The Nature of Business
Topic One

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The Nature of Business

A business as an entity is a formal complex organization which produces goods and services for satisfaction of its customers for profit and satisfaction. However, business as activity in itself is the regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants. Business management are the activities associated with running a company, such as controlling, leading, monitoring, organizing, and planning.

Characteristics or Features of Business

To be classified as a business, there are certain features that must be present which are as follows:

  • Exchange of Goods and Services
    All business activities are directly or indirectly concerned with the exchange of goods or services. In other words, what is produced must be consumed and this happens when the producer or the business sells goods and services to consumers in exchange for money.
  • Profit is the main Objective
    Most businesses are operated for profit even though many are non-profit making organizations. Therefore, businesses are motivated by profits.
  • Risks and Uncertainties
    Business is subject to risks and uncertainties. Some risks, such as risks of loss due to fire can be insured by insurance companies. However, there are some risks such as loss due to change in demand or fall in price that cannot be insured and must be borne by the businessman.
  • Buyer and Seller
    Every business transaction has minimum two parties - a buyer and a seller.
  • Production
    Business activities are connected with production of goods or services. Production is the process of using inputs to produce output.
  • Marketing and Distribution of Goods
    In order for the profit objective of the business to be effectively met, businesses must market or distribute their goods and services to prospective consumers.
  • Satisfaction of Human Wants and Needs
    The success of the business depends on its products and services being successfully exchanged for money. This can only happen if these products and services are to the satisfaction of the targeted consumers.

Money

Coins and Paper Money

Metals objects were introduced as money many centuries ago. Lydians became the first in the western world to make coins. Countries were soon minting their own series of coins with specific values. Metal was used because it was readily available, easy to work with and could be recycled. Since coins were given a certain value, it became easier to compare the cost of items people wanted. After coin, paper money soon appeared. Some of the earliest known paper money dates back to ancient China, where the issuing of paper money became common from about AD 960 onwards.

Kinds of Money

Representative Money - With the introduction of paper currency and non-precious coinage, commodity money evolved into representative money. This meant that what money itself was made of no longer had to be very valuable. Representative money was backed by a government or a bank's promise to exchange it for a certain amount of silver or gold.

Fiat Money - Representative money has now been replaced by fiat money. Money is now given value by a government fiat or decree. In other words, enforceable legal tender laws were made.

Characteristics or Qualities of Money

For any instrument to be considered to be money, it must possess some common characteristics. These characteristics are as follows:

Acceptability - money must be accepted by everyone in the economy. Money cannot be accepted by some and not by others in a particular country. This acceptance is for the purpose of the exchange of money for goods and services.

Divisibility - this relates to money being easily divided into smaller denominations for transactional purposes. It is necessary therefore for money to be easily broken down for different types of transactions. For example a $10 note can be broken up into two (2) $5 notes or ten (10) $1 notes.

Durability - this simply refers to the physical wear and use of money over a period of time. If money is easily damaged, it is likely that it will be more easily to be fraudulent and cannot be trusted.

Limited supply - in order for money to retain its worth, it must be limited in supply. The more money in circulation, the less it is valued by the economy.

Portability - it is necessary for money to be easily transported so that people can carry it around with them easily.

Uniformity - depending on the different types of currency that are available, money within that specific currency and country must look the same.

Functions of Money

In order to see the importance of money, it will be necessary to state the functions of money which are as follows:

Medium of exchange – consumers use money in exchange for goods and services which they buy.

Unit of account - the unit of account is the unit in which values of goods and services are stated, recorded and settled. For example a cell phone is valued at TT$1000 while a notebook is valued at TT$20.

Standard of deferred payment - this function of money allows for settlement of debts. Deferred payment means a payment made in the future not at present. Money therefore allows for payments at a later date.

Store of value - this function of money allows households to maintain the value of their wealth.

Instruments of Exchange or Payment

The following are some instruments of exchange or payment:

Debit cards - are used to pay for goods and to withdraw money at cash machines. The money is automatically taken from your current account when you spend it, so you must have enough money in your account to cover the transaction.

Credit cards - is a credit facility that enables you to buy things immediately but up to a pre-arranged limit, and pay for them at a later date. The cost of the purchase is added to your credit card account and you get a statement every month. You then have a choice of paying off the bill in full by a set date with no interest or paying at least a minimum amount and spreading the repayments with interest over a period of time.

Cheques - A cheque is a negotiable document to transfer money either in physical form or to effect transfer from one account to another. Unless or otherwise stated, a cheque is a signed unconditional order addressing the bank to credit it by the issuer.

Money order - is a certificate, usually issued by governments and banking institutions, that allows the stated payee to receive cash on-demand.

Bank Draft - A bank draft is a payment on behalf of a payer that is guaranteed by the issuing bank.

Bill of Exchange - A bill of exchange is a non-interest-bearing written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.

Promissory Notes - A promissory note is a financial instrument that contains a written promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite sum of money, either on demand or at a specified future date.

Electronic Transfer - An electronic or wire transfer is an electronic transfer of funds. Wire transfers allow for the individualized sending of funds from single individuals or entities to other individuals or entities.

Internet Banking - Internet banking is an electronic payment system that enables customers of a bank to conduct a range of financial transactions through the financial institution's website.

Concept of Private and Public Sectors

For the progress and development of any country, both the private and public sectors must work together as only one sector cannot lead the country in the path of success. The private sector comprises of businesses which are owned, managed and controlled by private individuals. On the other hand, the public sector comprises of various business enterprises owned and managed by the government.

Reasons for Establishing a Business

It is an important decision when a person decides to start their own private business rather than rely totally on being employed for other firms. There can be various reasons why people will want to establish their own business. Some of these reasons are as follows:

Independence - Many people thought about the independence that they can have by opening their own business and being their own boss. Many people who work a regular 8 to 4 job in a large company may find it to be frustrating and tedious and this can even impact on their private lives especially if these large businesses do not have flexible working arrangements.

Challenge - Many people venture into starting their own business because of the challenge that may be involved in starting a company from the beginning to the stage of maturity.

Sense of Accomplishment - Owners of their own business may feel tremendous pride when their startup business turns into a thriving and successful business enterprise. This sense of accomplishment comes from building something out of nothing or from the very beginning.

Provision for Family Members - A family business may be a more stable way of maintaining a family for now and the future compared to a fixed salary in a large company that may even be dependent on the economy and performance of the company.

Forms of Business Organizations

The following are some forms of businesses:

Sole Proprietorship - The sole proprietorship is a form of business which is operated by one person for his or her own benefit. The features of the sole trader are as follows:

  • It is the simplest form of business operations and has no existence apart from the owners;
  • Whatever liabilities associated with the business are the personal liabilities of the owner and the business terminates upon his or her death or by voluntary termination;

Partnerships - A general partnership is an agreement established between two or more persons who join together to carry on a business operation for profit. The features of partnerships are:

  • Each partner contributes capital and other assets and each also shares in the profits and losses of the business;
  • This form of business operations limits the personal liability of individual partners for the liabilities of the business based on the amount they would have invested.

Joint Stock Companies

There are two types of joint stock companies which are private joint stock company (private limited liability company) and public joint stock company (public limited liability company).

Private Joint Stock Company - The features of a private joint stock company are as follows:

  • A private joint stock company is a company that is owned by a small amount of investors or shareholders,
  • Legally, the company is a separate entity from the owners. The shareholders are private owners of the company,
  • Due to the fact that it is a legal entity, such companies must have their accounts audited annually. Private joint stock companies are called private placements,
  • Shares can only be issued privately and not publicly as in the case of a public stock exchange.

Public Joint Stock or Public Limited Liability Company - A public joint stock company is one where investors come together to own a company. Shares are issued in the primary market and then can be bought and sold in the public secondary stock market ;or a stock exchange. The features of a public joint stock company are as follows:

  • Funding – this comes mainly from the issuance of shares to members of the public on the stock exchange,
  • Liability - the liability of shareholders are limited to the amount of their investments in the company,
  • Legal requirements - this company is a legal entity which must meet all of the legal requirements,
  • Owners - investors are shareholders and also owners of the company,
  • Dividends - shareholders receive annual dividends if the company makes a profit.

Co-operatives - Co-operatives are autonomous associations formed and democratically directed by people who come together to meet common economic, social and cultural needs. Founded on the principle of participatory governance, co-operatives are governed by those who use their services.

Public Corporations - Public or state-owned corporations are organizations that are owned by the government to provide the public with public goods and services. These are formed to provide society with much needed goods and services which the government feels will be provided at a high cost if left to the private sector to produce and supply.

Multinational Corporations - A multinational corporation (MNC) is a company that has an established presence in a country other than its home country.

Conglomerate - A conglomerate is a corporation that is made up of a number of different, seemingly unrelated businesses.

Franchise - A franchise is a type of license that a party (franchisee) acquires that allows them to have access to a business's (the franchiser) proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the franchiser’s name.

Joint Venture - a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. In a joint venture, each of the participants is responsible for profits, losses and costs associated with it.

The local and municipal authorities - comprise of local governments, parish councils, boroughs and municipal corporations. Such entities are under the authority of the parliament of a country and a minister of central government is put in charge of local government affairs.

Non-Governmental Organizations - Non-governmental organizations (NGOs) are non-profit organizations which are usually independent of governments though often funded by governments. NGOs try to improve the lives of other people through humanitarian, educational, healthcare, public policy, social, human rights, environmental, and other such services.

Types of Economic Systems

There are three main types of economic systems (also referred to as allocative mechanisms) plus the traditional or subsistence system each with its own merits and demerits. These systems are: the market economy or free market enterprise, the planned economy and the mixed economy.

Market Economy or Free Markey System - In a market economy, the government plays a minor role. Instead, consumers and their buying decisions drive the economy. Market decisions are mainly dominated by supply and demand. Resources are privately owned and consumers and firms make decisions based on self-interest; consumers seek satisfaction while the firms seek profits. There is freedom of choice and the forces of demand and supply determine price and optimum quantity. There is consumer sovereignty since consumers possess the means by which decisions are made.

Planned Economy - A planned economy is sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and prices are made by the government.

Mixed Economy - The mixed economy combines elements of both the market and planned economies. This means that certain features from both market and planned economic systems are taken to form this type of economy.

Traditional or Subsistence Economy - A traditional economy is defined as one that is based on agriculture, fishing and hunting and is guided by traditions and use barter instead of money. This is a closed economy where people strive to be self-sufficient.

Functional Areas of a Business

Whether businesses are small or large, they all have four main functional areas.

Human Resource Management - The recruitment, placement, orientation, training, promotion, motivation, performance appraisal, wage and salary, retirement, transfer, merit-rating, industrial relations, working conditions, trade unions, safety and welfare schemes of employees are included in personnel management.

Production Management - Production management refers to planning, organization, direction, coordination and control of the production function in such a way that desired goods and services could be produced at the right time, in the right quantity, and at the right cost

Marketing Management - Through marketing management, marketing professionals determine the products that their companies introduce to the marketplace. Marketing managers help to establish prices for products, based on manufacturing costs. Marketing managers decide which types of advertising and promotions their companies are to use.

Financial Management - Financial management can be looked upon as the study of relationship between the raising of funds and the deployment of funds.

Business Stakeholders

A corporate stakeholder is a person or group who can affect or be affected by the actions of a business. There can be both internal and external stakeholders.

  • Internal stakeholders are entities within a business such as employees, managers, the board of directors and investors.
  • External stakeholders are entities not within a business but who care about or are affected by its performance such as consumers, regulators, investors and suppliers.

Responsibilities of Stakeholders

The responsibilities of each stakeholder of a business are as follows:

Shareholders or Owners – A business may be owned by a single individual (a sole trader), partners or by a group of shareholders forming a company.

Role of Shareholders or Owners - Stockholders’ initial role is to provide the capital a company needs to achieve its intended objectives. These are the investors who would have purchased shares in the business.

Managers - Managers are those persons who lead the respective departments in the organization.

Role of Managers – The role of a manager includes: setting objectives, organizing tasks, motivating employees and developing people.

Employees - are employed to carry out assigned tasks to achieve the company’s objectives.

Role of Employees - Employees are the closest stakeholders to production. They interact with customers and they work directly on the company’s products.

Customers - Customers are the supporters of businesses in the economy. They purchase goods and services to satisfy their needs and wants.

Role of Customers - The demand and purchase decisions of customers will determine the success of the business. Customers also provide valuable feedback to the business regarding its products and customer service level. This feedback is critical as it enables the business to improve upon the goods and services that it offers to customer.

Suppliers - A supplier is a person or business that provides raw materials that people and businesses need to achieve an objective.

Role of Suppliers – Suppliers supply the raw materials and intermediary goods that the business needs in order produce goods and services needed by consumers.

Society - Businesses must be aware of the society as a whole, how its activities affect it and not only their customers.

Role of Society - The production process may cause air pollution and the emission of dangerous chemicals into the atmosphere and rivers and seas. Society can act like a watchdog by making complaints when businesses are causing pollution in their business activities.

Lenders - Lenders are the financial institutions that provide the much needed funding.

Role of Lenders - When their savings and retained earnings have been exhausted, these businesses turn to lenders in the form of financial institutions to provide their much needed finance or funding.

Competitors - Competitors are those companies that compete against each other in a particular industry.

Role of Competitors - An industry is comprised of businesses which offer the same or similar products to the public. These businesses compete with each other to produce the best possible product which usually results in an increase in overall supply of that product at a lower price.

Government - The government is the manager of the economy within which the business operates.

Role of Government - Government performs many different roles in an economy. Traditionally, the government is seen as that entity that sustains the law which fosters stability in the economy and society at large.

Functions of the Business in Satisfying Needs

The main functions of business in society are as follows:

  • Identifying goods and services that are needed by consumers based on needs,
  • The manufacture and supply of these goods and services that are needed by consumers in society,
  • In the process of manufacturing these goods and services, business also create and provide employment opportunities,

Economic, Financial, Social, Political and Ethical Roles of Business

Besides existing to satisfy customers’ needs, businesses also have other responsibilities such as economic, financial, social, political and ethical. These are explored as follows:

Economic:

  • Provide goods and services to satisfy needs and wants of customers,
  • Create employment thereby assisting in the reduction of unemployment in society,
  • Assist in the increasing of the living standards of society through the creation of jobs,
  • Facilitate for trade both regionally and globally thereby increasing the income of the country,

Financial:

  • Mobilize savings through the provision of financial instruments,
  • Borrow these savings to invest in business thereby expanding the financial system and contributing to economic growth,
  • Lend to the government by the purchase of government bonds,

Social:

  • Financially support social organizations through their social responsibility function,
  • Lower the social problems of society such as crime,
  • Offer volunteer activities to strengthen societies,

Political:

  • Uphold the laws of the country.
  • Ensure that elections are held fair and contribute to the good of society.

Ethical:

  • Conduct business activities with the highest levels of ethical standards,
  • Offer constructive and positive advertising that are not harmful especially to children,
  • Treat employees fairly and humane by creating a healthy working environment and paying decent wages and salaries with good fringe benefits,

Careers in the Field of Business

A career can be defined as the actions taken by people throughout a lifetime, especially those related to that person's occupations. A career is often composed of the jobs held, titles earned and work accomplished over a long period of time, rather than just referring to one position. There are various careers in the field of business activities some of which will be discussed below.

Advertising and Public Relations Professionals - Professionals who work in adverting and public relations are responsible for promoting the products of a company. If you are working in an advertising agency, you may be responsible designing advertising campaigns, billboards, commercials and other promotional materials with the expectation of selling a product or service.

Compliance Officers - A compliance officer is that employee in the business firm who is responsible for ensuring the employees comply with all internal rules and laws and regulations.

Strategic Planners or Officers - The strategic planner will work with senior employees to chart and assist with the implementation of the strategic plan.

Information Officers - These professionals are responsible for managing and maintaining databases, information catalogues and web resources and these information officers use their expertise to make sure that the information they manage is safe, secure and easily accessible

Personnel and Human Resource Officers - Personnel officers manage the basic functions dealing with your employees. These can include interviewing, hiring, handling drug testing, overseeing payroll and maintaining employee files and handling benefits enrollment, expense reimbursement and terminations. Human resource officers go beyond personnel officers and have duties that include developing the business’s organizational chart, creating a comprehensive company handbook, handling psychological testing and creating training programs and developing a wellness program.

Web Designers - Web design is a relatively new industry, having been created with the advent of the internet, and is gaining popularity in particular over the last ten years, as digital media has become a major part of many people's lives. A web designer's main job is to design web pages.

Software Developers - Software developers are the creative minds behind computer programs. Some software developers develop the applications that allow people to do specific tasks on a computer or another device.

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