BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

Nature and Purpose of Business

Topics covered
Human Activities
Business, Profession and Employment
Business Risks and their Causes
Industry and Commerce
Factors to be Considered while Starting a Business

Human Activities

Humans are engaged in different types of work which are known as human activities. These are classified
into economic activities and non-economic activities.

Economic activities: These activities are done to earn a livelihood. The different types of economic
activities are
 Business
 Profession
 Employment

Non-economic activities: These activities are done with a social or psychological motive. The
different types of non-economic activities are
 Parental activities
 Religious activities
 Charitable activities
 Social activities

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

Business, Profession and Employment

Business
Business refers to activities which are concerned with the production, purchase, sale and supply of
goods with the motive of earning profit.

Definitions of Business

Business is a human activity directed towards producing or acquiring

wealth through buying and selling of goods.

L. H. Haney

Business is an institution organised and operated to provide goods and

services to society under the incentive of private gain.

B. O. Wheeler

Business is any enterprise engaged in the production and distribution

of goods for sale in the market or rendering services for a price.

R. N. Ownes

Characteristics/Features/Nature of Business

Characteristics/Features/Nature Explanation
Conducted by entrepreneurs to earn an adequate amount of
Economic activity profit and not to fulfil psychological needs.

Production or procurement of Goods are either manufactured or acquired from producers

goods and services and thereafter sold to final consumers at higher prices.

Business can sustain and grow only if it is earning a good

Profit earning amount of profit. If the profit motive is missing in a
transaction, then it cannot be considered a business activity.

Sale or exchange of goods and Involves the sale or exchange of goods and services
services between the seller and the buyer for value.

Dealings in goods and services Involves a regular exchange of goods and services so one
regularly single transaction or sale does not constitute a business.

Risk element Every type of business faces risk although the degree of risk
may vary from business to business.

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

Objectives of Business

Objectives are the end towards which all business activities are directed.

Role of Profit in Business

Although there are a couple of main objectives for business, earning profit is the sole motive of any
business activity. A business earns profit for various reasons:
i. Profit is the source of income for a business to flourish and is also a business’s lifeline. It satisfies
business needs so that they can survive in the competitive market.
ii. Only the incentives from profits can keep a business going and indulging in all its related activities. If
a large chunk of the profit is re-invested for expansion and diversification of production, then
that business can have a sound footing in the market.
iii. Profits are the rewards for bearing the risks and bringing in new products or processes to the
market. The desire to earn profit motivates the business to successfully undertake all the risks and
invest money.
iv. Profits and goodwill go hand in hand. A profit-earning firm has a better reputation/goodwill in the
market as compared to businesses which are in loss. The share value of a business increases with
an increase in profit. High-profit earning firms are more prone to get and raise loans and obtain credit
than ones which lag behind in profit earning. If a business is not earning profits, then it is considered
a non-viable venture.
v. Profit acts as an index of performance, i.e. the profit earnings will give an overall picture of how the
business is functioning in the market. High or adequate amounts of profits indicate efficient
management and lower profits or consistent losses indicate inefficiency of the management.
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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

Multiple Objectives of Business

Although the sole objective of every business is to earn maximum amount of profit, with growing
competition and diversity, multiple objectives have been put in place. All the efforts of a business are then
guided to achieve those objectives.

Keeping the prime objective in mind, a business strives to achieve the following objectives:
i. Market standing: It means the position of the firm in the market. A firm can build a strong position
in the market by providing good quality products to its customers and offering other product-related
benefits.
ii. Innovation: It refers to the development or invention of new ideas, techniques and methods to
meet new demands of the flourishing business and competitive market. It is an important objective
of business as no business can survive in the market without innovation.
iii. Productivity: It is calculated by comparing between output and input. Efficiency is measured
through productivity. To survive and grow, it is essential for the organisation to be productive.
iv. Physical and financial resources: Physical resources such as plants, machines, furniture and
office and financial resources (i.e. funds) are required by every business organisation to run the
organisation.
v. Maximum profit: Profit is the excess of revenue over cost. The purpose of every business is to
earn adequate amount of profit. A business can sustain and grow only if it is earning a good
amount of profit.
vi. Manager performance and development: Mangers control and coordinate the various activities
of business. Thus, manager performance and development become important objectives of
business.
vii. Worker performance and attitude: Organisations should work upon improving performance of
workers and build a positive attitude towards work. This is because productivity and profits of any
organisation are dependent on workers’ performance and attitude.
viii. Social responsibility: Social responsibility of business refers to an obligation of a businessman to
act for the benefit of society. This is because the business does not run on its own; it requires

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS
resources of society to carry on its activities. It is essential that a healthy relationship is maintained
between society and the business.

Business Risks

Business risk may be defined in terms of the possibility of occurrence of losses or insufficient profits
because of various unexpected events which cannot be controlled by business.

Types of Business Risks

i. Speculative risk: Risks taken on the basis of forecasts and guesses can be termed speculative
risk. It involves an equal possibility of earning gains or incurring losses. It arises because of change
in market conditions like changes in government policies and fluctuation in demand and supply.
ii. Pure risk: Risks which cannot be predicted precisely is pure risk. A firm can incur only losses or
incur no loss at all. Pure risk can be the risk associated with theft, fire and various natural calamities.

Nature of Business Risks

i. Arise due to uncertainties: Change in government policies or natural calamities can be some
uncertain reasons which can cause a business risk as the outcome of such events are unknown to
all.
ii. Essential part of business: Risk is an essential part of business and cannot be avoided. Every
type of business faces risk although the degree of risk may vary. A business risk can be reduced but
cannot be eliminated.
iii. Depends on the nature of business: The degree of risk which a business faces depends on the
nature and size of the business. A large-scale business is more prone to risks than a small-scale
one. For instance, a business which produces goods of daily use, such as soap and toothpaste,
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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS
faces a lower business risk than a business which produces fashion goods which are highly
dependent on consumer preferences.
iv. Profit—the reward for bearing risk: A business earns profit for undertaking risk. ‘No pain, no gain’
goes hand in hand with ‘no risk, no gain’ in business. Higher the degree of risk involved, higher the
amount of profit earned and vice versa.

Causes of Business Risks

Causes Description
Natural causes Unforeseen natural calamities cause heavy and irreplaceable loss to life,
property and income

Flood Earthquake Lightning

Human causes Loss to business because of human behaviour

Strikes Work stoppage due Riots

to power outage

Economic Changes in market conditions

causes

Fluctuations in
price Change in demand Change in technology

Other causes Caused due to unforeseen events

Fluctuations in
exchange rates Mechanical failures Political disturbances

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

Profession
A profession is an occupation where individuals with specialised knowledge and qualification provide
specialised services in the relevant field to the masses to earn a living. Each profession is distinct from the
other.
Doctor Lawyer Teacher

Employment
People are hired to work regularly by organisations. Salaries or wages are paid to employees in exchange
for the work or service provided to a company during their tenure in the company.

Employee Worker

Basis Business Profession Employment

By an entrepreneur After the completion After receiving an
Starting and after the fulfilment of a professional appointment letter
of certain legal degree or a course and service
formalities from an institute agreement
Capital Depends on the scale Limited capital is No capital is required
investment and nature of the required
business
Risk Risk & uncertainty A comparatively low Negligible risk
are always present degree of risk is involved

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

involved

Transfer of Possible on fulfilment Not possible as the Not possible

ownership of certain legal professional has the
formalities required degree and
skills which cannot be
transferred to the other
person
Reward Profit earned Professional fees Salary or wages
Code of No code of conduct Prescribed by According to the terms
conduct professional and conditions laid
associations down by the
concerned
organisation
Qualification No minimum Prescribed Depends on the
qualification is professional nature of the job
required qualification is
necessary

Classification of Business Activities

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS

Industry

Industry refers to economic activities involving constituents of production where raw materials undergo
change and get converted to finished products. It creates form utility as raw material is converted to a
useful finished product. It is also a group of firms producing the same goods. For example, the sugar
industry comprises all the firms producing sugar. Industries are again classified into three categories:

i. Primary industries: Under these industries, activities related to extraction and production of
natural resources and reproduction and development of living species are undertaken.
Farming, mining, lumbering, hunting, fishing operations, breeding farms and poultry farms are
examples of primary industries. These industries are classified into extractive industries and genetic
industries.
a. Extractive industries: Products are extracted from natural resources such as soil and water.
Manufacturing industries convert the products of these industries into useful goods. Examples:
Farming, mining, lumbering, hunting and fishing operations
b. Genetic industries: They include breeding and reproduction of plants and animals.
Examples: Cattle breeding farms, poultry farms, fishing hatcheries
ii. Secondary industries: Final products of primary industries are processed and converted to
final goods by secondary industries. Iron mining belongs to primary industries, whereas
manufacturing of steel falls under secondary industries. Secondary industries are further classified
as manufacturing industries and construction industries.
a. Manufacturing industries: These industries convert raw materials or semi-finished products
into finished products. For example, sugarcane is converted to sugar. These industries are
divided into the following categories:
1. Analytical industry: A raw material is analysed and separated into different products.
Example: Oil refinery
2. Synthetic industry: Different raw materials are combined to produce a new product.
Examples: Cement industry, cosmetic industry
3. Processing industry: This industry involves successive stages in order to produce the
product. Examples: Sugar industry, paper industry
4. Assembling industry: Different parts are assembled to make a new product. Examples:
Television, car, washing machine, computer
b. Construction industries: These industries are engaged in construction of buildings, dams,
roads and bridges. These industries require engineering and architectural skills.
iii. Tertiary industries: These industries act as a service provider for the primary and secondary
industries and for trade-related activities. Examples: Transport, banking, insurance, warehousing,
advertising

Commerce

Activities which fall under the purview of commerce involve helping directly or indirectly in
distributing goods and services from the producers to the users or ultimate consumers. Hence, we
can say that the gap between producers and consumers is removed by commerce. Commerce can be
further classified into trade and auxiliaries to trade.

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BUSINESS STUDIES NATURE AND PURPOSE OF BUSINESS
1) Trade: It refers to buying and selling of goods and services. It is only through trade that goods are
made available to consumers from manufacturers. Trade can be classified into two types:
a) Internal trade: Internal/home/domestic trade is trade which occurs within the geographical
boundaries of the country. It is further classified into wholesale trade and retail trade.
i) Wholesale trade is concerned with buying and selling of goods on a large scale.
ii) Retail trade is concerned with buying and selling of goods in smaller quantities.
b) External trade: Trade which occurs beyond the geographical boundaries of the country
between people and organisations is called external trade. External trade can be classified into
import, export and entrepôt.
i) Import trade: Goods are purchased from foreign countries.
ii) Export trade: Goods are sold to foreign countries.
iii) Entrepôt trade: Imported goods are exported to the other country again.

2) Auxiliaries to trade refer to activities which support trade. Generally, these activities are called
services as they eliminate various hindrances which take place when goods are produced and
distributed. The following are the auxiliaries to trade:

i. Transport and Communication: Production and consumption of goods take place at different
locations. Thus, it is essential to move goods from the place of production to the place of
consumption. Transport facilitates this movement and transfers raw materials to the place of
production. In addition to transport facility, communication is required so that information can be
exchanged between producers, traders and consumers.
ii. Banking and Finance: A business cannot get going unless funds and investments are available
for purchasing raw materials and meeting day-to-day expenses. It can obtain funds from banks and
financial institutions by taking loans, and thus, banks overcome the problem of funds for
businesses. Banks help businessmen in internal and external trade.
iii. Insurance: We know that every kind of business involves various types of risks such as risk of loss
due to fire, theft or damage, and risk of accident. To be protected from such risks, a business can
opt for insurance. Insurance provides protection from all kinds of risks and charges fees (called
premium) in return.
iv. Warehousing: Production and consumption of goods do not take place simultaneously. There is a
time gap between them. Hence, some place is needed to store the goods before supplying them to
the ultimate consumers.
v. Advertising: It is one of the tools used to promote a product. Promotion of the product helps in
increasing its sales. Advertising informs customers about the features of a product and convinces
them to buy it.

Factors to be Considered while Starting a Business

Factor
Selection of business line
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Explanation
Dependent on many factors such as
 Demand of consumers
 Interest area of entrepreneur
 Profit margin in the production of a particular product
 Technical knowledge which an entrepreneur possesses for
the production of a particular product
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Size of the firm
Choice of ownership form
Location of business Depends on the availability of following factors:
organisation
Financing the proposition
Physical facilities
Plant layout
Competent and committed Requirement of skilled and unskilled workers and managerial staff
workforce
Tax planning
Launching the enterprise
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Stable and certain market conditions + Availability of capital →
Large-scale operations can be started
Uncertain market conditions + High risks → Small size business
would be selected
Depends on
 Business line
 Capital requirements
 Owners’ liability
 Profit distribution
 Legal formalities
 Continuity of business
 Raw materials and labour
 Power supply
 Banking
 Transportation
 Communication
 Warehousing
Finance is required at every stage of a business from the start point
of business and purchase of fixed assets to continuous
investment in the business. A proper financial analysis helps
determine
 Required capital amount
 Capital sources
 Best ways to use capital
Depend on
 Nature and size of business
 Funds availability
 Production process
After the determination of physical facilities, the layout plan should be
drawn by the entrepreneur. In the layout plan, arrangement of
physical facilities is shown.
should be identified and planning should be done on how to provide
training and motivation to employees.
Tax laws influence the profit margin and working of the business.
Hence, it becomes essential for the business to do tax planning well
in advance.
After taking decisions related to the above mentioned factors, the
enterprise can be launched.
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