PART I

Foundations of Business
 CHAPTER 1

NATURE AND PURPOSE OF BUSINESS

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• explain the concept and characteristics of business;

• compare the distinctive features of business, profession and

employment;

• classify business activities and clarify the meaning of industry and

commerce;

• state various types of industry;

• explain the activities relating to commerce;

• analyse the objectives of business;

• describe the nature of business risks and their causes; and

• discuss the basic factors to be considered while starting a business.

NATURE AND PURPOSE OF BUSINESS 3

Imran, Manpreet, Joseph and Priyanka have been classmates in Class X. After
their exams are over, they happen to meet at a common friend Ruchika’s house.
Just when they are sharing their experiences of examination days, Ruchika’s
father, Mr. Raghuraj Chaudhury intervenes and asks about their well-being. He
also enquires from each one of them about their career plans. But none of them
has a definite reply. Mr. Raghuraj, who himself is a businessman, suggests to
them that they can opt for business as a promising and challenging career.
Joseph gets excited by the idea and says, “Yes, business is really good for making
lots of money even more than is possible by becoming an engineer or a doctor.”
Mr. Raghuraj opines, “Let me tell you, young man, there is a lot more to business
than merely money”. He then gets busy with some other guests. However, the
four classmates begin raising many questions: What exactly business is all about?
What else is there in business besides money? How is business different from
non-business activities? What does one require to start a business? And, so on.

1.1 INTRODUCTION that we understand the concept, nature

and purpose of business.
The conversation among the four
classmates is obviously focused on the 1.2 CONCEPT OF BUSINESS
meaning, nature and purpose of
The term business is derived from the
business. All human beings, wherever
word ‘busy’. Thus, business means
they may be, require different types of
being busy. However, in a specific
goods and services to satisfy their needs.
sense, business refers to an occupation
The necessity of supplying goods and
in which people regularly engage in
services has led to certain activities being
activities related to purchase,
undertaken by people to produce and
production and/or sale of goods and
sell what is needed by others. Business
services with a view to earning profits.
is a major economic activity in all
The activity may consist of production
modern societies concerned as it is with
or purchase of goods for sale, or
the production and sale of goods and
exchange of goods or supply of services
services required by people. The
to satisfy the needs of other people.
purpose behind most business activities
In every society people undertake
is to earn money by meeting people’s
various activities to satisfy their needs.
demands for goods and services.
These activities may be broadly
Business is central to our lives. Although
classified into two groups — economic
our lives are influenced by many other
and non-economic. Economic activities
institutions in modern society such as
are those by which we can earn our
schools, colleges, hospitals, political
livelihood whereas non-economic
parties and religious bodies, business
activities are those performed out of
has the major influence on our daily
love, sympathy, sentiments, patriotism,
lives. It, therefore, becomes important
etc. For example, a worker working in
4 BUSINESS STUDIES

a factory, a doctor operating in his (ii) Production or procurement of

clinic, a manager working in the office goods and services: Before goods are
and a teacher teaching in a school— offered to people for consumption, these
are doing so to earn their livelihood and must be either produced or procured by
are, therefore, engaged in an economic business enterprises. Thus, every
activity. On the other hand, a housewife business enterprise either manu-
cooking food for her family or a boy factures the goods it deals in or it acquires
helping an old man cross the road are them from producers, to be further sold
performing non-economic activities to consumers or users. Goods may
since they are doing so out of love or consist of consumable items of daily use
sympathy. Economic activities may be such as sugar, ghee, pen, notebook, etc.
further divided into three categories, or capital goods like machinery,
namely business, profession and furniture, etc. Services may include
employment. Business may be defined facilities offered to consumers, business
as an economic activity involving the firms and organisations in the form of
production and sale of goods and transportation, banking, electricity, etc.
services undertaken with a motive of (iii) Sale or exchange of goods and
earning profit by satisfying human services: Directly or indirectly, business
needs in society. involves transfer or exchange of goods
and services for value. If goods are
1.3 C HARACTERISTICS OF BUSINESS produced not for the purpose of sale but
ACTIVITIES say for personal consumption, it cannot
In order to appreciate how business be called a business activity. Cooking
activity is different from other activities food at home for the family is not
in society, the nature of business or its business, but cooking food and selling
fundamental character must be it to others in a restaurant is business.
explained in terms of its distinguishing Thus, one essential characteristic of
characteristics, which are as follows: business is that there should be sale or
(i) An economic activity: Business is exchange of goods or services between
considered to be an economic activity the seller and the buyer.
because it is undertaken with the object (iv) Dealings in goods and services
of earning money or livelihood and not on a regular basis: Business involves
because of love, affection, sympathy or dealings in goods or services on a
any other sentimental reason. It may regular basis. One single transaction
be mentioned here that this activity of sale or purchase, therefore, does not
can be undertaken either at small and constitute business. Thus, for example,
individual level, e.g. (purchase and sale if a person sells his/her domestic radio
by a shopkeeper) or on large scale in a set even at a profit, it will not be
more formal and organised level considered a business activity. But if
(purchase and sale by a cooporative he/she sells radio sets regularly either
society or company). through a shop or from his/her
NATURE AND PURPOSE OF BUSINESS 5

residence, it will be regarded as a changes in consumer tastes and

business activity. fashions, changes in methods of
(v) Profit earning: One of the main production, strike or lockout in the
purpose of business is to earn income work place, increased competition in
by way of profit. No business can the market, fire, theft, accidents,
survive for long without earning profit. natural calamities, etc. No business
That is why businessmen make all can altogether do away with risks.
possible efforts to maximise profits, by
increasing the volume of sales or 1.4 COMPARISON OF BUSINESS,
reducing costs. PROFESSION AND EMPLOYMENT
(vi) Uncertainty of return: Uncertainty
of return refers to the lack of knowledge As has been mentioned earlier,
relating to the amount of money that economic activities may be divided into
the business is going to earn in a given three major categories viz.,
period. Every business invests money (i) Business
(capital) to run its activities with the (ii) Profession
objective of earning profit. But it is not (iii) Employment

Business Functions at Enterprise Level

Business includes a wide variety of functions performed by many different kinds
of organisations called business enterprises or firms. Financing, production
marketing and human resource management are the four major functions which
are performed by business enterprises to carry on business. Financing is
concerned with mobilising and utilising funds for running a business enterprise.
Production involves the conversion of raw materials into finished products or
generation of services. Marketing refers to all those activities which facilitate
exchange of goods and services from producers to the people who need them, at
a 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 working people
who have necessary skills to perform various tasks in enterprises.

certain as to what amount of profit will Business refers to those economic

be earned. Also, there is always a activities, which are connected with the
possibility of losses being incurred, in production or purchase and sale of
spite of the best efforts put into the goods or supply of services with the
business. main object of earning profit. People
(vii) Element of risk: Risk is the engaged in business earn income in the
uncertainty 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
6 BUSINESS STUDIES

their occupation. Such activities are Bar Council of India and Chartered
generally subject to guidelines or codes Accountants belong to the accounting
of conduct laid down by professional profession and are subject to the
bodies. Those engaged in professions regulations of the Institute of Chartered
are known as professionals. For Accountants of India.
example, doctors are engaged in the Employment refers to the
medical profession and are subject to occupation in which people work for
the regulations of the Medical Council others and get remunerated in return.
of India, the concerned professional Those who are employed by others are
body. Similarly, lawyers are engaged known as employees. Thus, people who
in the legal profession, governed by the work in factories and receive wages and
COMPARISON OF BUSINESS, PROFESSION AND EMPLOYMENT
Basic Business Profession Employment
Entrepreneur's
decision and Membership of a Appointment letter
1. Mode of
other legal professional body and and service
establishment
for malities, if certificate of practice agreement
necessary
Provision of goods Rendering of Per for ming work as
2. Nature of
and services to personalised, expert per service contract
work
the public services or rules of service
Qualifications, expertise
Qualification and
No minimum and training in a specific
training as
3. Qualification qualification is field as prescribed by the
prescribed by the
necessary professional body is a
employer
must
4. Reward or
Profit ear ned Professional fee Salary or wages
retur n
Capital
investment
5. Capital Limited capital needed for
required as per No capital required
investment establishment
size and nature of
business
Profits are
uncertain and Fee is generally regular Fixed and regular
6. Risk
irregular; risk is and certain; some risk pay; no or little risk
present
T ransfer possible
7. T ransfer of
with some Not possible Not possible
interest
for malities
Nor ms of behaviour
No code of
8. Code of Professional code of laid down by the
conduct is
conduct conduct is to be followed employer are to be
prescribed
followed.
NATURE AND PURPOSE OF BUSINESS 7

salaries are in the employment of exchange of goods and services. On the

factory owners and are employees of basis of these two categories, we may
the factory. Similarly, people who work classify business firms into industrial
in the offices of banks, insurance and commercial 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
of these organisations. 1.6 INDUSTRY
Industry refers to economic activities,
1.5 CLASSIFICATION OF BUSINESS
which are connected with conversion of
ACTIVITIES
resources into useful goods. Generally,
Various business activities may be the term industry is used for activities
classified into two broad categories — in which mechanical appliances and
industry and commerce. Industry is technical skills are involved. These
concerned with the production or include activities relating to producing
processing of goods and materials. or processing of goods as well as
Commerce includes all those activities breeding and raising of animals. The
which are necessary for facilitating the term industry is also used to mean
8 BUSINESS STUDIES

groups of firms producing similar or for their use in further

related goods. For example, cotton reproduction. For the breeding
textile industry refers to all of plants, the seeds and nursery
manufacturing units producing textile companies are typical examples
goods from cotton. Similarly, electronic of genetic industries. In
industry would include all firms addition, activities of cattle-
producing electronic goods, and so on. breeding farms, poultry farms,
Further, in common parlance, certain and fish hatchery come under
services like banking and insurance the class of genetic industries.
are also referred to as industry, (b) Secondary industries: These are
say banking industry, insurance concerned with using the materials,
industry etc. which have already been extracted at
Industries may be divided into the primary stage. These industries
three broad categories namely primary, process such materials to produce
secondary and tertiary. goods for final consumption or for
(a) Primary industries: These include further processing by other
all those activities which are industrial units. For example,
mining of an iron ore is a primary
connected with the extraction and
industry, but manufacturing of steel
production of natural resources and
by way of further processing of raw
reproduction and development of
irons is a secondary industry.
living organisms, plants etc. These
Secondary industries may be further
industries may be further sub-
divided as follows:
divided as follows:
(i) Manufacturing industries: These
(i) Extractive industries: These
industries are engaged in
industries extract or draw out producing goods through
products from natural sources. processing of raw materials and
Extractive industries supply thus creating form utilities. They
some basic raw materials that bring out diverse finished
are mostly products of products, that we consume, or use
geographical or natural through the conversion of raw
environment. Products of these materials or partly finished
industries are usually materials in their manufacturing
transformed into many other operations. Manufacturing
useful goods by manufacturing industries may be further divided
industries. Important extractive into four categories on the basis of
industries include farming, method of operation for production.
mining, lumbering, hunting and • Analytical industry which
fishing operations. analyses and separates
(ii) Genetic industries: These different elements from the
industries remain engaged in same materials, as in the case
breeding plants and animals of oil refinery.
NATURE AND PURPOSE OF BUSINESS 9

• Synthetical industry which termed as trade. But there are a lot of

combines various ingredients activities that are required to facilitate
into a new product, as in the the purchase and sale of goods. These
case of cement. are called services or auxiliaries to trade
• Processing industry which and include transport, banking,
involves successive stages for insurance, communication, advertise-
manufacturing finished ment, packaging and warehousing.
products, as in the case of Commerce, therefore, includes both,
sugar and paper. buying and selling of goods i.e., trade,
• Assembling industry which as well as auxiliaries such as
assembles different compo- transport, banking, etc.
nent parts to make a new Commerce provides the necessary
product, as in the case of link between producers and
television, car, computer, etc. consumers. It embraces all those
(ii) Construction industries: These activities, which are necessary for
industries are involved in the maintaining a free flow of goods and
construction of buildings, dams, services. Thus, all activities involving
bridges, roads as well as tunnels the removal of hindrances in the
and canals. Engineering and process of exchange are included in
architectural skills are an important commerce. The hindrances may be in
part in construction industries. respect of persons, place, time, risk,
(c) Tertiary industries: These are finance, etc. The hindrance of persons
concerned with providing support is removed by trade, thereby making
services to primary and secondary goods available to the consumers from
industries as well as activities the possession or ownership producers.
relating to trade. These industries Transport removes the hindrances of
provide service facilities. As place by moving goods from the places
business activities, these may be of production to the markets for sale.
considered part of commerce Storage and warehousing activities
because as auxiliaries to trade remove the hindrance of time by
these activities assist trade. facilitating holding of stocks of goods
Included in this category are
to be sold as and when required. Goods
transport, banking, insurance,
held in stock as well as goods in course
warehousing, communication,
of transport are subject to the risk of
packaging and advertising.
loss or damage due to theft, fire,
accidents, etc. Protection against these
1.7 COMMERCE
risks is provided by insurance of goods.
Commerce includes two types of acti- Capital required to undertake the
vities, viz., (i) trade and (ii) auxiliaries above activities is provided by banking
to trade. Buying and selling of goods is and financing institutions. Advertising
10 BUSINESS STUDIES

makes it possible for producers and organisations operating in two or more

traders to inform consumers about the countries. If goods are purchased from
goods and services available in the another country, it is called import
market. Hence, commerce is said to trade. If they are sold to other countries,
consist of activities of removing the it is known as export trade. When goods
hindrances of persons, place, time, risk, are imported for export to other
finance and information in the process countries, it is known as entrepot trade.
of exchange of goods and services.
1.7.2 Auxiliaries to Trade
1.7.1 Trade
Activities which are meant for assisting
Trade is an essential part of commerce. trade are known as auxiliaries to trade.
It refers to sale, transfer or exchange of These activities are generally referred to
goods. It helps in making the goods as services because these are in the
produced available to ultimate nature of facilitating the activities relating
consumers or users. These days goods to industry and trade. Transport,
are produced on a large scale and it is banking, insurance, warehousing, and
difficult for producers to themselves advertising are regarded as auxiliaries to
reach individual buyers for sale of their trade, i.e., activities playing a supportive
products. Businessmen are engaged in role. In fact, these activities support not
trading activities as middlemen to make only trade, but also industry and hence,
the goods available to consumers in the entire business activity. Auxiliaries
different markets. In the absence of trade, are an integral part of commerce in
it would not be possible to undertake particular and business activity in
production activities on a large scale. general. These activities help in removing
Trade may be classified into two various hindrances which arise in
broad categories — internal and connection with the production and
external. Internal, domestic or home distribution of goods. T ransport
trade is concerned with the buying and facilitates movement of goods from one
selling of goods and services within the place to another. Banking provides
geographical boundaries of a country. financial assistance to the manufacturer
This may further be divided into and trader. Insurance covers various
wholesale and retail trade. When goods kinds of business risks. Warehousing
are purchased and sold in bulk, it is creates time utility by way of storage
known as wholesale trade. When goods facilities. Advertising provides
are purchased and sold in information to the consumers. In other
comparatively smaller quantities, for words, these activities facilitate
final consumption it is referred to as movement, storage, financing, risk
retail trade. External or foreign trade coverage and sales promotion of goods.
consists of the exchange of goods and Auxiliaries to trade are briefly discussed
services between persons or below:
NATURE AND PURPOSE OF BUSINESS 11

(i) Transport and Communication: help exporters in collecting money from

Production of goods generally takes importers. Commercial banks also help
place in particular locations. For promoters of companies to raise capital
instance, tea is mainly produced in from the public.
Assam; cotton in Gujarat and (iii) Insurance: Business involves
Maharashtra; jute in West Bengal and various types of risks. Factory building,
Orissa; sugar in U.P, Bihar and machinery, furniture etc. must be
Maharashtra and so on. But these protected against fire, theft and other
goods are required for consumption in risks. Materials and goods held in stock
different parts of the country. The or in transit are subject to the risk of
obstacle of place is removed by loss or damage. Employees are also
transport through road, rail or coastal required to be protected against the
shipping. T ransport facilitates risks of accident and occupational
movement of raw material to the place hazards. Insurance provides protection
of production and the finished in all such cases. On payment of a
products from factories to the place of nominal premium, the amount of loss
consumption. Along with the transport or damage and compensation for
facility, there is also a need for injury, if any, can be recovered from
communication facilities so that the insurance company.
producers, traders and consumers (iv) Warehousing: Usually, goods are
may exchange information with one not sold or consumed immediately after
another. Thus, postal services and production. They are held in stock to
telephone facilities may also be make them available as and when
regarded as auxiliaries to business required. Special arrangement must be
activities. made for storage of goods to prevent loss
(ii) Banking and Finance: Business or damage. Warehousing helps
activities cannot be undertaken unless business firms to overcome the problem
funds are available for acquiring assets, of storage and facilitates the availability
purchasing raw materials and meeting of goods when needed. Prices are
other expenses. Necessary funds can thereby maintained at a reasonable level
be obtained by businessmen from a through continuous supply of goods.
bank. Thus, banking helps business (v) Advertising: Advertising is one of
activities to overcome the problem of the most important methods of
finance. Commercial banks generally promoting the sale of products,
lend money by providing overdraft and particularly, consumers goods like
cash credit facilities, loans and electronic goods, automobiles, soaps,
advances. Banks also undertake detergents etc. Most of these goods are
collection of cheques, remittance of manufactured and supplied in the
funds to different places, and market by numerous firms — big or
discounting of bills on behalf of traders. small. It is practically impossible for
In foreign trade, commercial banks producers and traders to contact each
12 BUSINESS STUDIES

and every customer. Thus, for than what has been invested, and profit
promoting sales, information about the is the excess of revenue over cost. Profit
goods and services available, their may be regarded as an essential
features, price, etc., must reach objective of business for various
potential buyers. Also there is a need reasons: (i) it is a source of income for
to persuade potential buyers about the business persons, (ii) it can be a source
uses, quality, prices, competitive of finance for meeting expansion
information about the goods and requirements of business, (iii) it
services etc. Advertising helps in indicates the efficient working of
providing information about available business, (iv) it can be taken as society’s
goods and services and inducing approval of the utility of business, and
customers to buy particular items. (v) it builds up the reputation of a
business enterprise.
1.8 OBJECTIVES OF BUSINESS However, too much emphasis on
profit to the exclusion of other objectives
An objective is the starting point of can be dangerous for good business.
business. Every business is directed to Obsessed with profit, business
the achievement of certain objectives. managers may neglect all other
Objectives refer to all that the business responsibilities towards customers,
people want to get in return for what employees, investors and society at
they do. It is generally believed that large. They may even be inclined to
business activity is carried on only for exploit various sections of society to earn
profit. Business persons themselves immediate profit. This may result in the
proclaim that their primary objective is non-cooperation or even opposition from
to produce or distribute goods or the affected people against the
services for a profit. Every business is malpractices of business enterprises.
said to be an attempt on the part of The enterprises might lose business and
business people to get more than what may be unable to earn profit. That is
has been spent or invested or, in other the reason why there is hardly any
words, to earn profit which is the excess
sizable business enterprise whose only
of revenue over cost. However, it is being
objective is maximisation of profit.
increasingly realised nowadays that
business enterprises are part of society
1.8.1 Multiple Objectives of Business
and need to have several objectives,
including social responsibility to Objectives are needed in every area
survive and prosper in the long run. that influences the survival and
Profit is found to be a leading objective prosperity of business. Since a
but not the only one. business has to balance a number
Although earning profit cannot be of needs and goals, it requires
the only objective of business, its multiple objectives. It cannot follow
importance cannot be ignored. Every only one objective and expect to
business is an attempt to reap more achieve excellence. Objectives have
NATURE AND PURPOSE OF BUSINESS 13

to be specific in every area and ascertained by comparing the value

sphere of business. For example, of output with the value of inputs.
sales targets have to be set, the It is used as a measure of efficiency.
amount of capital to be raised has to In order to ensure continuous
be estimated and the target number survival and progress, every
of units to be produced needs to be enterprise must aim at greater
defined. The objectives define in productivity through the best use
concrete terms what the business is of available resources.
going to do. Objectives also enable the (d) Physical and financial resources:
business to analyse their own Any business requires physical
performance and take steps as resources like plants, machines,
neccessary to improve their offices, etc., and financial resources,
performance in future. i.e., funds to be able to produce and
Objectives are needed in every area supply goods and services to its
customers. The business enterprise
where performance and results affect
must aim at acquiring these
the survival and prosperity of
resources according to their
business. Some of these areas are
requirements and use them
described below:
efficiently.
(a) Market standing: Market standing
(e) Earning profits: One of the
refers to the position of an enterprise
objectives of business is to earn profits
in relation to its competitors. A
on the capital employed. Profitability
business enterprise must aim at refers to profit in relation to capital
standing on stronger footing in investment. Every business must
terms of offering competitive earn a reasonable profit which is so
products to its customers and important for its survival and growth.
serving them to their satisfaction. (f) Manager performance and
(b) Innovation: Innovation is the development:Business enterprises
introduction of new ideas or need managers to conduct
methods in the way something is and coordinate business activity.
done or made. There are two kinds Various programmes for motivating
of innovation in every business i.e., managers need to be implemented.
(i) innovation in product or service; Manager performance and
and (ii) innovation in various skills development, therefore, is an
and activities needed to supply important objective. The enterprises
products and services. No business must actively work for this
enterprise can flourish in a purpose.
competitive world without (g) Worker performance and attitude:
innovation. Therefore, innovation Worker’s performance and attitudes
becomes an important objective. determine their contribution towards
(c) Productivity: Productivity is productivity and profitability of any
14 BUSINESS STUDIES

enterprise. Therefore, every conditions including fluctuations in

enterprise 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 market
the part of workers. conditions are likely to result in gains
(h) Social responsibility: Social whereas unfavourable ones may result
responsibility refers to the obligation in losses. Pure risks involve only the
of business firms to contribute possibility of loss or no loss. The chance
resources for solving social problems of fire, theft or strike are examples of
and work in a socially desirable pure risks. Their occurrence may result
manner. in loss, whereas non-occurrence may
Thus, a business enterprise must have explain absence of loss, instead of gain.
multiple objectives to satisfy different
individuals and groups. This is essential 1.9 NATURE OF BUSINESS RISKS
for its own survival and prosperity.
Nature of business risks can be
1.8.2 Business Risks understood in terms of their peculiar
characteristics:
The term ‘business risks’ refers to the (i) Business risks arise due to
possibility of inadequate profits or even uncertainties: Uncertainty refers to
losses due to uncertainties or the lack of knowledge about what is
unexpected events. For example, going to happen in the future. Natural
demand for a particular product may calamities, change in demand and
decline due to change in tastes and prices, changes in government policy,
preferences of consumers or due to improvement in technology, etc., are
increased competition from other some of the examples of uncertainty
producers. Lower demand results in which create risks for business because
long sales and profits. In another the outcome of these future events is
situation, the shortage of raw materials not known in advance.
in the market may shoot up its price. (ii) Risk is an essential part of every
The firm using these raw materials will business: Every business has some
have to pay more for buying them. As risk. No business can avoid risk,
a result, cost of production may although the amount of risk may vary
increase which, in turn, may reduce from business to business. Risk can be
profits. minimised, but cannot be eliminated.
Business enterprises constantly (iii) Degree of risk depends mainly
face two types of risk: speculative and upon the nature and size of
pure. Speculative risks involve both the business: Nature of business (i.e., type
possibility of gain as well as the of goods and services produced and
possibility of loss. Speculative risks sold) and size of business (i.e., volume
arise due to changes in market of production and sale) are the main
NATURE AND PURPOSE OF BUSINESS 15

factors which determine the amount of power failure, strikes, riots,

risk in a business. For example, a management inefficiency, etc.
business dealing in fashionable items (iii) Economic causes: These include
has a high degree of risk. Similarly, a uncertainties relating to demand for
large-scale business generally has a goods, competition, price, collection of
higher risk than what a small scale has. dues from customers, change of
(iv) Profit is the reward for risk technology or method of production,
taking: ‘No risk, no gain’ is an age-old etc. Financial problems like rise in
principle which applies to all types of interest rate for borrowing, levy of higher
business. Greater the risk involved in taxes, etc., also come under these type
a business, higher is the chance of of causes as they result in higher
profit. An entrepreneur undertakes unexpected cost of operation of
risks under the expectation of higher business.
profit. Profit is thus the reward for (iv) Other causes: These are
risk taking. unforeseen events like political
disturbances, mechanical failures such
1.9.1 Causes of Business Risks
as the bursting of boiler, fluctuations
Business risks arise due to a variety of in exchange rates, etc., which lead to
causes, which are classified as follows: the possibility of business risks.

Methods of Dealing with Risks

Although no business enterprise can escape the presence of risk, there are
many methods it can use to deal with risk situations. For instance, the enterprise
may (a) decide not to enter into too risky transaction; (b) take preventive measures
like firefighting devices to reduce risk; (c) take insurance policy to transfer risk
to insurance company; (d) assume risk by making provisions in the current
earnings as is the case of provision for bad and doubtful debts; or (e) share risks
with other enterprises as manufacturers and wholesalers may do by agreeing to
share losses which may be caused by falling prices.

(i) Natural causes: Human beings 1.9.2 Starting a Business — Basic

have little control over natural Factors
calamities like flood, earthquake, Starting a business enterprise is similar
lightning, heavy rains, famine, etc. to any other human effort in which
These result in heavy loss of life, resources are employed to achieve
property and income in business. certain objectives. Successful results in
(ii) Human causes: Human causes business depend largely upon the
include such unexpected events like ability of the entrepreneurs or the
dishonesty, carelessness or negligence starters of a new business to anticipate
of employees, stoppage of work due to problems and solve them with
16 BUSINESS STUDIES

minimum cost. This is especially true business, he will start the operation at
of 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 better
business firms encounter, are of a basic choice.
nature. For example, to start a factory, (iii) Choice of form of ownership:
plans must be made and implemented With respect to ownership, the
about such problems as the location business organisation may take the
of 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 such
complex in a big business. However, factors as the line of business, capital
some of the basic factors, which must requirements, liability of owners,
be considered by anybody who is to division of profit, legal formalities,
start the business are as follows: continuity of business, transferability
(i) Selection of line of business: The of interest and so on.
first thing to be decided by any (iv) Location of business enterprise:
entrepreneur of a new business is the An important factor to be considered
nature and type of business to be 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 industry and Any mistake in this regard can result
commerce, which has the possibility of in high cost of production,
greater amount of profits. The decision inconvenience in getting right kind of
will be influenced by the customer production inputs or serving the
requirements in the market and also customers in the best possible way.
the kind of technical knowledge and Availability of raw materials
interest the entrepreneur has for and labour; power supply and
producing a particular product. services like banking, 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 a
important decision to be taken at the choice of location.
start of the business. Some factors (v) Financing the proposition:
favour a large size whereas others tend Financing is concerned with providing
to restrict the scale of operation. If the the necessary capital for starting as well
entrepreneur is confident that the as for continuing the proposed
demand for the proposed product is business. Capital is required for
likely to be good over time and he can investment in fixed assets like land,
arrange the necessary capital for building, machinery and equipment
NATURE AND PURPOSE OF BUSINESS 17

and in current assets like raw materials, to perform various activities so that
book debts, stock of finished goods, etc. physical and financial resources are
Capital is also required for meeting converted into desired outputs. Since
day-to-day expenses. Proper financial no individual entrepreneur can do
planning must be done to determine everything himself, he must identify the
(a) the requirement of capital, requirement of skilled and unskilled
(b) source from which capital will be workers and managerial staff. Plans
raised and (c) the best ways of utilising should also be made about how the
the capital in the firm. employees will be trained and motivated
(vi) Physical facilities: Availability of to give their best performance.
physical facilities including machines (ix) Tax planning: Tax planning has
and equipment, building and become necessary these days because
supportive services is a very important there are a number of tax laws in the
factor to be considered at the start of country and they influence almost
the business. The decision relating to every aspect of the functioning of
this factor will depend on the nature modern business. The founder of the
and size of business, availability of business has to consider in advance
funds 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) Launching the enterprise: After
been determined, the entrepreneur the decisions relating to the above
should draw a layout plan showing the mentioned factors have been taken,
arrangement of these facilities. Layout the entrepreneur can go ahead with
means the physical arrangement of actual launching of the enterprise
machines and equipment needed to which would mean mobilising various
manufacture a product. resources, fulfilling necessary legal
(viii) Competent and committed formalities, starting the production
worked force: Every enterprise needs process and initiating the sales
competent and committed work force promotion campaign.

Key Terms
Business Profession Primary Innovation Warehousing
Profit Employment Secondary Insurance Social responsibility
Risk Industry Tertiary Mining Manufacturing
18 BUSINESS STUDIES

SUMMARY

Concept and characteristics of business: Business may be defined as an

economic activity involving the production and sale of goods and services
undertaken with the motive of earning profit by satisfying human needs in
society. It’s distinguished characteristics are: (i) an economic activity,
(ii) production or procurement of goods and services, (iii) sale or exchange
of goods and services for the satisfaction of human needs, (iv) dealings in
goods and services on a regular basis, (v) profit earning, (vi) uncertainty of
return, and (vii) element of risk.
Comparison of business, profession and employment: Business refers
to those economic activities which are connected with the production or
purchase and sale of goods or supply of services with the main object of
earning profit. Profession includes those activities, which require special
knowledge and skill to be applied by individuals in their occupation.
Employment refers to the occupation in which people work for others and
get remunerated in return. The three can be compared on the basis of
mode of establishment, nature of work, qualification required, reward or
return, capital investment, risk, transfer of interest and code of conduct.
Classification of business activities: Business activities may be classified
into broad categories: industry and commerce. Industry refers to economic
activities which are connected with conversion of resources into useful
goods. Industries may be: primary, secondary or tertiary. Primary industries
are connected with the extraction and production of natural resources and
reproduction and development of living organisms, plants, etc. Primary
industries may be: extractive (like mining) or genetic (like poultry farms).
Secondary industries are concerned with using the materials which have
already been extracted at the primary stage. These industries could be:
manufacturing or construction. Manufacturing industries may be further
classified into analytical, synthetical, processing and assembling industries.
Tertiary industries are concerned with providing support services to primary
and secondary industries as well as activities relating to trade.
Commerce includes activities relating to trade and auxiliaries to trade.
Trade refers to sale, transfer or exchange of goods. It could be classified as
internal (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. These
include transport and communication, banking and finance, insurance,
warehousing, and advertising.
Objectives of business: Although earning of profit is considered to be the
primary objective, objectives are needed in every area where performance
results affect the survival and prosperity of business. Some of these areas
are: market standing, innovation, productivity, physical and financial
NATURE AND PURPOSE OF BUSINESS 19

resources, earning profits manager performance and development, worker

performance and attitude, and social responsibility.
Business risks: The term ‘risk’ refers to the possibility of inadequate profits
or even losses due to uncertainties or unexpected events. Its nature can be
explained with the help of its peculiar characteristics which are:
(i) Business risks arise due to uncertainties,
(ii) Risk is an essential part of every business,
(iii) Degree of risk depends mainly upon the nature and size of business,
and
(iv) Profit is the reward for risk taking. Business risks arise due to a variety
of causes including natural, human, economic and other causes.
Starting a business — basic factors: Some of the basic factors which must
be considered by anybody who is to start the business are: selection of line
of business, size of the firm, choice of form of ownership, location of business
enterprise, financing the proposition, physical facilities, plant layout
competent and committed workforce, tax planning and launching the
enterprise.

EXERCISES

Multiple Choice Questions

1. Which of the following does not characterise business activity?
(a) Production of goods (b) Presence of risk
and services
(c) Sale or exchange of (d) Salary or wages
goods and services
2. Which of the broad categories of industries covers oil refinery and sugar
mills?
(a) Primary (b) Secondary
(c) Tertiary (d) None of them
3. Which of the following cannot be classified as an auxilliary to trade?
(a) Mining (b) Insurance
(c) Warehousing (d) Transport
4. The occupation in which people work for others and get remunerated in
return is known as
(a) Business (b) Employment
(c) Profession (d) None of them
5. The industries which provide support services to other industries are
known as
(a) Primary industries (b) Secondary industries
(c) Commercial industries (d) Tertiary industries
20 BUSINESS STUDIES

6. Which of the following cannot be classified as an objective of business?

(a) Investment (b) Productivity
(c) Innovation (d) Profit earning
7. Business risk is not likely to arise due to
(a) Changes in government policy (b) Good management
(c) Employee dishonesty (d) Power failure

Short Answer Questions

1. State the different types of economic activities.
2. Why is business considered an economic activity?
3. Explain the concept of business.
4. How would you classify business activities?
5. What are various types of industries?
6. Explain any two business activities which are auxiliaries to trade.
7. What is the role of profit in business?
8. What is business risk? What is its nature?

Long Answer Questions

1. Explain the characteristics of business.
2. Compare business with profession and employment.
3. Explain with examples the various types of industries.
4. Describe the activities relating to commerce.
5. Why does business need multiple objective? Explain any five such
objectives.
6. Explain the concept of business risk and its causes.
7. What factors are important to be considered while starting a business?
Explain.

Projects/Assignments
1. Choose a locally operated trading or business unit. Find out the kind of
risks 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 other objectives.