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CHAPTER - 1 NATURE AND PURPOSE OF BUSINESS
CHAPTER - 1
NATURE AND
PURPOSE OF BUSINESS
Introduction
In order to
satisfy human needs beings require different types of goods and services. The
form of producing of good and services to those who are in need of them. These
are undertaken with the object of earning money or livelihood. Hence, it is
called an economic activity. Business is a major economic activity since it is
concerned with the production and sale of goods and services that people need.
business has a greater role to play in our daily lives. Hence it become
important that one should know th concept , nature and purpose of business
Concept of
business
Business
means busyness or the state of being busy . however, in a specific sense,
business includes all occupations in which people regularly engage in
activities with a view to earning profit. Such activities may consist of
production or purchase of goods for sale , or exchange of goods or providing
services to satisfy the needs of others
In every
society , people undertake various activities to satisfy their wants. These
activities may broadly be classified in to two;
Ø
Economic activities
Ø
Non economic activities
Economic
activities
Activities
undertaken with the object of earning money or livelihood are known as economic
activities . for example ; a teacher goes to school, a manager to his office, a
doctor to his clinic , a worker to the factory and a lawyer to the court are
instances to earn their livelihood and are their for engaged in economic
activities
Non-economic
activities
Activities
which are undertaken to derive psychological satisfaction or for religious or
social obligations, or are performed out of love, sympathy, patriotism and
similar sentiments are called non economic activities. A house wife cooking for
the family, a man visits to the temple for the day’s prayers are all examples
of human actions of this types The purpose of such activities is not to earn
money or to satisfy material needs. It gives the happiness, pleasure or satisfaction , which cannot be expressed in
terms of money
Characteristics
of business activities
All
business concerns irrespective of their size , nature or ownership have in
common the following essential characteristics;
§
An economic activity business is
consider to be an economic activities since it is concerned with the production
and distribution of goods and service. And
carried on regularly with the object of earning profit. This activities
are undertaken to satisfy human wants.
§
Production of procurement of goods and
services before goods are offered to people for consumption, these must be
either produced or procured from various sources. Thus, every business
enterprise either produce on its or
assembles them from producers to be sold to consumers. Goods may be consumer
goods (items of daily use like pen , pencil ,soap, suger ). Services denotes
facilities offered to consumers.eg; transportation, insurance, banking
electricity etc..
§
sales of exchange of goods and service
for the satisfaction of human needs
all business activities involved production, purchase, sale and transfer
of goods and service for some consideration. If a person cook food at home for
personal consumption, it is not a business .on the other hand, when a person
cooks food and sells it to others in a
restaurant it is a business. And essential characteristics of business
is that there should be sale of exchange of goods and services.
§
Dealing in goods and services business
consisting of dealing in goods and service. goods produced or purchased for
business purpose may be consumers goods like cloth ,shoe ,foods tuffs etc.., or
capital goods like tools and machinery. Consumer goods are used directly for
consumption. Capital of produces goods assist in the production of consumer
goods. Services are those facility offered to customers in the form of
transportation, supply of electricity, water etc...
§
Regularity or continuity of
dealing business activities consist of
manufacturing , buying and selling of goods and re entering services on a
continues and regular basis. It always involves a series of transactions. If a
person sells his old cycle or scooter, even at a profit, it is not a business.
But if he sells cycle or a scooter frequently either through a shop or from his
house, it will be his business.
§
Profit motive the profit motive is an important
distinguishing feature of business . it must earn profit for its survival, growth, expansion, research and
development and for its own prestige . profits must be earned through legal and
fair means and the business was not resort profiteering .
§
Element of risk there is always uncertainty in the feature
of business. It is through risk - taking that a businessman earns profits. Risk
means the possibility of a loss. Business decision are based on several
assumption which may not come true. Profits of a business depend not only upon
the efforts of the business concerned but also upon a large number of uncertain
and uncontrollable factors. Business
profession and employment
The
occupation of the people or economic activities can be classified into three
broad categories as followers;
§
Business
§
Profession
§
Employment
§
Business refers to those economic
activities consist of production or
purchase of goods for sales or exchange goods or providing services with the
object of earning profit. Those who are engaged in the business activities earn
income in the form of profit.
§
Profession a profession may be defined as an occupation
which involves the rendering of personal services of special and expert nature
, legal profession practiced by lawyers, medical profession by doctors. Those
engaged in professions are known as professionals. The specialised services are
rendered to their clients for a remuneration called fees. Since specialised
services have to be rendered by professionals
they should be experts in their respective fields and must possess the
minimum academic and other specific qualifications
prescribed by law or by the
association.(doctors- medical council of India )
§ Employment,
employment is a kind of human occupation where a person perform the work
assigned to him by his employer under an
agreement or rules of services in return for a remuneration called salary or
wages .
Industry and
its types
Industry refers to economic activities connected with
the raising , production, conversion ,processing or fabrication of products. An
industry may be primary or secondary.
Primary industry
Which are
concerned with the extracting, producing, and processing of natural resources.
Such type of industry may be further sub divided into two;
·
Extractive industries
Which are engaged in the extraction or
production of wealth from soil, water or air extracting minerals from under the earth, fishing, procuring timber
from forests, etc... are activities of extractive industries.
·
Genetic industries
Genetic industries refers to those
activities which are undertaken for producing, breeding, multiplying certain
species of plants or animals with the object of earning profits from their
sales. Eg; cattle breeding, poultry farming
etc...
Secondary Industries
Secondary
industries classified into;
Manufacturing Industries
Manufacturing industries refers to
those activities concerned with the conversion of raw materials or semi_
finished products into finished
goods. The manufacturing activities may be undertaken on a small scale using
simple tools and equipments. But it is usually done in factories.
§
Analytical industry; this industry analyse and separates different
element from the same minerals eg.. oil refinery
§
Synthetical industry ; this kind of industry combines various
ingredients into new product eg...cement
industry
§
Processing industry; here involves successive stages of
manufacturing process to get finished goods eg.. sugar or paper industry.
§
Assembling industry assembles different components into a new
product.eg.. computer or television industry etc...
Construction Industries
It refers to those activities
concerned with the construction of building, roads, bridges, canals, etc..
their products are not marketed like other industries.
Tertiary industries
It provide support service to
primary and secondary industries. They also include various activities relating
to trade.
COMMERCE
Commerce
may be defined as “ the sum total of all those processes which are engaged in
the removal of the hindrances of person , place and time in the exchange of
commodities.
For overcoming the hindrances ;
§
Trade
§
Transport
§
Warehousing
§
Storage
§
Insurance
§
Banking And Financing
§
Advertising
§
Salesmanship
Trade
It means
buying and selling of goods . but, there are various other activities that
facilitate trade. These activities called services or auxiliaries to trade.
This include transport, banking, insurance, warehousing, packaging etc...
Types of trade
§
Home trade(internal trade)
§
Foreign trade (external trade)
Home Trade
It also
called internal trade or domestic trade
consist of sale, transfer or exchange of goods within country. The primary
object of a home trade is to bring about equitable distribution of goods within
the country.
·
Wholesale trade
It involves buying goods from
producers in large quantities and selling them to retailers in small
quantities.
·
Retail trade
Retail trade consists in the supply of the requirements of the consumers
in small quantities needed by them . they buy large quantity from wholesalers
and give to small quantity to customers.
Foreign Trade
Foreign trade consists of trade among different
nations. Here goods are moved from one country to another. Foreign trade is
mostly conducted on wholesale basis. It is also known as international trade.
It may be further divided into;
§
Import trade, which consist of purchasing of goods from
supplier of a foreign country for home use.
§
Export trade, which consist of the selling of home goods to foreign countries
§
Entrepot trade, which consists of importing of foreign
produced goods from some countries with the object of re-exporting them to some other countries.
Auxiliaries to Trade
Organisations engaged in different
types of business activities are called business enterprises. It may be an
industrial , trading or service enterprises. These service enterprises
facilitates movement, storage, finance, risk coverage and sales promotion of goods. They also help the consumers in satisfying their needs and
desires. Auxiliaries to trade are briefly discussed below
§
Transportation
and communication
Production usually takes place in
particular locations. Here there is an obstacle or barrier of place. This is
removed by transport through various modes_ road, rail, or coastal shipping
transport makes possible the physical movements of materials and goods from the
points of production to the place where they are needed for consumption. Along
with transport facility there arises the need for communication facilities.
These will help producers, traders and consumers exchange information with one
another. Postal services, Telephone facilities and various modern means of
communication.
§
Banking
And Finance
Business
requires funds for acquiring assets, purchasing raw materials and meeting day
to day expenses. Finance or fund which
is the foundations of business activities is provides by banks. They
accept deposit from the public and provided credit to the public. They generally
lend money by providing overdraft and
cash credit facilities, loans and advances and discounting of bills. Besides,
commercial banks undertake collection of cheques, remittance facilities and
various other services to the business.
§
Insurance
In business , there are innumerable
risk such as destruction of property by fire, earthquake, theft, damages of
goods held in stock, loss of goods in transit, etc... so, insurance has been
protects property and human beings. On payment of a nominal amount called
premium, the amount of loss or damages is compensates by the insurance company.
§
Warehousing
Usually goods are produced in
factories or small scale business units are not sold or consumed
immediately . there are to be kept in
good condition and make them available as and when needed. Measures should be
taken for storage of goods to prevent loss or damage. Warehouse is help to
storage and stabilize price by equalizing supplies.
§
Advertising
It is one of thee most important
devices of promoting sales, especially consumer goods like soaps, detergent,
electronic goods etc...it helps in provide required information and inducing
them to buy particular items
Objectives Of Business
Business activities are undertaken
primarily to earn profit because, profit is the lifeblood of the business.
Business activities cannot be undertaken in isolation from the rest of the
society. Thus business activities should be conducted to fulfil the
expectations of the society and they will have multiplicity of objectives,
including social responsibility to survive and prosper in long run. It may be
stated here that profit is the primary objective but not the only one.
Role Of Profits In Business
§
It is a source of income, and it
provides the means for livelihood for the businessman. Nobody can undertake
business activities without earning income to satisfy his needs
§
Profit may earned to provide growth and
expansion of the businessman
§
Profit earning ability is considered to
be the index of business success.
§
Profit is the reward for the
entrepreneur’s taking business risk.
§
Profit provide economic power and
status to businessman
§
It can raise funds on easy terms.
Multiple objectives of business
§Market standing
Business activities can be sustained
only if it has a good standing in the market. This necessitates of the business
to lay down objectives to establish a place in the market and protect itself
from competition.
§Innovation
Innovation means exploring and
discovering ways and means by which products are made more useful to customers.
The business world is highly competitive. In order to capture the market, new
or improved products must be offered for sale. This is possible only with the
help of new methods of production.
§Productivity
Productivity is ascertained by
comparing the value of inputs. It is usually taken as the measure of
efficiency. Every business must aim at greater productivity by making the best
possible use of the scarce resources like men, money, machinery, materials
etc...it reduces the wastage of materials , fuller utilisation of equipments,
and allotting funds with due to regard to the benefit delivered.
§Physical and financial resources
All business establishments require
physical and financial resources. Physical resources include plant, machinery,
offices etc... by financial resources mean fund to produce and supply goods and
services to their customers .
§Earning profits
The primary objectives of the
business is to earn profit. It is driving force behind every enterprises. Profit has multiple
objectives.
§Manager performance and development
Good managers are needed by business
enterprises to conduct and co ordinate various business activities. Managers
must be motivated well to get the best out of them. Manager performance and
development must be an important objectives of any business.
§Worker
performance and attitude
Workers performance and attitude
very much determine the productivity and profitability of any business
enterprise . every business enterprises must
provide the workers with incentives to improve their performance.
§Social responsibility
Social responsibility refers to the
obligations of businessmen to pursue those policies, to make those
decisions which are desirable in terms
of the objectives and values of our society.
BUSINESS RISK
Risk means possibility of loss. In business,
risk is unavoidable. Business enterprise usually face two types of risk ;
Speculative and pure
Speculative risk involves both
chance for a gain or loss. Such risk arise due to change in the market
conditions like fluctuations in demand and supply, change in tastes and habits
of customers.
Pure risk involves the possibility
of loss or even no loss. Fire, theft, earthquake, strike, etc... are example of
pure risk.
Nature of business risk
·Business Risk Arises Due To Uncertainties
By uncertainty we mean lack of knowledge about what is going
to happen in the future. Eg. Natural calamities, changes in Govt. Policy etc..
·Risk Is An Essential Part Of Every Business
Risk is inherent in every business.
Business can’t totally avoid risk although the degree of risk may differ from
business to business. Risk can be minimised but, cannot be avoid.
·Degree of risk depends mainly upon the nature and size of
business
Nature of business( volume of
production and sale ) very much determine the degree of risk. Large scale
business had more risk than small scale business.
·Profit is the reward for risk taking
Risk and gain are two sides of the
same coin. No risk, No gain, is an age old principle, is applicable to all
kinds of business. Greater the risk, more is the reward.
Method Of Dealing With Risk
As no business can escape from
various risks, all that can be done is to apply different methods to deal with
them. For instance an enterprise may
·
Decide not to enter high risk business
transactions
·
Take precautionary measures like fire fighting
equipments to reduce risk
·
Take an insurance policy to cover
various risks
·
Take measure like provisions for bad
and doubtful debts, investment fluctuations, etc., to assume risk
Causes Of
Business Risk
·
Natural causes damages from flood, fire, earthquakes,
etc.,
·
Human causes caused by theft, bad debts, invalidated
contracts and other acts of general public.
·
Risk arising from competition in the form of entry of new products into
the market, low cost of products, new inventions etc..,
·
Price fluctuations this may totally upset stock values, selling
price, budget proposals, cost and income forecast.
·
Risk due to mismanagement wrong management decision about the use of
capital and other resources, lack of proper planning and control, lack of
research and technique knowledge etc..,
·
Risk due to changes in demand risk may also arise due to changes in demand
which depends upon the likes and dislikes, styles, fashions, consumer’s income
etc..,
·
Government policy Govt. Regulations, changes in tax structure,
international relations, etc.., may cause heavy losses to a businessman
·
Internal business environment personal failure from death, accident, ill
health etc.., and dishonest act in the form of embezzlement of funds and theft
of goods causes for heavy losses to the business.
Starting A Business-Basic Factors
The procedure of setting up of new
business enterprise is very lengthy and time consuming. It includes many steps
and formalities.
1
Discover
a business opportunity
·
A business opportunity may be to;
·
Start a new business
·
Expand or diversity the existing
business
·
Purchase another company
·
Enter a joint venture of foreign collaborations
etc..
2
Size
of a business
The promoter has to
decide the size of the business. He decide large, medium, or small scale
unit.it depend up on economics of scale, future demand, finance etc..,
3
Form
of business owner ship
The promoter must decide about form of ownership. The form of business
ownership are sole trader, partnership, private and public company etc.., the
form of ownership depends upon size of
business, finance, tax, extent of liability etc..,
4
Location
of business
The
promoter must decide about the location of the business. He must consider
factors like availability of land, electricity, water, nearness to market,
transportation, scope for expansion etc..,
5
Capital
needs
Finance is the lifeline of the
business. The promoter has to decide about business capital requirements and
also find out different sources of finance.
·
The finance need of business. (short
term or long term)
·
Source of finance like shares,
debenture , loans from banks etc..,
·
Cost of collecting finance and returns
on capital invested
·
The capital structure and appropriate
time for collecting finance
·
Source of working capital
6
Organisation
of physical facilities
Physical facilities means the
resources used to convert raw materials into finished products. Promoters has
to decide about the machines and equipments. And skilled and unskilled workers
required to job.
7
Layout
Layout means arrangements of
physical facilities like machines, equipments and workers required for
manufacturing goods. So promoter have a good plant layout.
8
Organisational
structure
A proper organisational structure is
needed to conduct business smoothly and efficiently. The employees are assigned
their duties and important responsibilities. It develop relationship between
them.
9
Manpower
requirements
A business enterprise require
skilled and semi skilled workers to do factory and clerical jobs. The success
of all business is depends upon selecting the right man for the right job.
10
Registration
Registration is a very important step. It is not compulsory, but is
beneficial to business. main reasons for registration
·
It gives legal entity and status to the
business.
·
Get all govt. Assistance and incentives
·
Get licence to import raw materials.
11
Starting
the business
After registration, the promoter start business. He
brings together the physical facilities, starts the production process,
recruits labour produces and distributes goods.
12
Tax
planning
The promoters has to decide about
the tax liability. It cannot be avoided, but it can be minimised by better
management. Tax planning does not mean non payment of tax . tax
planning influences the promoter’s decision about location, size, form
and profitability of the business.
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