Nature and Purpose of Business
Business: An economic activity involving the production and sale of goods and services undertaken with a motive of earning profit by satisfying human needs in society is called business.
Economic Activity: An activity by which someone earns his livelihood is called economic activity.
Non-economic Activity: An activity which done because of sense of love or charity is called non-economic activity. Non-economic activity is not done with the motive of earning money.
Characteristics of Business
An economic activity
All business activities are economic activities and are done for the sole purpose of earning money. A business activity may be done on a small scale or on a large scale. For example; purchase and sale by a shopkeeper is done on a small scale but purchase and sale by a cooperative society may be done on a large scale. Nevertheless, both of them are doing business activity.
Production and procurement of goods and services
A business activity involves production or procurement of goods and services. A manufacturer is involved in production, while a shopkeeper is involved in procurement. A product needs to be manufactured before it can be made available to the end user. Sometimes, the same organization may be involved in both production and sale of product to the end consumer. Similarly, the same organization may be involved in production and sale of services to the end consumer. But in some other cases, the producer and seller are different entities. For example; Hindustan Unilever is involved in production of goods while the local retailer is involved in selling those goods to end users.
Sale and exchange of goods and services
The business dealing always involves transfer or exchange of goods or services for a value. If a goods or service is produced for personal consumption, it cannot be part of a business. For example; if someone cooks food at home for the family it cannot be termed as a business activity. But if the same person cooks at a restaurant, then it is a business activity.
Dealing in goods and services on a regular basis
One time dealing in goods or services cannot be termed as a business. The business should happen on a regular basis. Suppose you have sold your old cell phone through an online portal, it cannot be termed as business activity because it is a one off sale. But if one of your friends sells cell phones through his shop on a regular basis, his activity is a business activity.
Profit earning is the sole motive of doing a business. No business can survive for long term without earning profit. Hence, profit maximization is the prime motive of a business organization. A business organization does this by increasing the volume of sale or by reducing costs.
Uncertainty of returns
Returns can never be certain in business activity. Sometimes, the return can be more than expectations but it can also be less than expectations. This happens because of external factors which are outside the control of the business organization.
Element of risk
An element of risk is always present in business activity. A business organization does not function in isolation. It is influenced by the external environment. Different aspects of the external environment present various types of risk to a business. For example; labour unrest, political unrest, launch of a new competitor, etc. can present risks to a business.