Nature and Purpose of Business
Long Answer Type Questions
Question 1: Explain the characteristics of business.
Answer: Characteristics of Business Activities
An economic activity: All business activities are economic activities and are done for the sole purpose of earning livelihood.
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.
Sale and exchange of goods and services for the satisfaction of human needs: Sale and exchange of goods and services is done to satisfy human needs.
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.
Profit earning: Profit earning is the sole motive of doing a business.
Uncertainty of returns: Returns can never be certain in business activity. 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. Market forces and other unforeseen circumstances present the elements of risk in business.
Question 2: Compare business with profession and employment.
Answer: For starting a business; decision of entrepreneur and legal formalities are required. For starting a profession one needs the required certificate and membership of the related professional body. For starting an employment one needs the employment letter from the employer.
No minimum qualification is required for starting a business. For starting a profession one needs the required training in the related field. For employment qualifications are as per specified by the employer.
A business provides goods and services. A professional provides personalised expert service. An employee provides services as laid down by the employer.
Profit is the reward in business and risks are very high. Professional fee is the reward in profession and risk is minimum. Salary or wages is the reward in employment and there is no risk.
Capital investment is required for starting a business which is least for a profession and none for employment.
Transfer of interest is possible; with some formalities in business. Transfer of interest is not possible in profession or employment.
Question 3: Explain with examples the various types of industries.
Answer:Industry: The term industry is used for those activities in which resources are modified for better usage by humans. Industry does some sort of value addition to the resource. For example; when flour is sent to a bakery, the bakery does value addition by converting flour into bread and cake. Similarly, a biscuit factory changes the same flour into biscuits.
Primary Industry: Industry in which natural resources are extracted is called primary industry. Mining is a good example of primary industry. Rearing of animals and breeding of plants also come under primary industry.
Secondary Industry: Industry in which some manufacturing is involved is called secondary industry. Making steel from iron ore is an example of secondary industry. Construction also comes under the secondary industry.
Tertiary Industry: Tertiary industries provide support services to the primary and secondary industry. Banking, transport, warehousing, communication are examples of tertiary industry. The whole service sector comes under the tertiary industry.
Question 4: Describe the activities related to commerce.
Answer: Commerce: Commerce facilitates business activities of industries. There are two types of commercial activities, viz. trade and auxiliary to trade. Trade involves buying and selling of goods. A factory needs to sell its goods to the end user. It is not possible for a company to directly sell goods to the end user. Wholesalers and retailers work as channel partners to facilitate trade. Insurance and advertising work as auxiliaries to trade. Advertising is a tool which motivates customers to buy a product. Banking and finance, transport, warehousing are also auxiliaries to trade.
Let us take example of an FMCG company selling various products in a large country like India. Let us assume that the company has manufacturing facilities in Gujarat. It needs to supply the goods to every part of India. Opening its own network of distribution channels would involve lot of investment and commitment. A third party working as channel partner would rule out the need for such investment. Usually, state capitals have C&F (Carrying and Forwarding) Agents who work as nodal points for supply of goods in a particular state. They earn some commission for facilitating the business. Wholesalers are present in major district towns. They get the good from C&F Agents and employ their own distribution machinery to supply the goods to the remotest parts. Retailers buy from wholesalers and work as the main points of purchase for end users. Thus the company need not deal with the retailer or the end user. This saves time and investment for the company and facilitates sale of goods and services.
Question 5: Why does business need multiple objectives? Explain any five such objectives.
Answer: A business has to survive and prosper in the real world which is full of challenges and surprises. There are numerous competitors offering similar or better products and services. The business organization needs to win consumer’s hearts for long term survival. For long term prospects a business has to balance a number of needs and goals. Hence a business needs multiple objectives. Focusing on a single objective cannot give excellence to the business. For example; if a business is too preoccupied with profit maximization and overlooks product quality and innovation; it would not be able to survive in the long run.
Some of the business objectives are discussed below:
Market Standing: Position of a business enterprise vis-à-vis its competitors is called market standing. Market standing gives strong footing and better business compared to competitors. A brand leader is in a position to earn more profit.
Innovation: An innovative product gives an edge to a business enterprise. No business enterprise can survive in the market for long without innovation. Apples products are very good examples of innovation.
Productivity: Productivity means taking maximum output from available resources. A higher productivity can lead to a higher profit.
Physical and financial resources: A business enterprise always needs physical and financial resources at regular intervals. A part of profit always needs to be ploughed back into the business to acquire these resources.
Manager performance and development: Big businesses cannot be run by a single person, rather needs managers to manage different aspects of business. Managers’ performance and development are important goals of the business. Continuous management development is the key for sorting out succession issues in an organization.
Question 6: Explain the concept of business risk and its causes.
Answer: Business Risks: There are two types of business risks: speculative risk and pure risk. Speculative risk involves both the possibilities of loss and gain. Market factors form the part of speculative risk. Pure risk involves either profit or loss. For example; in case of fire in the factory there is always a chance of loss.
Nature of Business Risks
- Business risks arise due to uncertainties
- Risk is an essential part of every business
- Degree of risk depends mainly upon the nature and size of business
- Profit is the reward for risk taking
Causes of Business Risks
Natural causes: Natural causes are beyond the control of human beings. Natural disasters can lead to huge losses in business.
Human causes: Strikes, dishonesty, carelessness, etc. are examples of human causes of business risk.
Economic causes: Inflation, unemployment, economic slowdown, etc. are examples of economic causes of business risk.
Other causes: Some political events can change the business scenario. A major policy change by the government can change the business environment.
Question 7: What factors are important to be considered while starting a business? Explain.
Answer: Starting a Business
Selection of line of business: Selection of a line of business can depend on many factors. Consumer preference is one of such factors. Sometimes, an altogether new business segment can also be explored.
Size of the firm: Size of the firm depends on the financial capability of the entrepreneur.
Choice of form of ownership: Choice of ownership also depends on the financial capability of the entrepreneur.
Location of business enterprise: Location of business enterprise depends on many factors. Availability of raw materials, infrastructure, workforce, etc. govern the choice of location of a business enterprise.
Financing the proposition: Financing depends on the financial capability and stage of the business. A small business can be started from personal finance resources. A large business may need venture capitalists or bank loans or even shareholder’s money.
Physical facilities: Physical facilities depend on the nature of goods or services being produced. For example; a small medicine shop will need at least one refrigerator and enough space to store medicines.
Plant layout: Plant layout is important for manufacturing purposes.
Competent workforce: Human resources is very important for a successful business. Quality of human resource can make a difference between productive and unproductive business.
Tax planning: Tax planning is necessary because it is mandatory to pay taxes to the government. Different types of registration may be required for tax formalities. For example; a business enterprise offering services may need to go for service tax registration.
Launching: Launching involves completing the required legal formalities, starting production and marketing activities.