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 cannot be insured and must be borne by the businessman.
Buyer and Seller - every business transaction has a 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 is anything generally acceptable as a medium of exchange. It is most common in the form of coins and banknotes. Before money was used, there was barter which involved the exchange of goods for other goods. Barter allowed trade to occur between countries. However, there were limitations. The main limitation of barter was that of the goods to be traded must have been of the same value. Another problem with barter was that of indivisibility. Some goods are not divisible. For example, a car could not have been divided to obtain other items. The solution was that of metals. Therefore, precious metals such as gold and silver started to be used as a medium of exchange. These metals were more convenient because they had intrinsic value in that they were used as assets. Following the use of precious metals, coins were made from metals. These coins were considered to be of value in that faces of famous people (for example, members of the Royal Family) were placed on these coins. Soon thereafter, coins started to be a popular form of money and the population then started to have confidence in coins. The problem with the use of coins is that they started to become short in supply. The solution was that of the invention and use of bank notes. For money to be useful, it must be of legal tender.
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.
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.
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.
A joint venture - is 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.
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.