NATURE AND PURPOSE OF BUSINESS

Chapter 1

ECONOMIC AND NON ECONOMIC ACTIVITIES

Basic
Economic Non-Economic
Meaning
Those activities whose Those activities whose aim is not to earn money,
Purpose/
Objective is to earn but to satisfy social, psychological and emotional
Notice
money and to create wealth. needs. For example love, sympathy, patriotism.
People work in factories
Cooking food in restaurant. A housewife cooking food for her family. A teacher
Examples
A teacher teaching in a training his daughter at home.
school.
Concept of Business: – Business refers to those economic activities involving the purchase
production and / or sale of goods and services with a motive of earning profit by satisfying
human needs in society.

Characteristics of Business:
1. An economic activity: Business in considered as an economic activity because it is
undertaken with the objective of earning money.
2. Production or procurement of goods and services: Business includes all the activities
concerned with the production or procurement of goods & services for sales. Services include
transportation, banking, Insurance etc. Goods may consist of consumable items.
3. Sale or exchange of goods & services – There should be sale or exchange of goods and
service between the seller & the buyer.
4. Dealing in goods & services at a regular basis: There should be regularity of dealings or
exchange of goods & services. One single transaction of sale or purchase does not constitute
business.
5. Profit Earning: The main purpose of business is to earn profit. A business cannot survive
without making profits.
6. Uncertainty of return: Every business invests money with the objective of earning profit
but the amount of profit earned may vary. Also there is always a possibility of losses.
7. Element of risk: All business activities carry some elements of risk because future is
uncertain and business has no control over several factors like, strikes, fire, theft, and change
in consumer taste etc.
Business: Refers to Purchase, production and/ or sale of goods & services with the objective
of earning profit.
Profession: Includes those activities which require special knowledge & skills in the
occupation.
Employment: Refers to the occupation in which people work for others and get remuneration
in return.
Basis of
Business Profession Employment
Destruction
Membership of a
Starts after completing
Mode of professional body and Start after getting
some legal formalities
establishment certificate of practice appointment letter.
if needed.
required.
Provision of goods Work allotted by the
Personalized services of
Nature of work and service to the employer according to
expert nature.
public. the contract.
No minimum Qualification and training
Professional Qualification
Qualification qualification is as prescribed by the
and training required.
necessary. employer.
Capital needed
Capital Limited capital for
according to its size No capital required.
investment established
and capacity.
Reward/
Profits Professional fee Salary or wages
Returns
Risk High Risk Low Risk No Risk
The terms and conditions
Code of Professional code of
No code of conduct of services contract are to
Conduct conduct
be allowed.

Objectives of Business:
The objective of business means the purpose for which a business is established and carried
on. Proper selection of objectives is essential for the success of a business.
The businessmen always have multiple objectives. All objective may be classified into two
broad categories. These are (1) Economic objectives and (2) Social Objectives

1. Economic Objectives
Business is an economic activity and therefore, its purpose is to show economic results. The
economic objectives of business are follows:
(i)Earning profit: Profit means excess of income over the expenditure. The foremost and
prime objective of every businessman is to earn profit. A business cannot service without
earning profit. Not only for survival but it is also required for growth and expansion of
business.
(ii)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. It is possible only when
business provides goods and services to satisfy the needs & wants of customers. Therefore,
creation and satisfaction of customers (market) is an important objective of business.
(iii)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. In these days of competition, a business can be successful only
when it creates new designs, better machines, improved techniques, new varieties etc.
(iv)Optimum utilization of resources: It refers to the best use of men, material, money and
machinery employed in business. The resources of business are scarce so these must be
utilized in the best possible manner so that the business can get maximum benefit from their
resources.
(v)Improving productivity: It is used as a measure of efficiency. Every business enterprise
must aim at greater productivity – to ensure continuous survival and growth. This objective
can be achieved by reducing wastages and making efficient use of machines and equipments,
human resources, money etc.

2.Social Objectives
Business is an integral part of society. It makes use of resources of society. It earns profit by
selling its products or services to members of society. So it becomes obligatory on the part of
the businessman to do something for the society. The important social objectives of business
are as follows:
(i)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 Jewellery.

(i) Avoidance of Anti-Social and Unfair trade practices: Anti-Social practices include
hoarding, black marketing and adulteration. Making false claims in advertisements to mislead
and exploit people is an example of unfair trade practice. Business should not indulge in such
practices.
(ii) Generation of Employment: Now days, employment is the biggest problem of society.
Business should provide employment to more and more people living in the country.
Handicapped and disabled people should be given extra care.
(iii) Employee Welfare: Employees are a valuable asset and they make significant
contributions towards the success of business. Another social objective of business, therefore,
is to ensure welfare of employees by providing good working conditions, fair wages and
facilities such as housing, medical and entertainment etc. such welfare facilities help to
improve physical and mental health of employees.
(iv) Community service: Business should contribute something to the society where it is
established and operated Library, dispensary, educational institutions etc. are certain
contributions which a business can make and help in the development of community.

Role of Profit in Business

Business is established for the purpose of earning profit. Profit plays a very important role in
business. The role of profit in business can be brought out by the following facts :-
(1) For Long Survival: Profit alone help a business to continue to exist for a long period. In
the absence of profit the establishment of a particular business loses its justification.
(2) For growth & Expansion: All businessmen want their business to expand and to grow.
For development of business additional capital is needed. Retained earnings is a very good
source of capital.
(3) For increasing efficiency: Profit is that power which motivates both the parties – owner
and workers to do their best. As they know that in case of good profits they will get good
compensation for their efforts so it finally helps in increasing the efficiency of business.
(4) For Building prestige and Recognition: For gaining prestige in the Society, Business
had to satisfy all the parties concerned. It has to supply good quality product/service at
reasonable price to customers, adequate remuneration to employees, to pay sufficient
dividend to the shareholdersetc. and all these are possible only if the business is earning good
profit.
Primary Industry: The primary industry includes those activities through which the natural
resources are used to provide raw material for other industries Primary industries are of two
types.
Extractive Industry refers to those industries under which something is extracted out of the
earth, water or air e.g., coal, iron, gas etc. Farming, mining, lumbering, hunting & fishing
come under this category of industry
Genetic Industry refers to those industries under which the breed of animals and vegetables
are improved and made more useful e.g., poultry farms, dairy farming, fish hatchery, cattle
breeding etc.
Secondary Industry: Under this industry new products are manufactured by using the
previously produced things e.g., producing cotton is a primary industry and manufacturing
cloth out of cotton is a secondary industry. It is of two types.
Manufacturing: These industries convert raw materials or semi-finished products into
finished products e.g., paper from bamboo, sugar from sugar cane. It is further divided into
four parts.
(i) Analytic: Different things are manufactured out of one material e.g., petrol, diesel,
gasoline out of crude oil.
(ii) Processing: Those industries wherein useful things are manufactured by making the raw
material to pass through different production process e.g., steel from iron ore, sugar and paper
industries.
(iii) Synthetic: Many raw materials are mixed to produce more useful product e.g., paints,
cosmetics, cement.
(iv) Assembling: Where in the parts manufactured by different industries are assembled to
produce new and useful product e.g., computers, watches cars, television etc.
2.Construction industries: Industries that are involved in the construction of buildings,
dams, bridges, roads as well as tunnels and canals.
3 Tertiary or Service Industry: Includes those services which help business to move
smoothly e.g. transport, bank, Insurance, storage and Advertising.
COMMERCE:
Meaning: Commerce refers to all those activities which are concerned with the transfer of
goods and services from the producers to the consumers. It embraces all those activities
which are necessary for maintaining a free flow of goods and services.
The functions of commerce are as follows.

1. Removing the hindrance of person by marking goods available to consumers from the
producers. through trade.
2. Transportation removes hindrance of place by moving goods from the place of production
to the markets for sale.
3. Storage and warehousing activities remove the hindrance of time by facilitating holding of
stock of goods to be sold as and when required.
4. Insurance removes hindrance of risk of loss or damage of goods due to theft, fire, accidents
etc.
5. Banking removes hindrance of finance-by providing funds to a businessman for acquiring
assets, purchasing raw materials and meeting other expenses.
6. Advertising removes hindrance of information-by informing consumers about the goods
and services available in the market.
Commerce includes two types of activities:

Trade: Refers to buying and selling of goods and services with the objective of earning
profit. It is classified into two categories:
1. Internal Trade: Takes place within a country. Internal Trade is classified into two
categories:
(i) Wholesale Trade: Refers to buying and selling of goods in large quantities. A wholesaler
buys goods in large quantities from the producers and sell them to other dealers. He serves as
a connecting link between the producer and retailer.
(ii) Retail Trade: Refers to buying of goods and services in relatively small quantities &
selling them to the ultimate consumers.
2. External Trade: Trade between two or more countries. External trade can be classified
into three categories:
(i) Import trade: If goods are purchased from another country, if is called import trade.
(ii) Export Trade: If goods are sold to other countries it is called export trade.
(iii) Enterpot: Where goods are imported for export to other countries e.g. Indian firms may
import some goods from America and export the service to Nepal .

Auxiliaries to Trade: All those activities which help in removing various hindrances which
arise in connection with the production and distribution of goods are called auxiliaries to
trade. An overview of these activities is given below.
(i) Transportation and Communication: The production of goods takes place at one place
where as these are demanded in different parts of the country The obstacle of place is
removed by the transport. Along with transport communication is also an important service.
It helps in exchange of information between producers, consumers and traders. The common
communication services are postal service, telephone, fax, internet etc.
(ii) Banking and Finance: Business needs funds for acquiring assets, purchasing raw
materials and meeting other expenses. Necessary funds can be obtained from a bank.
(iii) Insurance: It provides a cover against the loss of goods, in the process of transit, storage,
theft, fire and other natural calamities.
(iv) Warehousing: There is generally a time lag between the production and consumption of
goods. This problem can be solved by storing the goods in warehouses from the time of
production till the time they are demanded by customers.
(vi)Advertising: Advertising brings goods and services to the knowledge of prospective
buyers. It is through advertising that the customers come to know about the new products and
their utility.

Business Risk:
Business risk refers to the possibility of inadequate profits or even losses due touncertainities
or unexpected events. For example: demand for a particular product may decline due to
change in tastes preferences of consumers, or increase in competition etc. There are two types
of business risks:
Nature of Business Risks
1. Business risks arise due to uncertainties: Lack of knowledge of what is going to happen in
future create uncertainties in business. It may be due to natural calamities, change in demand
and prices, strikes etc.
2. Risk is an essential part of every business: No business can avoid risk although the amount
of risk may vary from business to business. Risk can be minimized but cannot be eliminated.
3. Degree of risk depends mainly upon the nature and size of business:
Level of risk is lower for small scale business while it is higher for large scale organization.
4.Profit is the reward for risk taking: A business gets profit as return for undertaking risk.
Greater the risk involved in a business, higher is the chance of profit.
Causes of Business Risks
1. Natural Causes: Human beings have little control over natural calamities like flood,
earthquake, famine etc. They result in heavy losses of life, property & income in business.
2. Human Causes: Human causes include such unexpected events like dishonesty,
carelessness or negligence of employees, strikes, riots, management inefficiency etc.
3. Economic causes: They are related to a chance of loss due to change in market condition
e.g., fluctuations in demand and prices, competition, change in technology etc.
4. Physical causes: Mechanical defects or failures may also lead to losses e.g., bursting of
boiler or machine may cause death or destruction.
5. Other causes: These include unforeseen events like political disturbances, fluctuation in
exchange rates etc

Starting a Business: Basic Factors

Selecting the line of business: The first thing to be decided by the entrepreneur is the line and
type of business to be undertaken.
1. Scale or size of business: After deciding the line of business the businessman must decide
whether he wants to set up large scale or small scale business.
2. Choice of form of Business organization: The next decision must be taken is to finalize
the form of business i.e., to set up sole proprietorship., partnership or joint stock company.
3. Location of Business Enterprise: The entrepreneur has to decide the place where the
enterprise will be located. Before taking this decision he must find out availability of raw
materials, power, labour, banking, transportation etc.
4. Financial Requirement: The businessman must analyze the amount of capital he might
require to buy fixed assets and for working capital (Day to day expenses) Proper financial
planning must be done to determine the amount of funds needed.
5. Physical facilities: include machinery equipment building etc. This decision depends upon
the size, scale and type of business activities he wants to carry on.
6. Plant layout: Showing the physical arrangement of machines and equipment needed to
manufacture a product.
7. Competent and committed Workforce: The entrepreneur must find out the requirement
of skilled and unskilled workers and managerial staff to perform various activities.
8. Tax planning: The entrepreneur must try to analyze the types of taxes because there are a
number of tax laws in the country which affect the functioning of business.
9. Setting up of the Enterprise: After analyzing the above mentioned points carefully the
entrepreneur can start the business which would mean mobilizing various resources and
completing legal formalities.