Bu 1st Module

7/31/2019 Bu 1st Module

1/21

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


4/21

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


5/21


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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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.


9/21


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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(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


12/21

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


13/21


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


14/21

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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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


17/21


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


19/21


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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Bu 1st Module