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Nature &
purpose of
Business
CH 1 Business Studies
Class 11 Commerce Notes
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 NATURE AND PURPOSE OF BUSINESS
1. History of Commerce :

A Commerce is a branch of business which is concerned with

exchange and distribution of goods and services .

4 It compromise of Trade and Auxalaries to trade .

↳ The present system of commerce has not emerged overnight

overnight but it is the result of an evolutionary process .

↳ In historic time commerce started with the emergence of

Banter system ,
when goods were exchanged for goods .

4 The major problem of Banter system was

"
Double coincidence
of Wants "

for e. g. , if a
person wants to build a house
and need help of labour and he can offer pots then
the labour must have want of pots else the transaction
cannot take place •

4 The major break through in the commerce came with

following development :

1) Indigenous Banking system

② Rise of intermediaries

3) Transport

4) Trading Communities

5) Merchant Corporations

1) Indigenous Banking system :

→
Indigenous bankers are private firms or individuals who , operates
as banks ,
relieve deposits and give loans like banks .

→
Indigenous banking system occupy an important place in Indian
banking system .

The following are the significance of indigenous bankers :

a. Credit to small traders :

Indigenous bankers advance loans to such small traders who

 generally fail to obtain credit from the modern banks .

•
These bankers advance loans not only to the urban traders
but rural traders as well .

b. Credit to Agriculture :

Indigenous bankers advance enough loans to small farmers .

•
foams are advanced to the farmers on simply pledging their
crops .

•
Even land -
less cultivators are given loans by these bankers .

c. Long Term Credit :

Indigenous bankers also give long term credit .

* Defects of Indigenous :

→
Despite the notable merits of simplicity and elasticity , indigenous
bankers have some defects ,
as under :

i. Old Methods of Business :

4 Most of the indigenous bankers adopt old and defective

methods of business .

4 Some of the indigenous bankers have resorted to modern methods

of business but their number is rather small .

ii. Lack of Organisation :

4 Indigenous bankers are generally jealous of each other and

therefore lack any organised set
up .

iii. Defective System of Money Tending :

4 Indigenous bankers have defective system of money lending .

4 The rate of interest charged by them is very high .

4 Some indigenous bankers use even unfair means to make money .

iv. Banking and Trading :

4 Besides banking activity ,

the indigenous bankers do various sorts of
non banking
-
activities .
DSpeculation is the most unproductive of these non -

banking activities .

v. Defective System of Accounts :

4 System of accounts of the indigenous bankers is very defective .

4 Details of their accounts are always kept as secret ; these are never

published .

Hi-hat is why these banks do not get any assistance from the
Reserve Bank .

vi. Fraud :

4 These bankers sometimes use fradulant means .

& Their rural customers are mostly illiterate and indigenous bankers
do not hesitate in cheating them by way of various deductions
at the time of advancing loans , recording inflated amount of loan ,

not issuing receipt of repayment of loan ,

etc .

vii. High Rate of Interest :

4 These bankers charge a very high rate of interest .

& Sometimes it is a high as 50% or even 100% .

4 This adversely effects the agricultural , trading and industrial activity .

viii. Tack of Statistical Data :

4 Data are seldom available regarding business activity of the indigenous

bankers .

2) Rise of Intermediaries :

→
Intermediaries are the middle men between buyer and seller or

between surplus unit

→ There are two types of intermediaries :

a. Financial Intermediaries

b. Trading Communities Or Trading Intermediaries

 a. Financial Intermediaries play a very important role in flow of
money in Financial world .

•
Financial intermediaries act as middleman between companies who need money
and want invest
surplus units who to .

Types of Financial intermediaries are :

i. Insurance Company iv. Investment Brokers

ii. Mutual Funds v. Investment Bankers

iii. NBFc(Non Banking-

Finance Corporation )
i. Insurance Company :

•
These companies not only provide policies to protect the policy
holders from various risks but also offer policies for funding
a child 's education and marriage , pension scheme etc .

ii. Mutual Funds :

•
Mutual fund companies collect resources from investors and invest
in capital and money market .

iii. NBFc(Non Banking -

Finance Corporation ) :

•
These are finance companies that concrete mainly on lending activities
in a well defined area .

Eg : Gold Ioan ,
Education loan .
Home loan etc .

iv. Investment Brokers :

They guide and help investors in buying and selling of securities in

financial markets .

They charge commission for their services .

v. Investment Bankers :

•
Investment Bankers focuses on investment .

•
These bankers help the firms to earn more
capital by helping
companies in issue of shares and debentures .
3) Transport :

→
Transport or
Transportation is the movent of humans ,
animals and goods
location to another
from one .

→ With the development to transport a big break through came in

commerce as exchange was no

longer restricted to place of
manufactures it can be across the states and across the nation
also common mode of transport are :

i. Zand transport 4. Air transport

2. Water Transport 5. Cable , Pipeline transport
3.
Space

4) Trading Communities :

→
Trading Communities are middle men or link between manufacturer
and consumer .

a. Agent / Brokers :

•
Agents and Brokers sell goods or services on commission .

b. Distributors :

•
Distributors are generally privately owned and operated companies ,

selected by manufacturer .

•
They buy different types of products and sell in a
particular
geographical area
example North India Distributor ete .

c. Wholesaler :

•
Wholesale Trade refers to the trade in which goods are sold
in large quantities .

• The person who carries on wholesale trade is known as

wholesaler .

• A wholesaler acts as a middleman between manufacturer and the

retailer .
d. Retailer :

•
Retail trade is the last link in the distribution chain .

•
Retail trade refers to sale of goods in small lots to the
final consumers .

•
A retailer buys goods from a wholesaler and sells them to
the consumer .

•
Retailing need not necessarily be carried on in a shop or
store .

- It includes selling goods door to door ,

on television ,
on
telephone ,

on Internet etc .

•
The who carries on retail trade is called a retailer
person .

5) Merchant Corporations :

→
Merchant corporations are financial institutions .

→
They provide business loans and act as underwriter .

→
Major role of merchant corporations / bank are :

i.
Providing Finance : Merchant corporations help in
providing
domestic international
as well as
finance .

ii. Promotional Activities : In India ,

merchant bankers act as
promoter
and conduct feasibility study .

iii. Brokers in Stock Exchange : Merchant bankers buy and sell

shares in stock exchange on

behalf of their client .

iv. Advise in Project Management :

They advise regarding the location
of the project preparation
, of project ,

report ,
etc .

v. Advise in Modernisation and Expansion :

They help and guide
companies for modernisation and

expansion .
 * Trade centres :

4 Today various trade centres are operating in India such as :

a. India international Trade centre

2. World trade Centre etc .

1. India International Trade Centre IITC :

•
International Trade Centre CITIC -

INDIA) is a leading international

investment and trade promotion organisation functioning for the last 17
years in India and other countries under the leadership of
Mr. Chandrakant Salunkhe .

☐ It has successfully provided insights for preparation of policy and

strategic framework for economic and industrial growth ,
and will continue
to do so .

•
It has integrated a
group of business tycoons , high profile
entrepreneurs ,
Institutional Investors and Ntlis .

-
It has the support and recognition of Government of India and
Government of Maharashtra for its activities .

-
IITC -

India has pressure in India and various countries ,

and is actively
working with State and Federal Governments for promotion of bilateral
trade and in and outbound investment .

2. World Trade Organisation ( w.TO ) .

:

☐
The World Trade Organisation is the only global international
organisation which deals with rules and regulations of trade
between different nations .

•
It was established on 1st January ,
1995 .

* Nature of World Trade Organisation / W.TO ) .

:

a. Deals with the sales of trade between nations at global level .

b. It contains contracts signed by governments to bind the governments

to keep their trade policies within agreed limits .

c. It operates with a
purpose of liberating trade and free flow
of goods and services in the international market .
d. WTO settles disputes through some neutral procedure .

e. Its main function is to ensure that trade flows as smoothly

and freely as
possible .

* Benefits of WTO / Role of WTO / Objectives of WTO :

→
Major benefits of WTO are
:

a. Promotes international peace .

b. Settles disputes among member nations .

c. Makes international trade very smooth by framing common rules

and
regulations .

d. Helps countries
in economic growth of developing by giving them
preferential treatment .

e. Free trade helps in

providing quality products and improving
standard of living of people .

* Major Import and Exports :

•
India 's top 3 imports
:

-
Petroleum crude ,
Gold and Silver ,
Electronic Goods
•

India 's top 3 exports :

-
Petroleum products ,
Gems and Jewelry Pharma, products .

•
India imports Gold and Silver ,
Pearls and Precious stones but
exports Gems and Jewellery .

* Business -

Concept
→
All human beings ,
wherever they are ,
are required to perform some
or the other activity to satisfy their needs .

→
They pursue different occupations to earn a livelihood and to get
some psychological satisfaction .

→
Activities which human beings undertake are known as human activities .
 * Types of Human Activities

V V

Economic Non Economic

-

Activities Activities

1. Economic Activities :

4 Activities which are undertaken by people with the object of earning

money are known as economic activities .

These activities are concerned with production , exchange and distribution

of goods and services .

↳ The purpose of economic activities should be expectation of money

income which is used for further creation of wealth or assets .

4 Examples of Economic Activities : Production of goods in a factory ,

distribution of goods by a wholesaler

or retailer

* Types of Economic Activities

1. Business (Profit) :

• Business refers to those economic activities which are connected

with the production purchase , ,
sale or distribution of goods or services
with the main objectives of earning profit .

2. Profession (Fees ) :

•
Profession refers to the activities which require special knowledge and
skill to be applied by an individual in his work to earn a
living .

3. Employment ( Wages and Salaries ) :

•
Employment refer to an activity in which an individual works
regularly for another person and gets remunerated in return .

• The persons who others in work regularly for them

engage are

known as
employees .
•
Example :
Working in offices ,
banks ,
insurance companies , shops ,
as a

manager clerk salesman etc

, ,
peon ,
.

* Non Economic
-
Activities :

4 The activities which are undertaken by an individual with a motive

of getting psychological satisfaction are known as non -
economic activities .

4 Eg .
:
Going to temple , charity ,
social services ,
etc .
* Characteristics / Nature of Business :

1. An Economic Activity :

→
Because it is undertaken with the objective or aim of earning
money and livelihood and not for psychological satisfaction .

2. Production or Procurement of Goods and Services :

→
Business enterprise either production or
procures goods or services from
producers .

3. Sales or Exchange of Goods and Services for the Satisfaction of Human

Needs :

→
The production of goods or services for self consumption
-
not business .

→
But the farmer who is cultivating crop for sale is involved in
business activity .
→
Similarly buying goods to gift to someone else is not business but

buying goods for resale is business .

So there must be sale of goods in

exchange services
→
or or

business .

4. Dealing in Goods or Services on a Regular Basis :

Buying or selling of goods or services once or twice is not business .

→
One single transaction of sale does not constitute business .

→
Eg .
:
If a
person sells his house to buy a new house ,
he is not
doing business .

But if a
person buys and sells his house on a
regular
basis to earn commission ,
then it will be considered as business .

Regularity of occurrence of business transaction is a must .

5.
Profit Earning :

→
The main purpose of business is earning profit .

→
If the profit motive is missing a transaction then ,
it cannot be
considered as business transaction .

6. Uncertainty of Return / Risk :

→
There is always a possibility of losses .

→
It is not certain that a businessman will always earn adequate
profit as market conditions change customer 's taste may
,
may ,

change ,
there may be strike in businessman 's own factory ete .

→ All these can lead to loss .

→ So in business transaction there is

always an element of risk
involved .

* Objectives of Business
4 The businessmen always have multiple objectives .

4 They cannot follow only one objective .

4 All objectives are important but the most important objective of every
business is earning profit .
4 The business objectives may be classified broadly into three categories .

tie These are :

☐
Economic Objectives
☐
Social Objectives
☐
Human or individual Objectives

Economic Objectives :

•
As business is an economic activity so the most important objectives
of business are economic objectives .

• The social objectives of a business are :

9. Survival : The basic purpose of every organisation is to

survive and exist in the competition market for
a long period of time and it is possible only when
it is able to cover its cost and earn profit .

2. Profit :
Profit is essential for survival , growth and expansion
of business .

Profit is the reward given to businessman for bearing

risk .

3. Growth :
The success of any organisation is measured by the
growth rate and growth is measured in terms of
sales ,
number of branches ,
number of products ,
number of
employees ete .

Social Objectives :

•
Social objectives deal with commitment of business towards the society .

• No businessman can be successful in the long run by ignoring the

interest of level he must meet his social objectives also .

)
i Supply of Desired Quality of Products :

Today 's customer is a quality conscious customer and he excepts

value for money .

•
For consumer goods such as refrigerator ,
TV ,
car ,
scooter ,
the quality may
mean durability and for products like pressure cooker , gas cylinder ,
etc .

quality may mean safety .

•
The businessmen must supply products with right quality at right price .

%) Avoidance of Unfair Trade Practices :

•
Anti-social or unfair trade practices includes blackmarketing adulteration ,

hoarding overcharging
,
etc .

•
Exaggerating in advertisements about the uses of products is also an

unfair trade practice .

•
No society accepts these practises .

•
The punishment can be in the form of fine or imprisonment or

both .

Employment Generation :

Unemployment is a major problem for every society .

•
The businessman must create employment opportunities and help in
overcoming this basic problem of developing countries .

•
This will improve the public image of the businessman .

•
The employees must be imparted training also so that they can

update their knowledge and can fulfil the demands of the job .

id Social Service or Community Service :

•
The large business houses undertake various projects of community
services such as running charitable dispensaries ,
schools ,
et .

Participating in social service programmes adds to the reputation of the

company can establish its public image .

•
E.gs :
Tata Company is spending a fixed amount every year on

social service
projects .

D Avoidance of Pollution :

•
The industries throw or drain their waste in lakes ,
rivers etc .
which
pollutes water .

•
The smoke coming out of the chimneys of industries pollutes the
environment .

•
The businessman must adopt environment-friendly technique of production
and should drain the waste materials in such a way that these
do not pollute the environment .
 Human or individual Objectives :

•
The common idividaal Objectives are :

⑨ Providing good working conditions

Payment of competitive and satisfactory wages and salaries

Personal growth and development of employee by imparting training to

employees and keep updating their
knowledge
① Peer recognition and respect by encouraging employees to take
initiative and participating in decision -

making
① Providing special benefits such as housing failing ,
medical facility , free
education of children etc .

* Role of Profit in the business :

→
Profit is the main objective of every business .

→
Profit cannot be the only or sole objective of a business ,
but it is
a very important objective of every business .

→
A businessman earns
profit for various reasons .

1. Survival :

•
A business and businessman cannot survive for a long time without
earning adequate profit .

Profit is a source of income for a businessman which becomes his

means of livelihood .

2. Expansion and Growth :

•
The business is expanded only when it is earning sufficient amount
of profit .

•
A part of it can always be reinvested for expansion or diversification
of production and other operations of the business .

3. Symbol of Efficiency or an Index of Performance :

Profits indicate whether a business is being managed efficiently or not .

Profit acts as an index of performance of those who manage the

business .
•

Higher profits indicate the efficiency of management and lower profits

indicates inefficiency of management .

•
The success of a business can be judged by its ability to earn

profit .

4. Reward for Bearing the Risk :

Profit is considered as a
price or reward paid to a businessman for bearing
the risk .

•
Businessman invests money in the business only with the hope of earning
profit .

•
The desire to earn
profit motivates the businessman ,
to bear the uncertainties
and unexpected risks .

5. Helps to Gain Reputation or Goodwill :

•
A profit earning company always has a better reputation in the market
as compared to companies which are running in loss .

•
The rate of earning profit help in creating a goodwill of the company
in the market .

•
The market price of shares increases with the increase in the profit .

* Industry :
Meaning and types
& Industry refers to an activity which converts raw material into useful
products .

A Industry includes activities related to production and processing as well

to and other
as activities related rearing reproduction of animals or living
species .

tithe of industry to create

purpose is
form utility by converting raw

materials into useful forms of finished products .

A. Primary Industry
•
Primary Industry includes all those industries which are concerned
with extraction of natural resources and reproduction of living species .

•
These industries can further be classified into two categories :
 1. Extractive Industries : Extractive Industries are those which involve
extraction of something from natural resources

such as minerals from earth , fish from rivers

and seas ,
timber from forest etc .

2. Genetic Industry :
The industries involved in the activities of
rearing and breeding of living organisms i.e. birds ,

plants ,
animals etc . are known as Genetic Industry .

B. Secondary Industry
• The Secondary Industry makes use of products which are extracted and
produced by Primary Industry as their raw materials and produce finished
products .

• There are three kinds of Secondary Industry :

a.
Manufacturing Industries

b. Construction Industry
c. Tertiary or Service Industry

a.
Manufacturing Industries
→
These industries are
engaged in the process of conversion of raw materials or

semi-finished goods into finished goods .

→
Eg .
: Timber is converted into furniture ,
iron into steel ete .

→
The manufacturing industries produce two types of goods :

]i Consumer goods : Those which can be directly consumed by the

consumer are known as consumer
goods .

Example : clothes ,
bread , soap et .

Industrial goods : Those which are

produced for manufacturing
consumer goods are known as industrial goods .

Example :
Machinery ,
tools et .
which are
required to

manufacture consumer
goods .

•
Manufacturing industries are of following types :

① Analytical Industries :

→
In this industry ,
the basic raw material is broken into different parts
to produce finished products .
 →
Crude oil is processed and many finished products such as petroleum ,

died , gasoline ,
kerosene oil are manufactured .

Synthetic Industry :

→
In this industry ,
two or more materials are mixed to manufacture some

new product .

→
Various chemicals are mixed to produce soap , paints ,
cosmetics ete .

Processing Industry :

In industry the material

this processed through stages
→

,
raw is various

of production and then finished goods are manufactured .

→
Example : Textile Industry , Sugar Industry ete .

# Assembly Industry :

→
In this industry ,
various finished products are combined produce a new

finished product .

→
Example :
Manufacturing of computers ,
watches ,
automobile ,
cars ete .

b. Construction Industry
→
These industries are concerned with the construction of buildings ,
dams
ete .

→
The unique feature of these industries is that their products cannot
be transferred or shifted to the market .

→
These are constructed and remain at a
fixed site only .

→
The unique feature of these industries is that their products cannot
be transferred or
shifted to the market .

→
They are constructed and remain at a
fixed site
only .

c. Tertiary or Service Industry

→
This industry helps in the activities of the primary and
secondary industry .

→
In other words industry provides services which support the activities
of primary and secondary industry ,
that is why it is also known
as service industry .
 1) Transport : It facilitates movement of goods from one place to another .

%) Banking :
Provides credit facility to industries and trading firms .

iii ) Insurance :
Provides coverage from various types of risks .

) Warehousing
iv : Provides storage place for goods produced by primary and
secondary industry .

v7 Advertising : Provides information to consumer .

* Commerce
•
Commerce refers to all those activities which help directly or indirectly
in the distribution of goods to the ultimate consumer .

•
There will be no use of producing goods unless and until these
goods reach the ultimate consumer .

* Functions of Commerce /Role of Commerce -

Trade and Auxalaries to Trade)

" Commerce is considered as the backbone of industry .

11 Commerce performs the following functions

:

1. Helps in Removing the Hindrance of Persons :

•
A large variety of goods are produced by a group of persons
called producers .

•
These goods are produced for another
group of persons called
consumers .

•
The trade segment of commerce creates a link between producers
and consumers .

•
Traders help in exchange of goods or services
from the producer
to consumer and hence remove the hindrance between producers and
consumers .

2.
Helps in Removing the Hindrance of Place :

•
There is a place gap between the producers and consumers .

•
The transport segment of commerce helps in removing the place gap .

•
The transport moves
goods from the place of production to the
markets which are easily accessed by the customers .
 Helps Removing the of Time
:
3. in Hindrance

•
Some goods are produced in a
particular season only but are demanded
throughout the year .

E.g. : Wheat ,
rice , pulses etc .

•
On the other hand ,
some goods are produced throughout the year
but are demanded in a particular season .

•
So there is a time gap between the production and consumption .

Warehousing segment of segment of commerce helps in removing the

problem of time gap .

•
Goods can be kept safely in the warehouses till they are demanded
in the market .

•
Perishable goods are
kept in cold storage houses , inflammable goods in

fireproof warehouses , etc .

4.
Helps in Removing the Hindrance of Exchange :

•
The common medium of exchange is circulated by the banking
branch of commerce .

•
The banks help the buyers and sellers in making and collecting
payments .

•
Banks are also financing businessmen by granting them loan ,

credit facility etc .

5.
Helps in Removing the Hindrance of Risk :

•
The insurance branch of commerce helps in
removing the
hindrance of risk by providing protection and compensation to the
insured .

•
Insurance companies agree to undertake to make good the loss
suffered by the businessmen .

•
The common types of risks are damage of goods during flood ,

transit , by fire , rain ete .

6. Helps in Removing the Hindrance of knowledge :

•
The advertisement branch of commerce help in removing the
hindrance of knowledge by spreading the awareness about the
new product and their utility .
 •

Everyone knows that I 10 is the latest microprocessor of computer

because of advertisement .

* Classification of Commerce :

→
Commerce can be classified into two broad categories :

i. Trade a. Aids to Trade

1. Trade :

-
Trade is an
integral part of commerce .

•
It refers to buying and selling of goods and services .

• The trading segment of commerce brings together the manufacturer and

the consumer .

• Traders acts as a link between the manufacturer and consumer .

is Internal Trade :

" Internal Trade refers to buying and of goods within the

selling
geographical area / boundaries of the
country .

" It is also known as Home Trade .

4 Goods and services are

bought and sold in the home currency .

4 The internal trade can be of two

types
:

a) Wholesale Trade b) Retail Trade

a) Wholesale Trade :

It refers to buying and selling of goods and services in large

→

quantity .

→
The wholesalers buy goods directly from the manufacturer and sell
these goods to the retailers .

→ He maintains a large stock .

→
He buy goods for cash from manufacturer and sells on
credit to retailer .

→
A large amount of capital required in wholesale trade .
b) Retail Trade :

→
It refers to buying and selling of goods and services in small
quantities .

→
Retailer buys goods from the wholesaler and sells these goods to
the ultimate consumer .

2. External Trade :

•
It refers to buying and selling of goods and services beyond
geographical area / boundaries of the
country .

•
External trade unable the businessmen to use the resources

of their country in a
competitive way .
.

• External trade is of the following types :

a) Export Trade b) Import Trade c) Entrepot Trade

a) Export Trade :

4 It refers to sale of goods of a

foreign country .

&
Developing countries like India encourage export as it results in

increasing foreign reserves .

b) Import Trade :

4 Refers to buying of goods from a foreign country .

4 Import of technology or
capital goods is
encouraged as
compared b-
import of consumer
goods .

c) Entrepot :

"
Refers to import of goods for the purpose of export .

4 In Entrepot ,
the goods are
purchased from a
foreign country but not

consumption home country but these to

for in , for selling goods
some other
foreign country .

2. Aids to Trade :

• The activities which help in smooth flow of trade are known

as Aids to Trade .

• These help in removing various hindrances of trade which arise in

 production and distribution of goods .

• The common aids to trade are

:

1. Transport and Communication :

•
The production of goods takes place at one place whereas
these are demanded in different parts of the
country .

•
The obstacle of place is removed by the transport .

Eg : Tea is
produced in Assam and Darjeeling but is consumed
in all the parts of the country .

Alongwith transport communication is also important service

•

,
an .

•
Communication helps in
exchange of information between producers ,

consumers and traders .

2. Banking and Finance :

•
Banks and financial institutions provide credit facility ,
loan et .
to
provide finance for smooth flow of business activities .

•
With provision of funds ,
the commercial banks provide many other
facilities such as collection and deposit of cheques ,
issue of bank
draft ,
etc .

3. Insurance :

•
Businessmen have to bear various types of risks .

•
Insurance provides protection from some kinds of risk
of loss due
to fire theft
, ,
accident etc .

•
Businessmen have to a nominal amount of premium and
pay
in return they get compensation for the loss from the insurance
company .

4.
Warehousing :

Warehousing helps the businessmen to the problem of

•
overcome

storage .

•
Warehouses are constructed keeping in mind the nature of goods .

Warehouses facilitates the availability of whenever required

goods
•
.
 5.
Advertising :

•
Advertisement helps to overcome this problem .

•
Goods are advertised to inform the consumers about their uses ,

and
quality pries .

•
Advertisement spreads awareness
among the consumers
regarding new

goods and their uses .

•
It is a
very good technique of sales promotion and improves
the knowledge of customers .

* Business Risk
→
Business Risk refers to the probability of losses or
inadequate profits
due to uncertainties or
unexpected events which are beyond control .

* Nature of Business Risk :

1. Business risk arises due to uncertainties

2. Risk is essential part of every business

3.
Degree of risk depends upon the nature and size of business

4. Profit is the reward for bearing the risk

* Causes of Business :

Economic Natural
Causes Causes
Business
Risk
Causes

Human Physical
Causes causes
i. Natural Causes :

Nature independent and have

phenomenon human
beings
• is an no
control over it .

• Natural calamities like earthquake , flood cyclone

, ,
tsunami ete .
affect a

business a lot and can result in heavy losses .

2. Human Causes :

• Human causes are related to a chance of loss due to

human
being or
employees of organisation .

☐ The dishonesty of employees can

bring heavy losses for business e.
g. ,

the employees may leak a business secret to a competitor and

may
commit fraud also .

• The employees hamper the production strikes ete

may by going on .

and can lead to heavy loss .

3. Economic Causes :

• These are related to a chance of loss due to

change in
market condition .

• There can be ;
→
price fluctuations in market

change in fashion
→
taste

→
preferences and demands of customers

degree of competition
→

All these have direct impact of the business

earnings
• on .

4.
Physical Causes :

• All the causes which result in damage of assets are considered

as
physical causes .

•
Eg :
Change in
technology may result in
machinery being outdated ,
→
use of old machinery .

Mechanical defects also result in damage of assets

may
→

such as
bursting of boiler etc .
* Types of Business Risk :

1. Insurable Risk :

4 The risks which can be recovered are called insurable risks .

The losses which can be good ,

or losses for which company can

get compensation from insurance

company are called Insurable Risks .

2. Non -

Insurable Risk :

4 The risks for which no protection is available are called non -

insurable risks .

↳
Generally the economic risk are non -
insurable risks .

3. Speculative Risks :

Speculative risks involve both the possibility of profit as well as loss .

4 Enample
-
:
Change in demand , price , fashion ete .

4. Pure Risks :

4 This involves only possibility of loss or no loss .

4 Their occurrence results in loss and no occurrence means no loss .

& Example :
Chance of fire ,
theft ,
strike ete .