Ch 1 Nature and

Purpose of Business
Class XI Commerce

Section II
 Non Economic
Economic Activity: Activities: Concerned
Concerned with with providing social
earning a livelihood and psychological
satisfaction.
Business refers to those activities which
are concerned with providing goods and
services with the aim of earning profit
 Characteristics of Business
2. Production and Procurement of
1. Economic Activity: goods and services: Goods are
Business is undertaken those products which are in
primarily for earning physical form like vehicles, fruits,
etc. Services are those products
money.
which are intangible form like
banking, transportation, etc.
Production means converting raw
material into finished goods.
Procurement means buying it
from some source for sale.
 Characteristics of Business

3. Sale or exchange of 4. Dealings with goods and

goods and services: If services at regular basis: A
goods are produced not single dealing even for with
for sale but for profit does not fall under
personal consumption, business. E.g. a person selling
it is not a business his house and earning profit
activity. is not a business as it is not
done on regular basis.
 Characteristics of Business
5. Profit earning: The 6. Uncertainty of return:
basic objective of There is uncertainty of
undertaking business is return on amount
to earn profit. No invested in business.
business can sustain for Thus, a business may not
long if it doesn’t make earn desired profit or it
profit. Earning profit is may even sustain a loss.
necessary for survival
and growth of business.
 Characteristics of Business

7. Element of Risk: Risk is the

uncertainty: associated with an exposure
to loss. Risk is caused by some unforeseen
unfavourable events like change in
consumer preference, change in production
methods, increase in competition in the
market, theft, accident, natural calamity,
etc.
 Profession

Profession is a specialised occupation which involves

providing expert services to clients based on professional
knowledge and skills.
 Characteristics of Profession

1. Well- Defined
knowledge:
• Profession means
having well defined
knowledge in the
relevant field.
• For e.g. legal, medical,
etc.
• The knowledge pertains
to concepts, theories
and techniques of the
field.
Characteristics of Profession

2. Restricted Entry:
• Only those persons are
eligible to enter a
profession who have
formally acquired
relevant knowledge of
the profession.
• E.g. only persons having
at least an LLB degree
can enter a legal
profession.
 Characteristics of Profession

3. Professional Association:
• For governing professions, professional
bodies or associations are formed.
• E.g Bar council of India for legal
profession and Medical council of India
for medical profession.
• A professional association prescribes
rules and regulations which have to be
observed by all professionals of the
concerned profession
Characteristics of Profession

4. Ethical Code of
Conduct:
• A profession has an
ethical code of conduct.
• This code is formulated
by concerned
professional
association.
• Any member deviating
from this will be barred
from the profession.
 Characteristics of Profession

5. Service Motive:
• Service motive suggests that
professionals should keep social interest
in mind while charging fees for their
professional services.
• Thus for professionals client interest and
not fee should be the first priority.
Employment

A person is in employment when he is employed by

another to render service under a contract of employment.
In return the employed person gets remuneration
 Characteristics of Employment

• Employment commences on joining service of the employer

who may be a person, firm or any other entity.
• It involves performing the duties assigned by the employer.
• The employee does not have the right to transfer his services to
another person.
• The employee works under the rules and regulations set by the
employer.
• The contract of the employer and employee can be terminated
as the relationship is on contract.
• The employee gets remuneration as per the terms of
employment
 Comparison between Business, Profession and Employment

Basis Business Profession Employment

Mode of As decided by the Certificate of Employment Contract
Establishment entrepreneur commencement of
profession
Nature of Dealing in goods Providing professional Providing service to
work and services services employer
Motive Profit earning Providing expert Earning remuneration
advice and charging
fees.
Qualification No formal Professional As prescribed by the
qualification qualification employer
Basis Business Profession Employment
Investment According to the Required for creating No investment
need of the professional facilities
business
Risk Involved High Very low No risk apart from lack
of job security
Transferability Possible Not possible Not possible
of ownership
Code of Mostly provided Provided by Provided by employer
conduct by legal concerned
provisions and professional body
business
associations
Example Factory, shop Lawyer, CA Jobs in Govt./Private
sector
 Business Objectives

Economic
Social Objective
Objective
 Economic Objectives
1. Profit Earning:
• Key objective
• Business man bears risk and
profit is reward of risk bearing.
• In absence of profit earning no
one would bear risk.
2. Survival :
• It implies that business will
exist on a long term basis.
• In business there are chances of
failure due to any unforeseen
reason.
• Therefore every business
pursues survival objective b
ensuring that revenues are at
least equal to costs.
 Economic Objectives

3. Growth :
• It implies expansion of business
volumes over a period of time.
• It is necessary for every
business because anything
which stops growing decays and
its survival is in danger
 Social Objectives

1. Better Quality Products : 2. Fair Trade Practices :

• Business is required to provide • Business should follow fair
better quality products to trade practices to ensure that
improve the living standard of customer gets exactly the same
the people. product for which he pays.
• The products should be • Thus business should not
according to the specifications indulge in practices like
as claimed by the concerned adulteration, black marketing,
producer. underweighting, etc.
 Social Objectives

3. Employment Generation : 4. Community Service :

• Business should put emphasis • Business should undertake
on generating employment in some community service. This
the process of performing its may be in the form of
activities so that people may providing training to
get employment. underprivileged people,
• Thus business should adopt providing health services,
man machine ratio in favour of development of backward
the people. areas, etc.
 Social Objectives

Protection of Environment :
• Business should maintain
ecological balance in order to
protect environment.
• Thus business should not
extract natural resources
disproportionately, pollute the
environment, etc.
 Role of Profit in Business

1. Incentive: Profit is a strong incentive

for an entrepreneur to start and run a
business. An incentive is an object which
motivates a person to do work in a better
way. Stronger the incentive higher the
motivation for doing work in a better way.

2. Expansion: Profit is necessary for

the expansion of business in the long
run as a part of profit is invested in
the business to expand it. Expansion
of business is necessary for
achieving its objectives.
 Role of Profit in Business

3. Indication of Efficiency: Profit is

indication of efficiency to business. Thus
more profit means higher efficiency.
However profit should not come through
unethical practices but only though fair
means.

4. Reputation: Reputation is attached

to a business that earns higher profit
by fair means. This reputation itself
becomes the source of motivation to
the entrepreneur to do better in his
business.
 Industry

Industry includes all those activities which are concerned with

extraction, production, conversion, processing or fabrication of goods.

2. Producer Goods:
1. Consumer Goods: Producer goods are those
Consumer goods are used goods which help in
by consumers, for e.g. TV, producing for e.g.
refrigerator, cloth, edible, machine, tools, etc. These
oil, etc. are also known as capital
goods.
 Industry

3. Intermediate Goods:
Intermediate goods are in
the form of raw materials
which are used for
producing other goods for
e.g steel, copper, crude oil,
etc.
Types of Industries
1. Extractive Industry: It involves
extracting goods from natural
Primary resources such as, land, air and sea.
Industry The goods extracted ad processed are
used in secondary industry. E.g. Mining,
lumbering, hunting, fishing, etc.

Primary Industries includes

all those activities which are
2. Genetic Industry: It includes
concerned with extracting activities which involve breeding of
and processing of natural plants and animals for their use in
resources. Primary industry further reproduction. E.g. plant
breeding nursery, animal husbandry,
is divided into two dairy farming, poultry and fish hatchery.
categories: extractive
industry and genetic
industry.
Types of Industries
Secondary
Industry
It is concerned with activities
which involve processing
materials that have been
produced by Primary
industries. E.g. Iron ore is
extracted at the Primary
stage and is processed to
manufacture iron and steel
at secondary stage.
1. Manufacturing Industry: It includes
those activities which are involved in
conversion of raw materials into
finished goods. It creates form utility.
E.g. steel, cement, textile, etc. There
are four forms of manufacturing
industry. Analytical, Synthetic,
Processing and Assembling.
2. Construction Industry: It includes
those activities which are concerned
with constructing buildings, dams,
roads, etc. These activities use
materials produced by manufacturing
industry like cement, steel, marble, etc.
A basic feature of this industry is that it
creates immovable assets.
Types of Manufacturing
Industries
i) Analytical Industry: It includes
activities which are involved in
analysing and separating basic material ii) Synthetic Industry: In this two or
into a number of products. E.g more materials are mixed together to
petroleum refining is an analytical create a new product. Soap, cement,
industry in which crude oil extracted fertilizer, cosmetics, etc. fall in this
from the earth is processed and category.
separated into petrol, diesel &
kerosene
Types of Manufacturing
Industries
iii) Processing Industry: In iv) Assembling Industry: In this
processing industry, raw industry the finished product is
materials are processed to produced by assembling various
produce finished goods through a components. Vehicle, TV, etc. fall
series of manufacturing in this category.
operations. E.g manufacturing of
the textile product is made
through spinning, weaving and
finishing. Sometimes, these
stages are undertaken by
different business organisations.
Types of Industries
Tertiary
Industry

Also known as service sector

includes those activities
which provide support to
primary and secondary as
well as to trade. Eg.
Insurance, Banking,
Warehousing, etc. These
activities are also included in
commerce.
 Commerce

Commerce includes all those activities

which are concerned with moving goods
and services from producers to
consumers
 ROLE OF COMMERCE
1. Removing Hindrance of
Persons: Both producers and
consumers are located a
different places. This results
in hindrance as producers
may not be able to contact
consumers. Traders of goods
help in overcoming this
hindrance. There are
different types of traders-
agents, wholesalers, and
retailers
2. Removing Hindrance of Place:
Locations of producers and
consumers differ considerably. This
is so because producers choose those
locations of production which
provide various facilities while
consumers are spread throughout the
country. Transportation, an element
of commerce, removes this hindrance
by transportation goods from location
of production to location of
consumption.
 ROLE OF COMMERCE
3. Removing Hindrance of
Time: There is a time lag
between production and use
of goods. During this period,
goods should be stored
safely. Warehousing
overcomes the hindrance of
storage as goods can be
stored in warehouses. Thus,
warehousing creates time
utility for goods.
1. Removing Hindrance of
Finance: Both businessmen and
consumers need finance.
Businessmen need finance to run
their businesses and consumer
need it to buy goods. But they
may not have sufficient finance.
Banking removes the financing
hindrance by providing financing
facilities to both the businessmen
and consumers.
 ROLE OF COMMERCE
5. Removing Hindrance of
Information: Producers may
not be able to communicate
the positive features of their
products to consumers.
Similarly, consumers may 6. Removing Hindrance of
not be aware of the types of Risk: There are number of risks
products available in the involved in carrying out a
market. Advertising comes in business. Similarly consumer also
the picture to remove this face some risks when they use
hindrance as it is a tool for costly consumer durables.
mass communication. Insurance helps in overcoming
risk hindrance at a nominal cost.
 Trade
Trade involves in buying and selling of goods and services. Traders are link
between producers and ultimate consumers.

Geographical Volume of
Area Trade

Internal External Wholesale Retail

 Internal Trade
Internal Trade refers to purchase and sale of goods within the boundaries of a
country and the payment is made in national currency either in cash or through
the banking system

Wholesale Trade: It refers to Retail Trade: It refers to purchase of

purchase and sale of goods of a
specified type in bulk. A wholesaler
purchases goods in bulk and sells in
comparatively smaller quantity. He
is a link between producer and
retailers.
goods in larger quantities from
wholesaler and selling to these in
smaller quantities. However, in retail
trade, some new features have
emerged: mail order and internet
trading.
 External Trade
External trade refers to exchange of goods and services between two or more
countries and payment involves foreign currencies.

Import Trade: goods, services and Export Trade: It involves selling

products brought into a country and goods and services in foreign
which were bought from another markets.
country

Entrepot Trade: It involves import of

goods from a foreign country and
export these goods to another
country.
 Auxiliaries to Trade
It means those activities which provide support to performing
activities related to industry and trade. These activities help in the
smooth flow of processes related to industry and trade.
1. Banking: Banking is the business
of accepting deposits of money 2. Insurance: It is a contract under
from the public for the purpose of which the insurer agrees, in
lending or investment. This money consideration of insurer agrees, in
is withdrawable by cheques or other consideration of insurance
instruments. premium, to pay an agreed sum of
money to the insured to make good
the loss, damage or injury by some
uncertain event or expiry of the
contract period.
 Auxiliaries to Trade
3. Transportation: It provides
physical means which facilitate
movement of people, goods and
services from one place to another.

4. Warehousing: It refers to
activities involving storage of
goods on a large scale in a
systematic and orderly manner and
making these available when
needed.
 Auxiliaries to Trade
5. Communication: It involves
exchange of information and its
understanding between two or more
persons.

6. Advertising : It is an impersonal
form of communication which is
paid for by sponsors to promote
their products.
 Auxiliaries to Trade
Nature of Business Risks

Business Risks
1.Caused by Uncertainties:
Business risk are caused by
It is possibility of loss
uncertainties in the business
inherent in a business environment in which a business
firm’s operations that operates. Uncertainty refers to lack of
impairs its ability to knowledge about what is going to
provide returns on happen in future. Natural calamities,
investment. change in government policies,
change in technology, change in
consumer preference, increased
competition, etc., lead to uncertainty
and business risks.
2. Essential Element of Business:
Risk is an element of business
because the money which is invested
in the business may or may not
guaranteed by anyone
3. Variability in Business Risks:
The degree of business risks is not uniform
for all businesses but depends on nature and
size of business. Nature of business indicates
that in some businesses there is a higher
degree of risk as compared to others. E.g
degree of risk in business which uses
agricultural produce as raw material is higher
as agriculture depend on weather to great
extent.
4. Profit as reward of risk bearing: Greater the
amount of risk in business, higher is the possibility of
profit. E.g when an producer introduces a new product
in the market with higher prices, initially the people
may not appreciate the idea and may not accept the
product. When people starts accepting he may earn
more profit.
 Causes of risk

1. Natural Causes: There are many natural

causes which create business risks, such as
earthquake, flood, drought, famine, etc.
Business organisations do not have control
over these calamities except to bear the risks.
 Causes of risk

2. Human causes: In many situations, human

beings are the prominent causes of business
risks. Human are in the form of inexperience
or inefficient personnel, dishonesty or parties
concerned, burglary, theft, riot, etc. These
features put a business organization at a great
loss.
 Causes of risk

3. Economic Causes: Economic causes are in

the form of fluctuations in the business
activities. Thus inn boom period, business
activities tend to be at their peak. During
recession business may incur loss. Besides
these there are other economic causes of
business risks like excessive competition,
change in production technology, increased
interest rate, increased taxes, etc.
 Causes of risk

4. Other Causes: There are other causes of

risk, which generate risks for business. Such
causes are political disturbance, change in
Government policies related to business,
frequent changes in technology, power supply
breakdown, etc.
 Factors kept in mind before starting a business

(i) Selection of line business: The first thing

to be decided by an entrepreneur is the nature
and type of business to be undertaken. He/she
will obviously like to enter that branch of
industry and commerce, which has the
possibility of greater amount of profits. The
decision will be influenced by the customer
requirements in the market and also the kind of
technical knowledge and interest the
entrepreneur has for producing a particular
product.
 Factors kept in mind before starting a business

(ii) Size of the firm: Some factors favour a

large size, whereas, others tend to restrict the
scale of operation. If the entrepreneur is
confident that the demand for the proposed
product is likely to be good over time and
he/she can arrange the necessary capital for
business, he/she will start the operation at a
large scale. If the market conditions are
uncertain and risks are high, a small size
business would be better choice.
 Factors kept in mind before starting a business

(iii) Choice of form of ownership:

With respect to ownership, the business
organisation may take the form of a sale
proprietorship, partnership, or a joint stock
company. Each form has its own merits and
demerits. The choice of the suitable form of
ownership will depend on such factors as the
line of business, capital requirements, liability
of owners, division of profit, legal formalities,
continuity of business, transferability of
interest and so on.
 Factors kept in mind before starting a business

(iv) Location of business enterprise:

An important factor to be considered at the start of
the business is the place where the enterprise will
be located. Any mistake in this regard can result in
high cost of production, inconvenience in getting,
right kind of production inputs or serving the
customers in the best possible way. Availability of
raw materials and labour; power supply and
services, like banking, transportation,
communication, warehousing, etc., are important
factors while making a choice of location.
 Factors kept in mind before starting a business

v) Financing the proposition:

Financing is concerned with providing the
necessary capital for starting a business.
Capital is required for investment in fixed
assets, like land, building, machinery and
equipment and in current assets, like raw
materials, stock of finished goods, etc. Capital
is also required for meeting day-to-day
expenses. Proper financial planning must be
done to determine (a) the requirement of
capital, (b) source from where the capital will
be raised and (c) the best ways of utilising the
capital in the firm.
 Factors kept in mind before starting a business

vi) Plant layout: Once the requirement of

physical facilities has been determined, the
entrepreneur should draw a layout plan
showing the arrangement of these facilities.
Layout means the physical arrangement of
machines and equipment needed to
manufacture a product.
 Factors kept in mind before starting a business

vii) Physical facilities:

Availability of physical facilities,
including machines and equipment,
building and supportive services is
an important factor to be
considered at the start of the
business. The decision relating to
this factor will depend on the
nature and size of business,
availability of funds and the
process of production.
 Factors kept in mind before starting a business

viii) Competent and committed worked

force:
Every enterprise needs competent and
committed workforce to perform various
activities so that physical and financial
resources are converted into desired outputs.
Since no individual entrepreneur can do
everything himself, he/she must identify the
requirement of skilled and unskilled workers
and managerial staff. Plans should also be
made about how the employees will be trained
and motivated to give their best performance.
 Factors kept in mind before starting a business

(ix) Tax planning:

Tax planning has become necessary these days
because there are a number of tax laws in the
country and they influence almost every aspect
of the functioning of modern business. The
founder of the business has to consider in
advance the tax liability under various tax laws
and its impact on business decisions.
 Factors kept in mind before starting a business

(x) Launching the enterprise:

After the decisions relating to the above
mentioned factors have been taken, the
entrepreneur can go ahead with actual
launching of the enterprise which would mean
mobilising various resources, fulfilling
necessary legal formalities, starting the
production process and initiating the sales
promotion campaign.
Bharatiya Vidya Bhavan’s
V.M.Public School
Baroda

Tasneem Hotelwala
PGT Commerce