Unit 1.

NATURE AND PURPOSE OF BUSINESS

Human activities:

Any activity that a human being performs to meet his needs is called Human
activity. Human needs can be related to earning money as well as mental
satisfaction. Thus human activities can be divided into two categories: (i) economic
activities; and (ii) Non- economic activities

Economic activities:

Those activities whose objective is to earn money are called economic activities.

Examples:

• A teacher teaches in a school and gets salary for that.

• An advocate pleads the case of his client and charges fee for his service.
• A trader sells goods with a view to earn profit thereon
Non- economic activities:

Activities undertaken by the people not for earning money but to gain mental
satisfaction, are called non-economic activities.

Examples:

• A doctor treating his sick son

• A teacher teaching his own son at home
• A house wife cooks food for her own family
• A person works in his own garden

Distinction between economic and non-economic activities

Economic activities Non-economic activities

1. Motivated by economic gain 1. Motivated by a desire to achieve

mental satisfaction
 2. Money gain is expected 2. money gain is not expected

3. Lead to creation of wealth 3 Lead to personal satisfaction

However, a particular kind of activity which is non-economic in one case may

economic in the other.

Types of economic activities:

Economic activities may be classified into three categories:

(i) Business
(ii) Profession
(iii) Employment

BUSINESS

Business may be defined as an economic activity involving regular production or

purchase and distribution of goods and services with the object of earning profit.

Characteristics:

(i) Economic activities: Business is an economic activity. It means business

activities are undertaken with the purpose of earning money.
(ii) Dealing in goods and services: Every business undertaking is engaged
in the production and distribution of goods or services in exchange of
money.
(iii) Regularity in dealing: All business enterprises engage in operation on a
continuous basis. Any unit having just one single operation or transaction
is not a business unit.
(iv) Profit motive: In order to consider any purchase and sale as business, it
is essential that the purpose of it is to earn profit.
(v) Element of Risk: Risk means the possibility or chance of suffering a loss.
Risk element is inherent in any business activity.

PROFESSION

Any activity which requires special knowledge and skill to be applied by an

individual to earn a living is known as profession. For example, doctors, teachers,
engineers, lawyers and accountants are engaged in profession.

It is an intellectual activity. It is not a mechanical or routine operation.

Characteristics:

• Every profession requires special knowledge and training.

• The primary objective is to render service.
• The service cannot be substituted by another individual
• Every profession is regulated by a professional body. For example, the
profession of Chartered Accountants is regulated by the Institute of Chartered
Accountants of India.

EMPLOYMENT

When a person works regularly for others and gets wages/salary in return, he is
said to be in Employment. Thus factory workers, office assistants and managers are
said to be in employment. Those in employment are called employees.

Characteristics:

• An employee has to provide service by himself. He cannot get service from

somebody else in his place.
• Employment is obtained under special contract.
• An employee is a servant of his master and act according to his orders.
• There is no need of capital in employment.
• There is no risk involvement in employment.

Distinction between Business, profession and employment

Basis Business Profession Employment

commencement Entrepreneur Membership of a Letter of

or establishment decision and legal professional body
formalities or certificate of employment
practice
 Nature of work Production or Personalized Performing the job
purchase and sale service of expert assigned by the
or exchange of nature employer
goods and services

Qualification No formal Prescribed Qualification is not

qualifications are qualifications necessary in all
required required the cases.

Capital Capital is needed Limited capital is Capital is not

according to the size required for required at all
of the firm establishment

Basic motive Earning profit Rendering service Earning salaries or

besides earning wages
income

Reward Profits Professional fee Salary/wage

Element of risk present present Absent

Transfer of Possible Not possible Not possible

interest

CLASSIFICATION OF BUSINESS ACTIVITIES

Activities connected with the production or purchase and sale of goods or services
with the object of earning profits are called business activities.

On the basis of function, Business activities may be classified into two broad
categories:

(I)Industry (II) commerce.

(I) INDUSTRY

Industry refers to economic activities which are connected with raising, producing
and processing of goods and services.

Industries are divided into three broad categories:

(i) Primary industries (ii) secondary industries, (iii)Tertiary industries

(A) Primary industries:

 The sector of industry that produces unrefined raw materials is called primary
industry. Examples are farming, agriculture and fishing, mining and fuel
extraction.

Primary industries may be further divided into :

(i) Extractive industries:-

Extractive industries are concerned with the extraction of material from
the earth, sea and air such as mining, farming, fishing and hunting etc.
(ii) Genetic industries:
An industry engaged in the reproduction and multiplication of certain
species with the main object of earning profit by selling them in the market
is known as Genetic industry. Example, agriculture for the production of
crops, dairy farming, poultry farming, pisciculture etc.
(B) Secondary industries
The sector of industry that use the raw materials produced by primary industries and
change them into finished items is called secondary industry. Examples are:
manufacturing including refining and processing metals and minerals, food and drink
processing, textiles, footwear and clothing, construction of building, road and bridge.

Secondary industry is of two types:

(i) Manufacturing industry and (ii) construction industry.

(I) Manufacturing industry:

Industries engaged in the conversion of raw materials or semi-finished
goods into finished product are called manufacturing industries. For
example Cloth from cotton, steel from iron ore, sugar from sugar cane etc.

Manufacturing industries may further be classified into four parts:

1. Analytical industry:
It is concerned with separating a single material into different elements. In
oil industry, for example, crude oil is analyzed and separated into a variety of
products like petrol, diesel, kerosene etc.
2. Synthetic industry:’
Under this industry many raw materials are mixed to produce a more useful
product. For example cement is manufactured by missing lime-stone, gypsum
and coal.
3. Processing industry:
Processing industry includes those industries wherein useful things are
manufactured by making the raw material pass through different production
process. For example, in cotton textile industry, cotton is subject to a series of
 operations such as spinning, weaving, bleaching, dyeing etc. before it is
converted into cloth.
4. Assembling industry:
It is concerned with assembling various components and parts already
manufactured to roll out a new product. Example, television, computer, car,
scooter etc.

(II) Construction industries:

Activities concerned with building houses for various purposes and
making roads, bridges, dams etc. belong to the category of construction
industry. These industries produce things which are of permanent nature.

(C) Tertiary industries

The sector of industry that provides service is called ‘Tertiary industry.
Examples of tertiary industries are Banking and financial services, insurance,
transport, advertisement etc.

COMMERCE

Commerce is defined as” activities involving the removal of hindrances in the

process of exchange’. Commerce includes all those business activities which are
undertaken for the sale or exchange of goods and services and facilitates their
availability for consumption and use- through trade, transport, banking, insurance
and warehousing. Thus commerce includes trade and aids to trade, namely
transport, banking, insurance and warehousing.

Functions of commerce

The main functions of commerce are:

(i) Removal of hindrance of person:- Producers and consumers are

separated by personal hindrances in the sense that they do not know each
other or each other’s wants. They require the help of an intermediary who
will bring them together. This intermediary is known as trader. He provides
a connecting link between the producer and the consumer and makes
exchange possible. Thus, trade or exchange of goods and services is an
important function commerce.

(ii) Removal of hindrance of place: in the process of transfer of goods from

the producer to the consumer the place or distance acts as a great
hindrance. The producer and consumer are separated by long distance.
Unless this hindrance is overcome, there can be no exchange. This
hindrance is overcome with the help of ‘transportation and communication’.
Thus transportation and communication is an important function of
commerce.
 (iii) Removal of hindrance of Risk: While goods are transported from place
to place, they are subject to various risk such as loss by theft, damage,
destruction etc. This hindrance of risk is removed by having the goods
insured. Thus insurance is another important function of commerce.

(iv) Removal of hindrance of knowledge: In order to facilitate the exchange

of goods it is necessary that the goods produced be brought to the notice
of the consumers. Otherwise the consumers do not know qualities of the
goods and when and where they are available. The hindrance of
knowledge of goods is removed by having resort to advertisement. Thus
advertisement constitutes an important function of commerce.

(v) Removal of hindrance of time: Production and consumption are often

separated by an interval of time. All the goods produced are not consumed
immediately. Generally goods are produced in anticipation of demand.
Therefore, stock of goods requires to be stored in godowns or warehouses.
Warehousing and storage facilities are thus another important function of
commerce.

(vi) Removal of hindrance of finance: All activities leading to exchange of

goods require finance and lack of finance is a big hindrance to the
exchange function. Finance is said to be the life blood of commerce. This
life blood is provided by agencies called Banks. Banking is, therefore,
regarded as an important function of commerce.

COMPONENTS OF COMMERCE

(I)TRADE:

The main branch of commerce is trade. Trade means buying and selling of
goods with the purpose of getting profit. Those who perform the activities are
called Traders and their activities are called trade.
Trade may be classified into (i) Home trade or internal trade (ii) Foreign trade
or external trade.
1. Internal trade: It means trade carried on within the boundaries of a country.
The primary object of internal trade is to bring about proper distribution of
goods within the country.
It may be divided into two types; (a) whole sale trade and (b) Retail trade.

(a) Whole sale trade: It involves buying goods from producers and selling them
in small quantities to retailers. The wholesaler generally deals in large
quantities of goods of a limited number of varieties.
 (b) Retail trade: A retail trade consists of selling goods directly to the consumers
in small quantities. A retailer usually purchases goods from wholesalers or
manufacturers and deals in a variety of goods of different manufacturers.

2. External trade: it refers to buying and selling goods by traders of different

countries. Foreign trade is of three types:

(a) Import trade: It refers to purchase of goods from other counties.

(b) Export trade: It refers to the sale of goods to foreign countries.

(c) Entrepot trade: When goods are imported with the purpose of re-exporting
them to some other country, it is called entrepot trade.

(II)AUXILIARIES TO TRADE:

The term auxiliaries to trade mean the subsidiary activities assisting trade. Various
auxiliaries are:

(i) Banking auxiliaries: Banking provides safe, efficient and convenient

mode of payment for goods in inland trade as well as in foreign trade.
Banking helps business firms to overcome the problem of finance by
lending money as and when required.
(ii) Insurance auxiliaries: Insurance provides security against risk. It makes
trade and business secure by making provision against all probable losses.
Insurance helps the business man to conduct his business with confidence
and peace of mind.
(iii) Transportation auxiliaries: Transportation helps trade by facilitating the
movement of goods and passengers from one place to another. It creates
place utility of the goods and removes the problem of distance.
(iv) Warehousing auxiliaries: There is a big gap of time between
manufacturing any product and consumption of that product. Hence
finished products have to be stored from their production time till they are
consumed. Warehousing helps the business in storing the goods.
(v) Communication auxiliaries: It is not possible to have business without
communication. Communication implies transmission of information,
ideas, opinion etc. between two or more persons. Means of communication
like telephone, telegram, letter etc. helps the business in finalizing the
business deals.
(vi) Advertising auxiliaries: Advertisement educate consumers and they start
feeling the need of commodities that have been advertised. Thus
advertisement increases the demand of commodities advertised and helps
in the expansion of business.
OBJECTIVES OF BUSINESS

The objectives business can be classified into two:

A) Economic Objectives and B) Social objectives

Economic Objectives:

A business has the following economic objectives:

• Survival:- The most important objective of a business is the survival of it. In

order to survive, the business must earn enough revenues to cover the costs.
• Profit earning: Another important objective of the business is to make a profit.
All business activity costs money and business must their costs out of the
income they receive from selling their goods and services. The profit a
business makes is the amount by which its income exceeds its costs.
• Growth: Growth of the business is another objective of business. As business
grows they are able to enjoy economies of scale. This means that they are
able to produce their goods or services for a lower average cost, increasing
their profit. Business can grow by increasing sales, leading to increased
production, and taking on more employees.

Social objectives:

Important social objectives of business are:

• Production and supply of quality goods and services: The first social
objective of business is to provide better quality product at a reasonable price.
The business man must not involve in adulteration and hoarding and should
provide required goods in proper quantity to the consumer.
• Contribution to community development: Another social objective of
business is to contribute something to the society where it is established and
operated. Library, educational institutions etc. are certain contribution which a
business can make and help in the development of community.
• Providing employment: Another social objective of business is to provide
employment. No business can survive without employees to produce the
goods or services and to run the business. All businesses, whatever size or
product, must provide employment.

ROLE OF PROFIT IN BUSINESS

• It is a source of income and a means of livelihood for the business man. No

one is expected to undertake business activities without earning an income to
satisfy his needs
 • A part of profit can be used for increasing the volume of business. Retention
of profit as an internal source of fund is a more dependable source of financing
than external source like banks.
• Profits indicate whether a business is being managed efficiently or not. Hence
profit is regarded as an index of the performance of those who manage the
business.
• Profit also represents a reward for risk bearing. It is because of profits that risk
taking become worthwhile in business.
• With increasing profit over time, a business firm gains reputation. It is able to
raise loan and obtain credit more easily.

BUSINESS RISKS

Business risk refers to the possibility of inadequate profits or even losses in the
business because of uncertainties.

Types of business risks:

Business enterprises constantly face two types of risks:

(a) Speculative risks; and (ii) pure risk

Speculative risk arises due to changes in market conditions. Pure risk arises due to
fire, theft, strikes etc. Speculative risk involves both possibility of gain as well as the
possibility of loss. Pure risks involve only the possibility of loss or no loss.

Nature of business risk:

• Risk is the result of uncertainties: Risk is the outcome of uncertainties.

Uncertainty refers to the lack of knowledge about what is going to happen in
the future. Natural calamities, change in demand change in government policy
etc. are some of the uncertainty which creates risk for the business.
• Risk is unavoidable: No business can avoid risk. Risks can be minimized
but cannot be eliminated.
• Degree of risk varies with the size of the business: The degree of risk is
less in small sized business as compared to the degree of risk in a big
business
• Risk depends upon the nature of business: The amount of risk depends
on the nature of business. In business of daily utility things the amount of risk
is less. On the other hand, in businesses where things governing fashion are
sold, the amount of risk is greater.
• Profit is the consideration of risk taking: Whatever business gets for taking
risk is profit. The greater the risk, the more is the possibility of profits.

CAUSES OF BUSINESS RISKS

The causes of business risks may be broadly be classified into –

• Human causes:-Human factor is an important element in losses of all kinds.
Even the slightest carelessness in the part of an individual may lead to a series
of accidents involving loss of life and property. Losses may also be caused by
strikes and lock outs and theft or misappropriation of cash and goods whether
by employees or others.
• Economic causes: when conditions in the market change, these may cause
business risks. These causes are known as economic causes. These include
fluctuations in demand and price, excessive competition, unforeseen changes
in the methods of production etc.
• Natural causes: Natural cause consist of losses arising from excessive rains
and heavy floods, or draught, earthquake etc.
• Miscellaneous causes: A business may have to suffer losses because of
unforeseen events like political disturbances, mechanical failures, fluctuations
in exchange rates etc.