Chapter 1

Nature and Purpose of Business

Meaning of Business
Business can be referred to an occupation in which people regularly engage in activities
related to purchase, production or sale of goods and services with the view to earn profit.

Definition of Business
According to R N Owens, “Business is an enterprise engaged in the production and
distribution of goods for sale in a market or rendering services for a price.”

Business involves various activities and these activities are broadly classified into 2 groups:

1. Economic Activities: These are activities which are performed to earn livelihood.
Example: Doctor, Teacher, Manager etc
2. Non-Economic Activities: These are activities which are performed out of love,
sympathy, patriotism etc. Example: Helping a blind person cross the road, cooking food
at home, etc.

Economic activities include the following:

1. Business: It is concerned with production and sales of goods and services for the purpose
of profit. It involves only those activities which is done for a profit nature.

2. Profession: It is an economic activity concerned with the rendering of technical

specialized service to clients in return for a payment called fees.

3. Employment: It is an economic activity in which a person known as employee under the

contract of employment regularly performs the work assigned to him by the employer in
return for salary or wages.

Characteristics of Business

1. An Economic Activity: Business activity is considered to be an economic activity

because it is undertaken with the objective of earning money and not because of love,
affection or sympathy. Here the activity can be done in a small level or on a big scale.
Example: purchase and sale by small shop keeper.
2. Production on procurement of goods and services: Before goods are offered to people
for consumption it has to be produced or procured. Hence, every business enterprise
either manufacture the goods it deals in or procures it from producers to sell to it to the
ultimate users or customer. These goods can be consumable goods or capital goods or
service.
3. Sale or exchange of goods and services: One essential characteristic of business is that
there should be a sale or exchange of goods on service between buyer and seller. Directly
or Indirectly business involves transfer or exchange of goods and service for money.
4. Dealing in goods and service on a regular basis: Business involves dealing in goods
and services on a regular basis. One single transaction of sale or purchase does not
 constitute business even if it was at a profit. Example: Selling a `radio just once for profit
cannot be a business but selling it on a regular basis is a business.
5. Profit Earning: One of the main purposes of any business is to earn profit. No business
can survive for long without earning profit. Hence, a businessman makes all the possible
efforts to maximise profit either by increasing sale or reducing cost.
6. Uncertainty of Profit: Uncertainty of return to the lack of knowledge to the amount of
money that the business will be able to earn on a future period of time. Every business
invest money to run its business with the objective of earning profit, but the amount of
profit is always uncertain.
7. Element of Risk: Every business is associated with uncertainties. These uncertainties are
termed to be risks. One of the major risks every business face is the exposure to loss.
Apart from this, it also faces risk like customer tastes, changes in the method of
production, strike or lock-out, increased competition, fire, theft, accident, etc.

Comparison of Business, Profession and Employment

Basis Business Profession Employment

Mode of Entrepreneur’s Membership of a
Appointment letter
Establishment decision and other professional body and
and service
legal formalities. certificate of practise.
agreement.
Nature of Provides goods and Renders personalized
Performs work as
Work services to the public. and expert services.per the service
contract or
according to the rule
of a service.
Qualification No minimum Qualification and Qualification and
qualification is training in a specific training prescribed
required. field as prescribed by a by the employer.
professional body is
must.
Return or Profit Professional Fee Salary or Wages
Reward
Capital Required as per the Limited capital needed No Capital required.
Investment size and nature of for establishment.
business.
Risk High Risk, uncertainty Lesser risk, Fee may be No risk or little risk.
of Profit irregular.
Transfer Possible with some Not possible Not possible
formalities
Code of No Code of Conduct Professional code of Norm of behaviour
Conduct is prescribed. conduct is to be laid down by the
followed. employer has to be
followed.
Industry
Industry refers to economic activities which are connected with conversion of resources in to
useful goods. Generally, the term industry is used for activities in which mechanical
appliances and technical skills are involved.
Industries are broadly divided into 3 categories:

1. Primary Industry: These industries include all those activities which are connected with
the extraction and production of natural resources and reproduction and development of
living organisms.
These industries are further divided as follows:
a) Extractive Industries: These industries extract products from natural sources.
Extractive industries supply some basic raw materials that are mostly produced from
natural or geographical environment which can be transformed into many useful
goods. Example: Mining, Fishing, Hunting etc.
b) Genetic Industry: These industries remain engaged in breeding of plants and animals
for their use in reproduction. Example: Fish hatchery, poultry farming etc.

2. Secondary Industry: These are concerned with using the materials which have already
been extracted at the primary stage and produced for final consumption. Example: Mining
of iron ore is a primary industry function but manufacturing of steel by way of further
processing raw iron is a secondary industry function.
These industries are further divided as follows:
a) Manufacturing Industry: These industries are engaged in producing goods by
processing raw materials and converting them into finished goods. Manufacturing
industry is further divided into 4 categories:
 Analytical Industry: It is an industry which analyses and separates different
elements from the same material. Example: Oil Refinery
 Synthetical Industry: It is an industry which Combines various raw materials
into a new product. Example: Cement
 Processing Industry: It is an industry which involves successive stages for
manufacturing finished products. Example: Paper
 Assembling Industry: It is an industry which assembles different components to
form a new product. Example: Automobile Industry

b) Construction Industry: These are industries are involved in development of

infrastructure, construction of building, dams, bridges, roads etc. Engineering and
Architectural skills are an important part in construction industry.

3. Tertiary Industry: These are industries concerned with providing support services to
primary and secondary industries like transportation, banking, insurance, warehousing,
communication, packaging, etc.
Commerce
According to James Stephenson “Commerce is the sum total of all the processes which are
engaged in the removal of hindrances of place, person, time in exchange of commodities”. It
includes activities like trade, transportation, insurance, warehousing etc.

Commerce includes 2 types of activities:

1. Trade: Trade is an essential part of commerce. It refers to sale, transfer or exchange of
goods. It is through trade the goods are made available to ultimate customers.
Trade is broadly classified into 3:
a) Internal Trade (Domestic Trade): It is concerned with buying and selling of goods
and services within the country
b) External Trade (Foreign Trade): Consists of exchange of goods and service
between people or organization operating in different countries.
c) Entrepôt: It refers to the importing of goods with an intention of exporting it to
another country

2. Auxiliaries to Trade: Activities which are meant for assisting trade are known as
auxiliaries.

a) Transport and communication: Production of goods generally takes place in one

particular location but these goods are required for consumptions in different parts of
the country hence this obstacle is removed through road, rail or coastal shipping.
b) Banking and Finance: Business activities cannot be undertaken unless funds are
available for acquiring assets purchasing raw materials and meeting other expenses.
Hence banking helps business activities to overcome the problem of finance.
c) Insurance: Business involves various types of risks like fire, theft, risk of loss or
damage etc. Employees are also required to be protected against various risks like risk
of accident, occupational hazards etc. Insurance provides protection in all such cases.
d) Warehousing: Usually goods are not sold or consumed immediately after production.
They are held in stock to make them available as and when required. Therefore,
warehousing is brought into practise to store the stock.
e) Advertising: Advertising is one of the most important method of promoting sales of
the product particularly consumer goods. Since it is practically impossible for
producers to contact each customer. Advertisements are used to spread information
about products to customers.

Objectives of Business

1. Profit: Profit is regarded as the essential objective of business for various reasons:
a) It is the source of income for the business persons.
b) It can be a source finance for meeting expansion requirements of business.
c) It indicates that the business is working efficiently.
d) It can be taken as society’s approval of the utilities of business
e) It builds up the reputation of the business enterprise.

2. Multiple Objectives of Business

a) Market Standing: Market standing refers to the aim of an enterprise to stand strong in
offering competitive products to its customers and to satisfy them with their products.
b) Innovation: Innovation is the introduction of new ideas or methods in the way
something is done. It includes:
  Innovation in products service
 Innovation in various skills and activities
c) Productivity: Every business must aim at greater productivity for its survival and
progress. Productivity is the difference in the value of output and the value of input.
d) Physical and Financial Resources: Every business requires physical resources like
plants, machines, offices etc and financial resources that is funds to produce and
supply goods and service to the customers.
e) Manager Performance and Development: Business enterprise needs managers to
conduct and co-ordinate business activity. Therefore, various programs for motivating
the managers must be implemented for performance and development of them.
f) Worker’s Performance and Attitude: The attitude and the performance of the
workers have a direct impact on the productivity and profitability of the firm.
g) Social Responsibility: Social responsibility refers to the obligation of business firm to
continue resources for solving problems and work in a socially desirable manner.

Business Risks
The term business risk refers to the possibility of inadequate profits or even losses due to
uncertainties or unexpected events.

Types of Risk

1. Speculated Risk: It involves both the possibility of gain as well as the possibility of loss.
This type of risk arises due to changes in market condition, tastes and performance,
tradition, demand and supply, etc.

2. Pure Risk: It involves only the possibility of loss or no loss.

Nature of Business Risk

1. Business risk arises due to uncertainties: Natural calamities, changes in demand and
prices, changes in government, improvement in technology etc, creates risk in business
because the outcome of these events are not known in advance.
2. Risk is an essential part of every business: Every business has some risks. No business
can avoid risk. Risk can be minimised but cannot be eliminated.
3. Degree of risk mainly depends upon the nature and size of the business: It is the size
of the business and the nature of the product produced and sold determines the amount of
risk in business.
4. Profit is the reward for risk taking: Greater the risk, greater the profit. No risk, no gain.
Therefore, an entrepreneur undertakes the risk with the expectation of earning higher
returns.
Causes of Business Risk

1. Natural: Natural calamities like earthquake, heavy rain, floods etc results in heavy loss
of life, property and income in the business.
2. Human: It includes unexpected events like carelessness, dishonesty, negligence of
employees, stoppage of work due to power failure, strike, management inefficiency etc.
3. Economic: They are uncertainties related to demands for goods, competition, changes in
technology and method of production, rise in interest rates etc, results in high costs of
operation of business.
4. Other causes: Unforeseen events like political disturbance, mechanical failure,
difficulty in transportation etc, leads to possibility of business risk.

Methods to deal with Business Risk

1. Decide not to enter into too risky transactions.

2. Take preventive measures like installing fire-fighting devices.
3. Take Insurance
4. Assume risk by making provisions in current profits.
5. Share risk with other enterprises by entering into a contract.

Basic factors for Starting a Business

1. Selection of the line of Business: The first thing to be decided by any entrepreneur of a
new business is the nature and type of business to be undertaken. This decision is
influenced by the knowledge and interest of the entrepreneur and customer requirements.
2. Size of the Firm: If the entrepreneur is confident that the demand for the proposed
product is likely to be good over the time, he will start the operation at large scale. If the
market condition is uncertain then small business will be the best choice.
3. Choice of form of Ownership: The business organization can be in the form of sole
proprietorship, partnership or a joint stock company. The choice of the suitable form of
ownership depends upon the line of business, capital requirement, liability of owner’s
requirement, liability of owner’s division of profit, legal formalities, transferability of
interest etc.
4. Location of the Business Enterprise: An important factor to be considered at the start of
business is the place where it will be located, various factors like labour, power supply,
transportation, warehousing, banking etc are considered while making choice of location.
5. Financing the Proposition: Capital is required for investing in fixed assets and current
assets and also to meet the day-to-day expenses. Proper financial planning must be done
to determine:
 Requirement of Capital
 Source of Capital
 Best way to utilize the capital
6. Physical Facilities: Availability of physical facilities is a very important factor to be
considered at the start of business. The decision relating to this factor will depend upon
the nature and size of business, availability of funds and processes of production.
7. Competent and Committed work force: Every enterprise needs competent and
committed workforce to perform various activities so that physical and financial resource
are converted to desired outputs.
8. Tax Planning: The owner of the business has to consider in advance the tax liability
under various tax laws and its impact on business decision.
9. Launching the Enterprise: After considering all the above factors the entrepreneur can
go ahead with actual launching of the enterprise like fulfilling necessary legal formalities
starting production process, initiating sales promotion etc.