Nature and Purpose of Business
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. An entrepreneur would like to enter a segment which offers the scope for maximum profit. Technical knowledge of entrepreneur is also an important factor while selecting a particular line of business. For example; a person with expertise in HTML may like to enter the dot com business.
Size of the firm: Size of the firm depends on the financial capability of the entrepreneur and on market prospect. If an entrepreneur believes that the market has huge potential, he may like to begin from a larger size. If business plan appears to be lucrative enough and market size is good, then a new business can even attract good amount of capital. Recent cases of funding in flipkart are very good example of how market potential determines the size of the firm.
Choice of form of ownership: Choice of ownership depends on the financial capability of the entrepreneur, willingness to share profit, long term plan, etc.
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. Let us take the example of TISCO plant at Jamshedpur. When the Tatas were planning to set up a steel plant, they preferred the location of Jamshedpur because of various factors; like availability of raw materials, water, connectivity with railways and roadways, etc.
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. A proper plan needs to be made regarding source of funding, utilization of capital and so on.
Physical Facilities: Availability of various physical facilities is another important factor while planning a business. Machines, building, office, etc. come under physical facilities. The traditional brick and mortar business would obviously require more physical facilities compared to the online business.
Plan Layout: Once the physical facilities are available, the business person needs to chalk out the layout of the factory or the office. In both the cases, the layout should allow efficient operations management.
Competent and Committed Workforce: Every organization needs the workforce to perform various functions. The workforce should be competent. Proper qualification and training is necessary for a particular functional area. Commitment of workforce is ensured by various tools related to Human Resource Management.
Tax Planning: Tax planning is very important so that a large portion of the revenue could be saved from being diverted to the taxes. Some state governments provide tax holidays to companies. Many SEZs also offer similar facilities to attract potential investors to start a business. Implications of various tax liabilities should be properly analyzed.
Launching the Enterprise: Once everything is placed in order, the business organization needs to start production of goods or services. It also needs to carry out a marketing campaign to increase awareness among the potential customers.
Possibility of lower profit or possibility of loss is the crux of business risk. 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: Uncertainties refers to the lack of knowledge about what is going to happen in the future. Many surprising changes can happen in the future which may warrant the business strategy to be changed altogether. Changes can happen in technology, government laws, socio-economic situation or in political situation. Changes can also take place in the market with the entry of a better product or a more capable competitor.
Risk is an essential part of every business: Every business faces some or other type of risk. No business can be isolated from risks.
Degree of risk depends mainly upon the nature and size of business: Nature and size of business are the main factors of risk. For example; the models of cell phones keep on changing almost on a daily basis. A model which is supposed to be superb today may become obsolete tomorrow. A large business organization is usually at lower risk because of its financial muscle, whereas a small business organization is usually at a higher risk.
Profit is the reward for risk taking: This is because of the risks involved that business persons are rewarded with profit. A person who is averse to risk would prefer employment rather than risking his lifetime’s savings on starting a business.
Causes of Business Risk
Natural causes: Natural causes are beyond the control of human beings. Natural disasters can lead to huge losses in business. Let us take example of various small hotels which were wiped out during the massive floods in Uttarakhand. Nobody could do anything when the flood hit the hilly state.
Human causes: Strikes, dishonesty, carelessness, etc. are examples of human causes of business risk. Labour unrest have often resulted in shutdown of many factories. The factory of Maruti at Gurgaon is an example of crippling operations due to labour unrest.
Economic causes: Inflation, unemployment, economic slowdown, etc. are examples of economic causes of business risk. The recent economic slowdown has resulted in reduced demand for housing. According to leading newspapers, there is huge inventory in the housing sector which would take at least ten years to be sold. Luxury products suffer severe decline in demand during an economic slowdown.
Other causes: Some political events can change the business scenario. A major policy change by the government can change the business environment. A very good example of effect of policy change on a business is the upsurge in mobile telephony market in India when the then telecommunications minister favoured CDMA by making some changes in policy. It is always seen that a stable government at the centre improves the business climate, while an unstable government is detrimental to the business climate.