Notes - Introduction to Business

 

1. Introduction to Business

 

1.1 Business

 

Business is a major economic activity in all modern societies. The central purpose behind most of the business activities is to earn money. Today, business has major influence on the life of people.

“Business may be defined as an economic activity in which different persons exchange something of value, whether goods or services for mutual gain or benefit”.

It can also be stated that it is an organised or systematic activity involving the satisfaction of human wants. The term business is derived from the word ‘busy’. Thus, business includes all occupations in which people are busy in earning income either by production or purchase and sale or exchange of goods and services. Their motive is to satisfy the needs of other people so as to earn income or profit.

 

1.1.1 Characteristics of Business

 

Given below are the characteristics of business, which explain the fundamental nature of business and make it different from other activities.

·         Economic Activity

·         Production or Procurement of Goods or Provision of Services

·         Sale or Exchange of Goods and Services for Satisfaction of Human Needs

·         Profit Earning    

·         Uncertainty of Return

·         Dealing of Goods and Services on Regular Basis

·         Element of Risk

 

1.1.2 Objectives of Business

 

Business objective means the purpose for which a business is established and carried on. Objectives define the future state of affairs which the organisation strives to realise. Therefore, every businessman must define and select his objectives carefully and clearly.

 

The main objectives of business activity are:

(i) Economic Objectives: Main objective is earning profit.

Other economic objectives are:

(a) Exploring new markets and creation of more customers.

(b) Growth and expansion of business operations.

(c) Making innovations and improvements in goods and services.

 

(ii) Social Objectives: Objectives which are desired to be achieved for the society.

Some major social objectives are:

(a) Production and supply of quality goods and services for the society.

(b) Providing goods at reasonable prices.

(c) Contributing towards the general welfare and upliftment of society,

 

(iii) Human Objectives: Primarily refer to objectives aimed at safeguarding the interest of employees e.g. fair remuneration to employees.

 

(iv) National Objectives: These are objectives for fulfilling the national goals and aspirations, e.g. creation of employment.

Thus, we can say that profit maximisation is an important objective of business but should not be the sole objective of business.

Best said by Henry Ford, “Business is not more money chasing but it should also aim at serving the community”.

 

1.2 Classification of Business Activities

 

All the activities that are undertaken in connection with the production of things and carrying them from the place of production to the place of consumption are called business activities. They are broadly classified into two broad categories viz industry and commerce. On the basis of these two categories, business can be classified into industrial and commercial enterprises.

 

 

1.2.1 Industry

 

Process through which goods are produced by application of human/mechanical power. It includes all those business activities that are concerned with the production of goods and services by converting raw material into useful products.

Industry may be divided into three categories viz primary, secondary and tertiary

 

1.       Primary Industries

They include all those activities which are concerned with extraction of natural resources, reproduction and development of living organisms plants etc.

They are further sub-divided into two categories

(i)   Extractive Industry: It includes all those activities which extract or draw out various products from natural resources like soil, water, earth air etc. e.g. agriculture, minerals like coal, iron-ore, fishes from beneath the water, wood and timber from forests etc.

 

(ii) Genetic Industry: It involves activities like breeding and reproduction and multiplication of certain species of plants and animals. Some of these are

·         Nurseries Where plants are grown for sale.

·         Animal Husbandry Rearing of cattle for milk;

·         Poultry Farming Raising birds for meat and eggs.

·         Pisciculture Growing fish in ponds, rivers and cances.

·         Dairy Farming Catties used for getting milk to produce butter, cheese etc.

·         Orchards and Farms Used to grow different types of fruits like apples, cherries etc.

 

2.       Secondary Industries

These industries produce new products by using the products of primary industries as raw materials. Hence are called secondary industries.

(i)   Manufacturing Industry: These industries convert raw materials or semi finished products into finished products, e.g. sugarcane is converted into sugar, wood is converted into furniture. They are divided into four categories

(a) Analytical Industry: In such industries, a basic raw material is analysed and separated into different finished products, e.g. crude oil is the raw material which is separated into lubricating oils.

(b) Synthetical Industry: Under this two or more raw materials are combined together to make a new product, e.g. to make cement lime, clay, mortal etc are mixed.

(c) Processing Industry: It involves successive stages for manufacturing a product, e.g. sugar industry and paper industry.

(d) Assembling Industry: In these industries, parts manufactured by different industries are assembled to produce new and useful produces like TV, car, computer etc.

 

(ii) Construction Industry: It includes all those industries which are engaged in construction of buildings, roads, dams, bridges etc. Engineering and architectural skills are an important part in construction industries.

3.       Tertiary or Services Industries

These are concerned with providing services which facilitate a smooth flow of goods and services or in other words these are concerned with providing support services to primary and secondary industries as well as activities relating to trade. Various types of service providing industries are

 

1.2.2 Commerce

 

·         It refers to all those activities which help directly or indirectly in the distribution of goods to the ultimate consumer. It provides the necessary link between producers and consumers.

 

·         It embraces all those activities which are necessary for maintaining a free flow of goods and services.

 

Type of Commerce

Commerce may be classified as

 

1.       Trade

It involves the buying and selling of goods. It act as a link between manufacturers and the consumers. It can be classified into two types

(i)   Internal or Home Trade: It is also known as domestic trade or inland trade. It means buying and selling within the geographical boundaries of a country. Both the buyer and seller belong to the same country. The internal trade can be of two types

(a) Wholesale Trade: A wholesaler buy goods in large quantities directly from the producer and sell them in small quantities to retailers. He serves as a connecting link between the producer and the retailer.

(b) Retail Trade: It refers to buying and selling of goods and services in small quantities. The retailer buys goods from the wholesaler and sells these goods to the ultimate consumer.

 

(ii) External or Foreign Trade: It is also known as international trade. It refers to buying and selling of goods and services between two or more countries.

      The external trade is of following three types

(a) Import Trade: It refers to the purchase of goods from foreign countries. For instance, India buys petrol from Iran.

(b) Export Trade: It refers to sale of goods to a foreign country, e.g. India exporting tea to UK.

(c) Entrepot: Trade It refers to import of goods for the purpose of export. In entrepot, the goods are purchased from a foreign country but not for consumption in home country. They are imported for selling these goods to some other foreign country. It is also called re-export trade.

 

2.       Auxiliaries to Trade

Activities which assist or support trade are known as auxiliaries to trade. They remove various hindrances in the production and distribution of goods.

Various auxiliaries to trade are:

(a)   Transportation: It creates place utility by bringing the goods from the place of producer to the place of the consumer, via the trader.

 

(b) Communication: Means of communication removes the hindrance of contact. The common communication services are postal service, courier service, telephone service, fax, internet, etc.

 

(c) Warehousing: There is usually a time lag between production and consumption. During this time, goods have to be stored and made available, whenever required. Warehousing creates time utility by removing hindrance of time.

 

(d) Banking and finance:  No business is possible without adequate finance. Banking and finance companies greatly facilitate trade by providing timely finances to producers, traders and even consumers (to buy products like houses, cars, etc) and remove hindrance of finance.

 

(e) Insurance: Businessmen have to bear many types of risk, e.g. risk of loss of goods by fire, damage of goods in transit, likely losses of destruction of business properties, risk of theft, etc. Many business risks can be insured with insurance companies, on payment of a nominal premium.

 

(f) Advertising: It removes the hindrance of knowledge and information. Advertising brings the existence of knowledge of goods and services to the consumers and facilitates trade.

 

1.3   Profession

 

A profession is something which is more than a job. It is a career for someone which is chosen to be competent in their respective areas. It includes professional activities which are subject to guidelines or codes of conduct laid down by professional bodies. Those engaged in profession are called professionals and they earn income by charging professional fee.

 

1.3.1 Characteristics of Profession

 

Characteristics of profession are as

·         Professionals render a specialised service based upon advanced specialised knowledge and skill.

·         It involves a confidential relationship between a practitioner and a client.

·         It is bound by a distinctive ethical code.

·         Professionals earn monetary gain by charging professional fees.

 

1.4   Employment

 

·         It refers to the occupation in which people work for others and get remuneration in form of wages/salaries. Those who are employed by others are called employees and the one who employs is called employer.

 

·         A service agreement is entered between the employer and the employee, specifying the terms and conditions of the service. Managers, clerks, bank officials, factory workers etc are the examples of employees.

 

1.4.1 Characteristics of Employment

 

Characteristics of employment are as

·         There is a contract existing between the employer and employee,

·         Employee performs according to assigned task.    

·         Remuneration is given to employees for delivering value services.  

·         An employee must abide by the rules and regulations of the organisation.      

 

1.5 Small Scale Business and Large Scale Business    

 

Business can be divided into two parts on the basis of scale of production. These are small scale business and large scale business.

 

1.5.1 Small Scale Business

 

·         These businesses employ less number of persons and capital. Most of the work is done by manpower, small machines and tools.

 

·         Raw materials used are less and the production is consequently less. These are scattered in rural and    urban areas and are in the private sector, e.g. cycle T.V. radio.

 

1.5.2 Large Scale Business

 

·         These businesses employ a larger number of persons and capital. The work is done is done mostly by larger machines and laboures.

 

·         Raw materials used are large and there is mass production. These are located in urban centres and are in the public sector or run by big industrialist, e.g. cotton textiles, jute textiles.

 

The differences between a small scale business unit and large scale business unit are

 

Basis of Distinction	Small Scale Unit	Large Scale Unit
Nature	Labour intensive	Capital intensive.
Type of Labour	Uses labour of family	Uses hired labour
Scale of operation	Operates on small scale	Operates on large scale
Capital	Capital does not increase more than ` 1 crore	Capital can be increased above ` 1 crore

1.5.3 Assistance by Government to Small-Scale Sector

 

Many incentives are provided both by the Central and State Government to promote the growth of small-scale industries and also to protect them from the onslaught of the large-scale sector. Among the various incentives given to small-scale industries the following deserve special mention:

1.   Reservation: To protect the small-scale industries from the competition posed by large-scale industries, the government has reserved the production of certain item exclusively for the small-scale sector which now stands at 822.

 

2.   Preference in Government Purchases: The government as well as government organisation show preference in procuring their requirement from the small-scale sector.

 

3.   Price Preference: The SSI units are given price preference up to maximum of 15% in respect of certain items purchased both from small-scale and large-scale units;

 

4.   Supply of Raw Materials: In order to ensure regular supply of raw materials, imported components and equipment’s, the government gives priority allocation to the small-scale as compared to the large-scale sector. Further, the government has liberalised the import policy and streamlined the distribution of scarce raw materials.

 

5.   Excise Duty: In respect of SSI units excise duty concessions are granted to both registered and unregistered units on a graded scale depending upon the production value. Full exemption is granted up to a production value of ` 30 lakh in a year and 75% of normal duty is levied for production value exceeding ` 30 lakhs but not exceeding ` 75 lakhs. If the production value exceeds ` 75 lakhs, normal rate of duty will be levied.

 

6.   RBI’s Credit Guarantee Scheme: In 1960, the RBI introduced a Credit Guarantee Scheme for small-scale industries. As per the scheme, the RBI takes upon itself the role of a guarantee organisation for the advances which are left unpaid, including interest overdue and recoverable charges. This scheme covers not only working capital but also advances provided for the creation of fixed capital.

 

7.   Financial Assistance: Small-scale industries are brought under the priority sector. As a result, financial assistance is provided to SSI units at concessional terms by commercial banks and other financial institutions. The tiny/small-scale sector. In 1996, the small-scale sector received 42.3% of the total priority sector advance from public sector banks.

 

8.   Technical Consultancy Services: The small industries development organisation, through its network of services and branch institutes, provides technical consultancy services to SSI units. The technical consultancy organisation renders consultancy services to SSI units at a subsidized rate.

 

9.   Machinery on Hire Purchase Basis: The National Small Industries Corporation (NSIC) arranges supply of machinery on hire purchase basis to SSI units, including ancillaries located in backward areas which qualify for investment subsidy.

 

10. Transport Subsidy: The transport subsidy scheme, 1971 envisages grant of a transport subsidy to small-scale units in selected areas to the extent of 75% of the transport cost of raw materials which are brought into and finished goods which are taken out of the selected areas.

 

11. Training Facilities: The entrepreneurship development institute of India, financial institutions, commercial banks, technical consultancy organisations and NSIC provide training to existing and potential entrepreneurs.

 

12. Marketing Assistance: The National Small Industries Corporation (NSIC), the Small Industries Development Organisation (SIDO) and the various export promotion councils help SSI units in marketing their products in the domestic as well as forcing market. The SIDO conducts training programmes on export marketing and organizes meeting and seminars on exports promotion.

 

13. District Industries Centre (DICs): In 1977, industrial policy statement introduced the concept of DICs. According a DIC is set up in each district. The DIC provides and arrange a package of assistance and facilities for credit guidance, supply of raw materials, marketing etc.