Notes

A business relates to either products (such as food grains, electronic appliances, and cosmetics) or services (such as information technology and healthcare). The business provides (or should provide) quality goods or services to its customers, and in return, the customer pays the company a fair price (the perceived value) for those goods or services. Therefore, the main purpose of a business is to provide value in the form of goods or services and earn profits. A key feature of business is that it facilitates an exchange of value.

A businessperson or entrepreneur who owns a business seeks to obtain returns that are sufficient to cover the costs of the business and to fund life needs. After paying off all expenses and retaining part of the profit for personal income, the owner can use any leftover money for further business expansion or other activities. Owners can expand their businesses in two ways. They may decide to spend money either on research and development (to develop better products) or on marketing their goods on a much larger scale. They may also choose to spend money on upgrading (buying or upgrading equipment) or on additional overhead expenses (for example, improving the workspace).

So far, we have discussed the meaning and purpose of business. Let’s examine the different forms of business.

Proprietorship: As the name suggests, a proprietorship (also called a sole proprietorship or sole trader) belongs to an individual. The owner receives all the profits and absorbs all the losses. If the business shuts down, debtors (persons or organizations that loaned money to the business) may recover dues from the owner’s personal assets. It is not possible for a sole proprietorship business to raise money from the capital market (stock market). A beauty parlor and a local mom-and-pop store are examples of proprietorships.

Partnership: In a partnership, two or more individuals come together to start a business. There are two types of partnerships: general and limited. In a general partnership, the partners who are actively involved in the working of the business (general partners) have an unlimited liability (a financial debt obligation for which they are responsible). In a general partnership, as in a proprietorship, each owner’s earnings appear on the owner’s tax return declaration. However, in a limited partnership, the liability of partners is only to the extent of their investment in the company. Joint tenancy of real estate is an example of general partnership.

Corporation: A corporation is a legal entity that is separate from the individuals who own it. In other words, after the registration of a corporation, it is a separate construct in the eyes of the law. The chief distinguishing factor of a corporation is its limited liability. The owners have a direct claim on the corporation’s assets in direct correlation with their ownership of shares. However, their liabilities are limited to their investment in the corporation. Therefore, if the corporation goes bankrupt, the owners are not responsible for its debts and other obligations. A corporation can trade its stocks in the financial markets as common stock. An investor who purchases stock in a corporation becomes a shareholder in it, but does not bear any liabilities. Most multinational companies are examples of corporations.

Cooperative organization: The members of a cooperative organization own and control its activities. The main objective of a cooperative organization is to work for the benefit, development, and mutual support of its members. Profit generation is not the motive. Credit unions and industrial and provident societies are examples of cooperative organizations.

The North American Industry Classification System (NAICS) further categorizes business by industry. Some of the categories include Manufacturing, Construction, Retail Trade, Transport and Warehousing, Educational Services, Public Administration, and Finance and Insurance.

A firm’s workforce handles key functions such as finance, marketing, accounting, human resources, operations, management information systems, and strategy.

Finance deals with areas related to money: debt (or loans), stock (often called shares), and owner’s funds (also known as capital). Finance managers also oversee the risks and responsibilities related to sources of money.

A business’s performance in the market determines its success or failure. Marketing is all about finding, targeting, attracting, and connecting with the right customers. In order to target and reach the right customers, marketing managers need to identify potential markets, assess product properties, understand competitors’ marketing strategies, and advertise effectively.

The main tasks in accounting involve compiling, recording, and analyzing financial transactions. The accounting department answers or tracks questions such as:

“How much cash do we have?”

“How much profit did we make this year?”

“Can we pay off our immediate debts?”

Accounting audits are reviews by external agencies to ensure that a company properly maintains its books of accounts.

For any business to be successful, it needs to find the right people, fit them into efficient work teams, and develop competitive pay structures. The human resources department of a company manages functions such as recruitment (hiring and training), promotions, payroll and performance appraisals, and compliance with labor laws.

The operations department readies products and services for production and delivers them to the market. It receives assistance from management information systems (MIS), which uses software applications to track production and employee performance.

Business strategy relates to the challenges that a company faces in the ever-changing business environment. To create effective strategies, managers must recognize that no company can survive without common goals, ideals, and a sense of purpose.

Business is part of the society in which we live. Business and society interconnect with one another. Businesses make and deliver the products and services that individuals are not capable of producing on their own. Apart from its profit motive, a business also often operates based on a need to serve society. Any business decision can affect (or be affected by) society. Let’s discuss an example of this interconnection.

If a business plans to expand its operations, it will create more employment opportunities and contribute more to the national economy. In turn, the company pays to obtain its natural and human resources from the society in which it operates. This illustrates how business and society form a mutually dependent and interactive system.

Entities such as employees, stockholders, creditors, suppliers, customers, distributors, wholesalers, and retailers work both competitively and cooperatively with a business.

Any business decision can have a direct effect on each of these market or primary stakeholders. A business also has secondary stakeholders in the form of the government, communities, the general public, non-governmental organizations, the media, business support groups, and similar entities not directly related to the basic mission of a firm. Any action taken by a business indirectly affects these secondary stakeholders as well.

An example of this is a business that does not pay its taxes on time. This can create a deficit in the funds required for societal welfare.

The fact that business and society interconnect—and that any business action has an effect on the company’s stakeholders—has given rise to the concept of corporate social responsibility (CSR).

Through CSR, a business voluntarily integrates various social and environmental concerns into its business model. If you observe a multinational company sponsoring a project that benefits the environment, it most likely involves a CSR initiative.

In addition, the actions of stakeholders can influence the operations of a business—economically, politically, or socially—because they have a direct or indirect bearing on the firm’s performance. For example, civil unrest in a particular country can bring a company’s operations to a halt, or a change in national fiscal policy can prove unfavorable to the operations of the business.

Global trade or trading between countries has made the entire world a single market, thereby making it possible for you to buy goods that your home country does not produce. Global trade takes place through imports (purchasing goods from another country) and exports (selling goods to another country).

Global trade offers many benefits. Participating countries experience economic growth due to an increase in demand for their products. This leads to an increase in production, which creates additional employment opportunities and improves the purchasing power of citizens. This ultimately raises the standard of living in the participating nations. Global trade also ensures that consumers can buy quality goods at lower rates.

Globalization is not a new concept—only the pace has changed. Rapid technological advances and easy connectivity in communication have made the market environment convenient and favorable for globalization.

In which type of business can debtors recover dues from the owner’s personal assets?

A: Proprietorship

Which key function in business readies products for production and delivers them to the market?

A: Operations

Which of the given stakeholders form part of a company’s secondary stakeholders?

A: Government