fees.
People engaged in profession are known as professionals. For example, Lawyers, Doctors, Chartered Accountants, etc.
Characteristics of Profession
The main features or characteristics of profession are:
1. Well-defined body of knowledge: Every profession has a systematised body of knowledge, which can be learnt through instructions.
2. Restricted Entry: Every profession restricts the entry on the basis of examination or education. An individual can enter a profession, like Doctor or Lawyer, only after acquiring knowledge and skills through formal education and training.
3. Professional Association: All professions are affiliated to a professional association which
regulates entry, grants certificate of practice and develops code of conduct. For example, a lawyer has to become a member of Bar Council, to practice law in India. Similarly, a doctor needs to be a member of Medical Council of India and a Chartered Accountant needs to be a member of Institute of Chartered Accountants of India (ICAI).
4. Code of conduct: A strict code of conduct exists in every profession. Members of a profession are required to follow the code sincerely and honestly.
5. Service Motive: The basic motive of a profession is to serve clients with dedication. For example, task of lawyer is to ensure that his client gets justice.
Employment
Employment refers to the occupation in which people work for others and get remunerated in return, in the form of salary or wages.
Those who are employed by others are known as employees, like managers, assistants, clerks, peons, etc. People who engage such employees are known as employers.
Characteristics of Employment
The main features or characteristics of employment are:
1. Contractual Relation: Employment is the outcome of a contract between the employer and employee. The contract may be written or oral. It consists of terms and conditions of employment.
2. Reward or Return: The employee is paid salary or wages for his services, at regular time intervals.
3. Nature of work: Employee is required to perform work as prescribed by the employer.
4. Capital Investment: Employment does not require any investment and involves negligible risk.
5. Code of conduct: Employee has to follow norms of behaviour as laid down by the employer.
6. Qualification: Under employment, employee is required to possess qualification and training as prescribed by the employer.
COMPARISON OF BUSINESS, PROFESSION AND EMPLOYMENT
| BASIC | BUSINESS | PROFESSION | EMPLOYMENT |
| Nature of establishment | Provision of goods and services to the public | Rendering of personalised, expert services | Performing work as per service contract or rules of service |
| Mode of establishment | Entrepreneur’s decision and other legal formalities, if necessary | Membership of a professional body and certificate of practice | Appointment letter and service agreement |
| Risk | Profits are uncertain and irregular risk is present | Fee is generally regular and certain some risk | Fixed and regular pay no or little risk |
| Reward or return | Profit earned | Professional fee | Salary or wages |
| Example | Shop, factory | Legal, medical profession, chartered accountancy | Jobs in banks, insurance companies, government department |
OBJECTIVE OF BUSINESS
Business objective broadly classify into three categories:
- Organizational or economic objective
- Social objective
- Human or personal or individual objective
- Economic Objective:- Business is an economic activity and therefore, its purpose is to show economic results.
- Market standing/creation of customer:- Business can survive for a longer period only if is able to capture a big share in the market & has market standing.
- Innovations:- Innovation means making new products or adding new features of old products for making it more useful, improving methods of production & distribution exploring new markets, etc.
- Earning profit:- Profit means excess of income over the expenditure. The foremost and prime objective of every businessman is to earn profit .
- Optimum utilization of resources:- It refers to the best use of men, material, money and machinery employed in business.
- Improving Productivity:- It is used as a measure of efficiency. Every business enterprise must aim at greater productivity to ensure continuous survival and growth.
- Social Objectives:- Business is an integral part of society. It earns profit by selling its products or services to members of society.
- Quality Goods and Services at Fair Price:- The first social objective of business is to provide better quality product at reasonable rice and in proper quantity on continuous basis to consumers examples. Example:– Consumers look for ISI mark on electrical goods, FPO mark on food products. Hallmark on jeweler.
- Avoidance of Unfair Trade Practices: Business enterprise should not indulge in anti-social and unfair trade practices like black marketing, hoarding, adulteration, etc. Such practices are not only illegal but also hamper the image of business community. So, every business organisation should aim to avoid such undesirable activities.
- Generation of Employment Opportunities: Every business enterprise should create sufficient employment opportunities without any discrimination as to caste, religion, sex, etc.
- Protection of Environment: Business enterprise should take all reasonable steps to check and protect environment. It must make proper arrangement for disposal of effluents, smoke, wastes, etc. in order to avoid various types of pollution.
- Community Service: Many business organisations engage in various community services, like setting up schools, charitable dispensaries, donating money for social and religious activities, etc. Fulfillment of this objective helps to improve the reputation and public image of business.
- Welfare of Employees: No business can succeed without the contribution of its employees. Thus, business should aim to provide fair wages and reasonable working and living conditions to workers.
Human or personal or individual objective
Human or personnel objectives refer to the objectives related to the individual needs of the employees of an organisation. As employees are one of the most valuable resources for an organisation, satisfaction of their objectives is very important.
Individual objectives include the following objectives:
1. To provide healthy and safe working conditions.
2. To pay fair and competitive salaries and perks.
3. To provide opportunities for personal growth and development of employees.
4. To provide reasonable security of service.
5. To provide various financial and non-financial incentives in order to motivate the workers.
6. Peer Recognition and encouraging employees to take initiative and participate in decision-making.
Classification of business activities
Business activities are broadly classified into two categories:
1. Industry: It is concerned with the production or processing of goods and materials.
2. Commerce: It includes all those activities which are necessary for facilitating the exchange of goods and services.
In other words, Business = Industry + Commerce
On the basis of these two categories, we may classify business firms into industrial and commercial enterprises.
Industry
Industry refers to all those economic activities which are concerned with converting the raw materials and resource into useful goods. The following are the various types of industry;
(1)Primary industry:-These include all those activities which are concerned with the extraction and production of natural resources and reproduction and development of living organisms etc. These are divided as follow;
(a)Extractive industry: – These industry deal with extraction and refinement of natural resources. The products of these industries serve as raw materials for other industries, which further process these products into useful goods by manufacturing industries. Example farming, mining, hunting, fishing.
(b)Genetic industries: – These are the industries that undertake breeding of plants and animals which can be used for further reproduction. Seeds and nursery industries and poultry farming are examples of genetic industries.
(2)Secondary industries:- These industries, also known as manufacturing industries, acquire raw materials and convert them into final goods after further processing and value-addition. In other words, these industries aim at making the raw materials that they procure more readily consumable by the final consumer. Secondary industries can be further classified in the following manner.
(i)Manufacturing industries: –
It includes all those industries, which are engaged in processing of raw materials to produce finished goods.
They create form utility by changing the form of raw materials (obtained from extractive and genetic industries) into finished products.
For example, cotton textile industry makes use of cotton that is produced by the extractive industry.
(ii)Construction industries: – These industries are concerned with the construction and development of infrastructure such as buildings, dams road as well as tunnel etc.
(3)Tertiary industries:-
Tertiary industry includes all those activities, which are concerned with providing support services to primary and secondary industries as well as activities relating to trade. It is also known as Service Industry.
Tertiary Industry tries to remove various hindrances or obstacles which arise during production and distribution of goods and services.
It provides following service facilities:
(i) Transport: It facilitates movement of goods from one place to another.
(ii) Banking: It provides finance and credit for various business activities.
(iii) Insurance: It provides protection from various kinds of risks.
(iv) Warehousing: It stores goods to facilitate their supply to the market at the right time.
(v) Advertising: It provides information about the product to the consumers.
Commerce
Commerce is a wide term consisting of all those activities, which are necessary for sale, transfer or exchange of goods and services.
It provides the necessary link between producers and consumers to ensure proper distribution of goods.
Commerce basically aims to ensure supply of goods at the right place, in the right quantity and at the right time.
In this way, commerce ensures free and smooth exchange by removing various hindrances or obstacles in the way of exchange.
The hindrances may be in respect of persons, place, time, risk, finance and information.
Role or Functions of Commerce
Commerce plays a vital role by removing the following hindrances in the exchange of goods and services:
1. Hindrances of Persons: This hindrance occurs due to lack of contact and communication between producers and consumers.
Commerce removes this hindrance through ‘Trade’
Trade provides an organised market where the buyers and sellers can contact each other.
2. Hindrances of Place: This hindrance occurs due to geographical separation between producers and consumers.
The producer needs to make his goods available to consumers who are scattered in different corners of the country.
Commerce removes this problem by means of “Transport’.
Transport moves goods from the places of production to the markets for sale.
3. Hindrances of Time: This hindrance occurs due to time gap between production and consumption of goods. ‘Storage and Warehousing’ activities remove the hindrance of time by facilitating holding of stocks of goods to be sold as and when required.
4. Hindrances of Risk: This hindrance occurs due to risk of loss or damage due to theft, fire, accidents, etc. Protection against these risks is provided by ‘Insurance’ of goods.
5. Hindrances of Finance: This hindrance occurs due to requirement of capital to undertake the above activities. Commerce removes this hindrance through ‘Banking and Financing Institutions’. They provide the requisite capital to carry on various activities.
6. Hindrances of Information: This hindrance occurs due to lack of product awareness on the part of consumers. Advertising makes it possible for producers and traders to inform consumers about the goods and services available in the market.
Hence, Commerce is said to consist of activities of removing the hindrances of persons, place, time, risk, finance and information in the process of exchange of goods and services.
BRANCHES OF COMMERCE
- TRADE
- AIDS OR AUXILIARIES OF TRADE
Trade
Trade refers to buying and selling of goods and services with the aim of earning profit.it is essential part of commerce .it help in making the goods produced available to ultimate consumers or users.
Classification of trade
1. Internal Trade (or Home Trade): It is concerned with the buying and selling of goods and services within the geographical boundaries of a country. Both the buyer and the seller belong to the same country.
Internal trade is of two types:
(i) Wholesale Trade: It involves buying and selling of goods in large quantities. The wholesaler buys goods from manufacturers in large quantities and sells them in small quantities to the retailer. Wholesaler serves as an important link between manufacturers and retailers. Wholesaler maintains large stocks of goods.
(ii) Retail Trade: It refers to buying of goods and services in relatively small quantities from wholesalers and selling them to the ultimate consumers. A retailer serves as a link between the wholesaler, manufacturer and consumers. Retailer maintains personal contacts with ultimate buyers and deals in large variety of goods.
2. External Trade: It is concerned with the buying and selling of goods and services between persons or organisations operating in two or more countries. Such trade is also known as Foreign Trade or International Trade.
External trade is of three types:
(i) Import Trade: It refers to purchase of goods from a foreign country. For example, purchase of toys from China into India is the case of Import Trade.
(ii) Export Trade: It refers to sale of goods to a foreign country. For example, sale of tea from India to Japan is the case of Export Trade.
(iii) Entrepot Trade: It refers to import of goods for the purpose of export to other countries. For example, India imports many commodities from European countries to export them to Nepal.
AIDS OR AUXILIARIES OF TRADE
It refer to those activities which facilitate the Purchase and sale of goods i.e. which are meant for assisting trade.
Axillaries to trade help in removing various hindrance which arise in production and distribution of goods.
- Transport and communication: – It involves all the activities which are concerned with the movement of goods from one place to another. As we know that production takes place at various places and these goods are required at other places for consumption. For Example, jute is produced in west Bengal, but it is consumed in various other places. Communication is one of the most important services. It serves as a link between manufacturers, Producers, Wholesalers and consumer and help in exchanging information. Postal services, Fax, internet, etc.
- Banking and finance: – It involves activities which are related with providing finance for various business activities. Business activities cannot start without having adequate funds. Funds are needed acquiring machinery, raw materials, etc. Banking solves the problem of finance. It helps to overcome the hindrance of finance. Banks also undertake collection of cheques, issue of bank drafts, etc.
- Insurance: – It involves all the activities which are concerned with protection from various kinds of risks. Business involves many kinds of risks and insurance help to protect the businesses from such risks. Insurance removes the hindrance of risks by protection against various risks. Employees should also be protected against the risk of accidents and occupational hazards.
- Warehousing: – Usually, goods are not sold or consumed immediately after production. They are held in stock to make them available as and when required. Special arrangement must be made for the storage of goods to prevent loss or damage. Warehousing help business firm to overcome the problem of storage the availability of goods when needed.
- Advertising: – Advertising is one of the most important methods of promoting the sale of products, particularly, consumer goods, like soaps, detergents, etc.
BUSINESS RISK
The term ‘Business Risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Lower demand results in long sales and profits. In another situation, the shortage of raw materials in the market may shoot up its price. The firm using these raw materials will have to pay more for buying them.
Business enterprises constantly face two types of risk:
(i) Speculative Risk: Such risk involves both the possibility of gain as well as the possibility of loss. They arise due to changes in market conditions, like fluctuations in demand and supply, changes in prices or fashion or tastes of customers. Favourable market conditions lead to gains, whereas, unfavourable ones lead to losses.
(ii) Pure Risk: Such risk involves only the possibility of loss or no loss. For example, chance of fire, theft, strikes etc. Occurrence of such risk may lead to loss, whereas, non-occurrence lead to absence of loss.
NATURE OF BUSINESS RISK
- Business risks arise due to uncertainties:- uncertainties is when it is not known what is going to happen in future, Example of uncertainties that affect a business are, change in government policy, change in demand, etc.
- Risk is an essential part of the business: – The risk involved in a business can be reduced to some extent but it is not possible to eliminate the risk involved.
- Degree of risk depends mainly upon the nature and size of business: – Nature of business and size of business are the main factors which determine the amount of risk in a business. Example, a business dealing in fashionable items has a high degree of risk.
- Profit is the reward for risk taking: – No risk, no gain is an age old principle which applies to all types of business. Greater the risk involved in a business, higher is the chance of profit.
CAUSE OF BUSINESS RISK
- Natural causes: – Human beings have little control over natural calamities, like flood, earthquake, etc. Property and income in business.
- Human causes: – Human Causes include such unexpected events like dishonesty, carelessness, etc.
- Economic causes: – These include uncertainties relating to demand for goods, competition, price, etc. financial problem like rise in interest rate for borrowing, etc.
- Other causes: – These are unforeseen events, like political disturbance, such as the bursting of boiler, etc. which lead to the possibility of business risks.