Chapter – 1

NATURE & PURPOSE OF BUSINESS

Introduction
Man is always busy with certain activities during his life time in order to earn his lively-hood.
Broadly the human activities can be classified into two, they are Economic Activities and Non-
Economic Activities.
1. Economic Activities – These are those activities which are undertaken to earn money or
money’s worth and related to production and exchange of wealth. Eg; Running a factory, Retail
shop, Cultivating land etc.

Characteristics of Economic Activities.

a. Economic Activities are related to production of wealth.
b. These are undertaken to satisfy human wants.
c. They are performed with an expectation of earning money.
d. It acts as a basis for economic development of the society.

2. Non-economic Activities – Non-economic activities are those activities which are undertaken
not for any reward but for the personal satisfaction. Example; A mother looks after her children,
A house-wife cooks food for the family, Visiting Temples etc.
Differences between Economic activities and Non-economic activities
ECONOMIC ACTIVITIES NON-ECONOMIC ACTIVITIES
To earn money or money’s worth For personal or psychological satisfaction
It can be measured in terms of money It cannot be measured in monetary terms
Money is the reward Mental satisfaction is the reward

3. Business – Business is defined as the “repeated buying and selling or manufacturing of goods
and services with an intention to earn profit which involves the creation of wealth.”
Example; A factory, A retail shop, Commission agents, brokers etc.
Characteristics of Business:
1. Economic Activity – because it is undertaken with the object or earning money or livelihood.
2. Production or procurement of goods and service – In order to offer the goods for
consumption they must be either produced or procured by the business enterprise. Goods may
consist of consumable goods, industrial goods or capital goods. Services include facilities offered
to consumers in such as transportation, banking, insurance, electricity etc. (Consumable goods –
Pen, soap, sugar etc., Industrial goods – Steel, cement etc., Capital goods – Machinery, furniture
etc.)
3. Sale or exchange of goods and services – There should be sale or exchange of goods or
services between the seller and buyer. If goods are produced for personal use, it cannot be treated
as a business. Eg: Cooking food for the family is not a business, but cooking food and selling it
to others in a restaurant is a business.
4. Regular Dealings – Business involves dealing in goods and services on a regular basis. One
single transaction of sale or purchase is not considered as a business. For example, if a person is
selling is old car is not considered as a business.
5. Earning Profit – It is the main purpose of business. So that the businessmen should take all
efforts to increase the profit by increasing sales volume or reducing cost of production.
6. Uncertainty of Return – No business can predict its future profit as it is uncertain. Also there
is a possibility of loss being incurred.
7. Element of Risk – Every business is subject to risk due to various reasons like change in
fashion, technological changes, increasing competition, fire, theft, accidents, natural calamities
etc.
Classification of Business
On the basis of size, business activities can be grouped into small scale and large scale. Small
scale business units require only a small amount of capital and they employ a lesser number of
workers and the production is carried out on a small scale. Large scale business units invest a
large amount of capital and produce goods on a large scale.
On the basis of ownership, business can be classified into public sector, private sector and joint
sector. If a business is owned by government or any of its agencies, is called public enterprises.
While the ownership is vested in the hands of private individuals, it is called private enterprises.
Beyond these certain enterprises are owned partly by government and partly by private
individuals, they are called joint sector enterprises.
On the basis of functions business may broadly be classified into Industry and Commerce.
INDUSTRY
The term industry refers to that part of business which is concerned with the production of goods
and material. An industry may be classified into primary industry, secondary industry and
tertiary industry.
Primary industries are concerned with the extracting, producing and processing of natural
resources. It may further be divided into extractive industries and genetic industries.
Secondary Industries are concerned with the materials which have already been produced at the
primary stage, and they are again classified into Manufacturing industries and Construction
industries.
Tertiary Industries are providing support services to primary and secondary industries and it
form part of commerce. All service activities which are auxiliaries to trade like transport,
banking, insurance etc. fall under this category.
Extractive Industries are engaged in the extraction (collection) of useful materials from the earth
and sea. Mining, fishing, agriculture, quarrying etc. are the examples for extractive industries.
The products of these industries are either directly consumed or used as raw materials by other
industries.
Genetic Industries are engaged in the reproduction or multiplication of plants and animals. E.g.
Plant nurseries, Poultry farms, cattle breeding farms etc.
Manufacturing Industries are engaged with the conversion of raw materials into finished goods.
E.g. cotton into textiles, timber into furniture etc. they change the form of goods i.e. raw material
into finished goods and thus create form utility. Manufacturing industries usually produce
consumer goods such as soap, cloth, tooth paste etc., industrial goods such as steel, cement etc.
and Capital goods such as machinery and tools.
Types of Manufacturing Industries:
a. Analytical industry – Separates different elements from the same material. Eg: oil refinery.
b. Synthetical industry – Combines various ingredients into a new product. Eg: Cement.
c. Processing industry – Go through successive stages for manufacturing a finished product. Eg:
sugar, paper etc.
d. Assembling industry – Assembles different component parts to make a new product. Eg: TV,
Car, Mobile Phone, Computer etc.

Construction Industries are engaged in the construction of buildings, dams, roads, bridges etc.
and they use the products of manufacturing industries and extractive industries.
COMMERCE
Commerce is concerned with the buying, selling and distribution of commodities and it is an
organized system for the exchange of goods and services in between the businessman and the
customers. It is also concerned with the marketing aspects of business, i.e. supply of right type of
goods to the right persons, at the right time and at the right price. Thus commerce includes trade
and aids to trade.
Definition – Commerce can be defined as the sum total of all those activities which are involved
in the removal of hindrances in the process of exchange of goods.
Functions of Commerce –
1. Removal of Hindrance of Person: It refers to the lack of contact between the producers and
customers. Here the trader acts as an intermediary among them and customers are able to find
out the products which they are wanted from the market.

Removal of Hindrance of Place: It is a common problem that the producers and customers are
in distant places, hence the commodities should be transferred from the production centre to the
hands of customers. This problem can be solved by the system of commerce by means of
transport, packing and insurance.
3. Removal of Hindrance of Risk: Goods and properties of business are subject to various risk
such as fire, theft, damage etc., and they have to be protected by insuring the goods and
properties.
4. Removal of Hindrance of Time: There may be a gap between the production and
consumption as the production is carried out in anticipation of future demands. Therefore, it
becomes necessary to store the goods until they are sold. This problem can be solved by
warehousing.
5. Removal of Hindrance of Knowledge: Advertising helps in the removal of hindrance of
knowledge among the buyers.
6. Removal of Hindrance of Finance: The problem of finance can be handled by banks, which
form part of commerce. It will also help the businessman in exchange of money between
different persons at different places.
TRADE
Trade means buying and selling of goods, which involves the exchange of commodities for
money or money’s worth.
Types of Trade:
1. Home Trade - It is also known as domestic trade or internal trade. It means that the buying and
selling of goods within the country and both the buyer and seller should belong the same nation.
Home trade is of two types:
a. Wholesale Trade - It implies that the buying and selling in large quantities. A wholesaler buys
goods directly from the producers and sells them to the retailers.
b. Retail Trade – It involves buying and selling of goods in small quantities. A retail trader buys
goods from the wholesalers and sells them to the customers.

2. Foreign Trade – It is also known as External trade or international trade. It involves the buying
and selling of goods and services in between the persons belonging to two or more countries.
Foreign trade is of the following types:

a. Export Trade – It implies the sale of goods to foreign countries.

b. Import Trade – It refers to the purchase of goods from foreign countries.
c. Entrepot Trade – It means importing goods from one country for the purpose of exporting
them to some other countries.

Aids to Trade (Auxiliaries to Trade)

The activities which assist trade are called aids to trade or Auxiliaries to Trade. It includes
Transport, Banking, Insurance, Warehousing, Advertising etc. These service enterprises facilitate
movements, storage, finance, risk coverage and sales promotion of goods.
1. Transport and Communication – Usually production takes place in certain locations and
consumption all over the country, for instance tea is produced in Kerala and Assam, Jute in West
Bengal, here there is an obstacle or barrier of place. This is removed by transport through various
modes such as road, rail or water transport.
Along with transport there arises the need for communication. This will help producers, traders
and consumers in exchange of information. Postal service, telephones and other modern means
of communication may be regarded as auxiliaries to business activities.
2. Banking and Finance – All business concerns need fund for acquiring assets, raw materials
and meeting day today expenses. Finance is the foundation of all business provided by banks.
The banks accept deposits from the public and provide credit facilities for business. They
generally lend money by providing overdraft and cash credit facilities, loans and advances and
discounting of bills. Besides, they undertake collection of cheques, remittance facilities and
various other services to the business community.
3. Insurance – In business, there are a lot of chances of risks such as damage to property and
human resource (employees), such as fire, earthquake, theft, damage of goods in stock and
transit. Insurance has been emerged for the fulfillment of this need. On payment of a nominal
amount called premium, the amount of loss or damage is compensated by the insurance
company.
4. Warehousing – Production is always in anticipation of future demands, so that the products
are to be kept in good condition until they are sold. Storage of goods is done by warehouses
specially constructed for this purpose. They facilitate the availability of goods when required.
Thus warehousing stabilizes prices by equalizing supplies.
5. Advertising – It is an important device for promoting sales. It is not an easy task to reach
millions of customers; therefore, promoting sales, information about the product must be made
available to the potential buyers though advertising. Thus advertising makes possible marketing
of goods and services on a large scale.

Objectives of Business (Multiple Objectives of Business)

A business enterprise must have multiple objectives to satisfy different individuals and groups
for its own survival and prosperity.
a. Market Standing – It refers to the position of an enterprise in relation to its competitions by
providing quality products and better service to its customers.
b. Innovations (Novelty) – Innovation means the introduction of something new to the market.
It may be a new design, new quality for the existing product, new method of production etc.
c. Productivity – Every enterprise should aim at greater efficiency and productivity by the best
use of available resources.
d. Physical and financial resources – The business enterprise must aim at acquiring physical
resources like buildings, plant and machinery, offices etc. and financial resources or fund for its
operations and ensure its efficient use.
e. Earning profits - It is the most important aim of every business. Profit is regarded as the life-
blood of a business to survive and to make growth and development of the enterprise.
f. Manager performance and development – The enterprise should take much initiative to
improve the efficiency of its managers by conducting various programs to motivate them.
g. Worker performance and attitude – Every enterprise should aim at improving its workers’
performance and their positive attitude.
h. Social responsibility – It refers to the social obligations of business firms to contribute
resources for solving social problems and to work in a socially desirable manner.

BUSINESS RISK
In simple words risk means the possibility of loss. It can be defined as the chances of loss due to
certain uncertain events in the future. It may be of two types, such as speculative risk and pure
risk.
Speculative risk – It involves both chances of gain or loss. It arises due to change in demand
and supply, change in taste and habits of customers etc. If the market condition is favourable it
will result in gain, otherwise, loss.
Pure risk – It involves the possibility of loss or even no loss. Fire, theft, earthquake, strike etc.
are the examples of pure risks. If such events take place, it may result in loss, non-occurrence of
which is explain absence of loss, instead of gain.
Nature of Business Risks
1. It arises due to uncertainties.
2. It is an essential part of every business (Unavoidable).
3. Degree of risk depends on the nature and size of business.
4. Profit is the reward for bearing risk.

Methods of dealing with risk

1. Not to enter high risky transactions.
2. Take precautionary measures like firefighting equipments etc.
3. Take an insurance policy to cover various risks.
4. Take measures like provision for bad debts, investment fluctuation fund etc.

Causes of Business Risk

1. Natural Causes: It may include damages from flood, fire, earthquake etc.
2. Human Causes: It may arise due to certain human activities, such as theft, bad debt, mistakes,
accidents etc.
3. Economic Causes: It include uncertainties relating to demand for products, competition,
price, change in technology, rise in interest rate, higher taxes etc.
4. Other Causes: Political disturbances, mechanical failures, change in exchange rates, etc.
come under this category.

Starting a business – Basic Factors

1. Selection of line of business – It means the nature and type of business that an entrepreneur
should choose to start his business.
2. Size of the firm – The promoter has to decide the size of business, which may be either small
scale, medium scale or large scale depends on the financial stability, future demand etc.
3. Choice of form of ownership – The promoter must decide whether he wants to start a sole
proprietorship concern, partnership firm, private company, public company, or cooperative
society.
4. Location of business – It must be decided by considering the factors like availability of land,
electricity, water, accessibility to market, transportation, scope for expansion etc. Unscientific
location affects the efficiency and profitability of business.
5. Financing the proposition (Capital needs) – The promoter has to decide about business
capital requirements and also find out the sources of finance. It may include short term or long
term capital requirements, sources like shares, debentures or bank loans, cost of capital (interest
or dividend) etc.
6. Physical facilities – It means the resources used to convert raw material into finished goods,
which includes buildings, machines and equipments, skilled and unskilled workers, good quality
raw materials etc.

7. Plant lay out – A proper arrangement of physical facilities like machines, equipment and
workers will result in reduction of wastages, better use of available space, safety and security to
workers etc. It also increases the profit of the business.
8. Competent and committed work force – A scientific planning must be done by the
businessman in calculating the number of employees (skilled and unskilled) to be appointed in
various positions, and their qualities.
9. Tax planning – Tax planning does not mean non-payment of tax. It means to minimize the
taxes through better planning about location (tax free zones), size of business etc.
10. Launching the enterprise – After completing the above formalities, the entrepreneur can
launch his business by mobilizing necessary resources, starting production process and initiating
sales promotion activities.