Chapter 1 Nature and Purpose of Business

Part - A
Foundation of
Business

Chapter - 1
Nature and Purpose
of Business

Introduction
● All human beings, wherever they are, are
required to perform some or the other
activity to satisfy their needs.
● They pursue different occupations to earn
a livelihood and to get some psychological
satisfaction.
● Activities which human beings undertake
are known as human activities.
● Some of these activities are undertaken to
earn money but others are performed to
derive personal satisfaction.

(A) Non-economic Activities
● These are those activities which are
performed out of love, sympathy, care,
affection, sentiments etc.
● In simple words, these are those
activities which are not done with the
aim of earning money.
● The end result of non-economic activities
is not earning profit or creation of wealth
but it gives satisfaction.
● For example, doing charity work,
cooking at home, kitchen gardening etc.

(B) Economic Activities
● These are those activities which are
performed to earn livelihood.
● In simple words, these are those
activities which are undertaken with the
aim of earning money.
● The end result of economic activities
is earning profit or creation of wealth.
● For example, working in an office,
practising as a lawyer, working as a
teacher in a school etc.

Difference between Economic Activities
and Non-economic Activities
Basis Economic Activities Non-economic
Activities
1. Motive
2. Expectation
3. Purpose
4. Outcome
5. Examples
Earning money and
creation of wealth.
Money income is
expected from
these activities.
Creation of wealth.
Production of goods
and services.
Business, Profession
and Employment.
Social or
psychological
motive.
Money income is not
expected from
these activities.
Psychological
satisfaction.
Mental and personal
satisfaction.
Social service,
religious service
etc.

Types of Economic Activities
1. Business – Business refers to those
economic activities which are connected
with the production, purchase, sale or
distribution of goods or services with
the main objective of earning profit.
2. Profession – Profession refers to the
activities which require special
knowledge and skill to be applied by an
individual in his work to earn a living.
Those who are engaged in profession are
known as professionals.

3. Employment - It refers to an activity in
which an individual works regularly for
another person and get remunerated in
return. Those are employed by others
are known as employees. The persons
who employ others are known as
employers.

Comparison between Business,
Profession and Employment

Concept of Business
● Literal meaning of Business is “BUSY”.
● Business is defined as an economic activity
involved in the production and sales of
goods and services undertaken with the
motive of earning profit by satisfying
human needs in the society.
● In modern times, business is no longer
dealing only with goods or services. It
cannot be defined in terms of profit only.

Features/ Characteristics of Business
1.An Economic Activity: It means an activity
aimed at earning money. Business is also
aimed at earning money or livelihood by
satisfying human needs.
2.Production and procurement of goods and
services: Every business enterprise must
either manufacture the goods or it acquires
from producers. Goods may be consumer goods
or capital goods. Services means facility
offered to consumers like banking, insurance
etc.

3.Sale or exchange of goods and services:
Business involves transfer or exchange of
goods and services for value. The production
of goods and services for self consumption is
not business.
4.Dealing in goods and services on a regular
basis: It should be a regular activity. One
time sale or exchange will not be considered as
business. One single transaction of sale does
not constitute business. Regularity of
occurrence of business transaction is must.
5.Profit earning: Business always aims at
earning profit. If the profit motive is missing
in a transaction, then it cannot be considered as
business transaction.

6.Uncertainty of return/ Risk: In business
there is a presence of risk factor in a
business. There is always a possibility of less
amount of profit or even loss in business.

Multiple Objectives of Business
● Objectives are the end towards which the
activities of the business are directed.
These are the goals established to guide
the efforts of the company.

● The businessmen always have multiple
objectives. They cannot follow only one
objective.
● Earning profit is important and the prime
objectives of every business but it cannot
be the sole or only objective of business.

(A) Economic/ Organisational Objectives
● As business is an economic activity so the
most important objectives of business are
economic objectives.
(i) Growth – The success of any firm is measured
by the growth rate and growth is
measured in terms of sales, no. of employees,
no. of branches etc.
(ii) Profit – Profit is important for survival,
growth and expansion of business. Profit is
the reward for risk bearing.
(iii) Survival – The basic purpose of business is to
survive and exist in the market for a long
period of time. Earning of profit is must for it.

(B) Social Objectives
(i) Supply of Good Quality of Products – To
survive in the market for a long run and to
maintain the goodwill, the businessmen must
supply products with right quality at right
price.
(ii) Avoidance of Unfair Trade Practices – A
businessmen should not indulge himself into
unfair practices like black marketing,
adulteration, hoarding, overcharging etc.
(iii) Employment Generation – The businessmen
must create employment opportunities and
help in overcoming the problem of
unemployment in the society. This will improve
the public image.

(iv) Social Service or Community Service –
Participating in social service programmes adds
to the reputation of the company and a company
can establish its public image.
(v) Avoidance of Pollution – As the businessmen
has added to the spreading of pollution, so it
becomes the moral duty of the businessman to
come forward and help in solving the problem of
pollution. Eco-friendly techniques should be used.

(C) Human/ Personal/ Individual Objectives
● These are related to the employees of the
organisation. Employees are the most valuable
resources who contribute significantly to the
success in business.
(i) Providing good working conditions.
(ii) Payment of competitive and satisfactory wages
and salaries.
(iii) Personal growth and development of employee.
(iv) Peer recognition and mutual respect.
(v) Encouraging employees to take initiative and
participate in decision making.
(vi) Providing some special benefits to employees
like free housing, insurance facility etc.

Objectives of
Business
Economic
Objectives
Social
Objectives
Human
Objectives
1. Growth
2. Profit
3. Survival
1. Supply of good
quality products.
2. Generation of
employment.
3. Use of eco-friendly
techniques of
production.
4. Social welfare
1. Good working
conditions.
2. Reasonable
salary/wages
3. Mutual respect
4. Financial security
5. Job security

1. Survival – Profit is a source of income for a
businessman which becomes his means of
livelihood. Profit is needed to satisfy the
needs of the businessman and his family
members.
2. Expansion & Growth – The expansion of
business is possible only when sufficient
amount of profit is earned. A part of profit
is kept as reserve and used for the purpose
of growth and diversification.
Role of Profit in the Business
(Why earning profit is important for
business?)

3. An Index of Performance – Profit acts as
an index of performance of those who
manage the business. Higher profits indicate
the efficiency of management and vice versa.
4. Reward for Risk Bearing – The desire to
earn profit motivates the businessman to
bear the uncertainties and unexpected risks.
Profit and risk are directly related to each
other. Higher risk means higher profit and
lower risk means lower profit.
5. Helps to Gain Goodwill – A profit earning
company always has a better goodwill in the
market as companies running in loss. It helps
to increase the market price of shares.

Classification of Business Activities
The common bases of classification is on the basis
of function.

(A) Industry: Meaning and Types
● Industry refers to an activity which converts
raw material into useful products.
● Industry includes activities related to
production and processing as well as activities
related to rearing and reproduction of animals
or other living species.
● The purpose of industry is to create form
utility by converting raw material into useful
goods.
● The term industry is also used to refer to a
group of firms producing similar types of
goods.

● Industry may produce consumer goods or
capital goods.
● Goods such as breads, fruits, milk etc. are
consumer goods as they are directly used by
the consumers.
● Goods such as machinery, equipments, tools
etc. are capital goods as they are used in the
further production process to produce useful
products.

1. Primary Industry
● It includes all those industries which are
concerned with extraction of natural
resources and reproduction of living species.
(i) Generic Industry: These industries are
involved in the activities of rearing and
breeding of living organisms i.e., birds,
plants, animals etc.

Examples: Rearing of cattle for milk, dairy
farms, poultry farms, rearing of plants in
nursery, pisciculture etc.
(ii) Extractive Industries: These are those
industries which involve extraction of
something from natural resources.
The product of these industries can be used
directly or they become raw material for other
industries.
Examples: Extraction of minerals from earth,
fish from rivers & seas, timber from forest etc.

2. Secondary Industry
● It makes use of products extracted and
produced by primary industries as their raw
materials and produce finished goods.
For example, sugarcane is grown in farms and
the same is used to make sugar in the industry.

(a) Manufacturing Industries
● These industries are engages in the
process of conversion of raw materials or
semi-finished good into finished goods.
● These industries create form utility by
changing the form of raw materials into
finished products.

(i) Consumer Goods –
● The goods which can be directly consumed by
the consumer are known as consumer goods.
● These goods are used for day-to-day
consumption. For example, cloth, oil, soap,
bread etc.
(ii) Industrial Goods –
● The goods which are produced for
manufacturing consumer goods are known as
industrial goods like machinery, tools,
equipments etc., which are required to
manufacture consumer goods.

Types of Manufacturing Industries
(i) Analytical Industries – Here raw material is
broken into different parts to produce
finished products.
(ii) Synthetic Industry – Here two or more
materials are mixed to manufacture some
new product.
(iii) Processing Industry – Here the raw
material is processed through various stages
of production and then finished goods are
manufactured.
(iv) Assembly Industry – Here the various
finished goods are combined to produce a
new finished product.

(b) Construction Industry
● These industries are concerned with the
construction of buildings, dams, roads etc.
● These industries use the products of
manufacturing industries such as cement,
iron and steel, lime etc.
● The unique feature of these industries is
that their products cannot be
transferred or shifted to the market.
● They are constructed and remain at fixed
site only.

3. Tertiary/ Service Industry
● It is concerned with providing services which
facilitate a smooth flow of goods & services.
● This industry helps in the activities of the
primary and secondary industry.
● This industry provide services which
support the activities of primary and
secondary industry, that is why it is also
known as service industry.
Tertiary Industry
BankingTransport Insurance Advertising

(B) Commerce
● It refers to all those activities which help
directly or indirectly in the distribution of
goods to the ultimate consumer.
● There is no point of producing goods until and
unless they reach the ultimate consumer.
● All the problems/ hindrances are solved by
commerce.

Functions/ Role of Commerce
● Commerce is considered as the backbone of
industry.
● The goods produced by the industry reach
the ultimate consumer only because of
commerce.
1. Helps in Removing the Hindrances of Persons
● Goods are produced by a group of persons
called producers. These goods are produced for
another group of persons called consumers.
● The trade segment of commerce creates a link
between producer and consumers.
● Traders help in exchange of goods or services
from the producer to consumer.

2. Helps in Removing Hindrances of Place
● There is a place gap between the place of
production and the place of consumption.
● The transport segment of commerce helps in
removing the place gap.
● The transport moves goods from the place of
production to the markets which are easily
accessed by the customers.
3. Helps in Removing Hindrance of Risk
● The insurance branch of commerce helps in
removing the hindrance of risk by providing
protection and compensation to the insured.
● The common types of risks covered are: loss
by fire, loss by theft, loss by accident etc.

4. Helps in Removing Hindrance of Knowledge
● The consumer and buyer are unaware about the
new goods produced by the manufacturer.
● The advertisement branch of commerce helps in
removing the hindrance of knowledge by
spreading the awareness about the new
products and their utility.
5. Helps in Removing Hindrance of Exchange
● The common medium of exchange is circulated
by the banking branch of commerce.
● The banks help the buyers and the sellers in
making and collecting payments.
● Banks provide loans to business and they also help
in external trade by issuing letter of credit.

6. Helps in Removing Hindrance of Time
● Some goods are produced in a particular
season only but are demanded throughout the
year.
● Similarly, some goods are produced throughout
the year but are demanded in a particular
season.
● So, there is a time gap between the production
and consumption.
● Warehousing segment of commerce helps in
removing the problem of time gap.
● The goods can be kept safely in the
warehouses till they are demanded in the
market.

(A) Trade
● Trade refers to buying and selling of goods
and services.
● In simple words, it refers to exchange of
goods and services.
● The trade segment of commerce brings
together the manufacturer and the
consumer.
● The traders act as a link between the
manufacturer and the consumer.

Types of Trade
(i) Internal Trade
● It refers to buying and selling of goods
and services within the geographical
boundaries of a country.
● It is also known as home trade/ domestic
trade.
● Here, trading takes place in the home
currency only.

● The internal trade is of two types:
1. Wholesale Trade
● It refers to buying and selling of goods and
services in bulk quantity.
● The wholesalers buy goods from
manufacturers in bulk quantity and sell them
in small quantities to the retailers.
● A large amount of capital is required in
wholesale trade.

2. Retail Trade
● It refers to buying and selling of goods and
services in small quantities.
● The retailers buy goods from
wholesalers and sell these goods to the
ultimate consumers.
● A large amount of capital is not required in
retail trade.
● The retailer has to maintain a large variety of
goods.

(ii) External Trade
● It refers to buying and selling of goods
and services beyond the geographical
boundaries of a country.
● It is also known as international/ foreign
trade.
● In external trade, the market is very wide.
● Here, trading takes place in terms of foreign
currency only.
● The external trade involves completion of
various rules and regulations such as
licensing, custom clearance etc.

● External trade is of three types:
1. Export Trade
● It refers to sale of goods to a foreign
country or countries.
● Exports create inflow of foreign currency and
therefore, they are termed as positive items.
● Exports results in increasing the foreign
exchange reserves of any country.

2. Import Trade
● It refers to purchase of goods from a foreign
country or countries.
● Imports create outflow of foreign currency
and therefore, they are termed as negative
items.
● Imports results in decreasing the foreign
exchange reserves of any country.
● Import of technology or capital goods is
encouraged more as compared to consumer
goods.

3. Entrepot Trade
● It refers to import of goods for the purpose
of exports.
● In Entrepot, the goods are purchased from a
foreign country but not for consumption in
home country, but for selling these goods to
some other foreign country.

(B) Aids/ Auxiliaries to Trade
● The activities which help in smooth flow of
trade are known as Aids to Trade.
● These activities are known as services and
together constitute service sector or
tertiary sector of commerce.
● These help in removing various hindrances of
trade which arise in production and
distribution of goods.
Transport &
Communication
Banking &
Finance
Insurance
Warehousing
Advertising

1. Transport and Communication
● Transport refers to movement of goods from
one place to another.
● There is a big place gap between the place
where the goods are produced and the place
where they are consumed.
● This obstacle of place is removed by transport.
● Transport is helpful in movement of goods,
raw materials, resources and even the labour
from one place to another place.
● Communication helps in exchange of
information between producers, consumers
and traders.

2. Banking and Finance
● Banks and financial institutions provide credit
facility, loan etc. to provide finance for
smooth flow of business activities.
● Along with the provision of funds, the
commercial banks provide many other
facilities such as collection and deposit of
cheques, issue of bank draft etc.
● The bank also provide the facility of
overdraft, cash credit limit, arrangement and
payment in foreign currency in case of foreign
trade.

3. Insurance
● Business is full of various types of risks.
Insurance provides protection from some
kinds of risk.
● Insurance is a contract between the insurer
and the insured.
● The insurance company provided protection to
employees also against the risk of accident
while working.
● Businessmen have to pay a nominal amount of
premium and in return they get compensation
for the loss from the insurance company.

4. Warehousing
● Usually there is a time gap between the
production and consumption of goods.
● Goods are not consumed immediately when
these are produced.
● Special arrangement has to be made to store
the goods to prevent the loss and to keep
them fresh.
● Warehouses helps the businessmen to
overcome the problem of storage.
● Warehouses facilitate the availability of
goods whenever required.

5. Advertising
● It is not possible for the manufacturer or
trader to contact each & every customer.
● Advertising helps in overcoming this problem.
● Advertisement spreads awareness among the
consumers regarding new goods and their
uses.
● It directly promotes the sale of goods.
● It is a very good technique of sales promotion
and improves the knowledge of customers.
● Through advertising the businessmen can
reach to a large number of potential
consumers.

Business Risk
● Business risk refers to the probability of
losses or inadequate profits due to
uncertainties or unexpected events, which are
beyond control.
● Business risk means a chance of incurring losses
or less profit than expected.

Nature of Business Risk
1. Arises due to uncertainties -
● Uncertainties mean when you are not sure of
what is going to happen in future.
● Uncertainties lead to business risk.
2. Risk is essential part of business –
● Without risk there cannot be business. It is
an important feature of business.
● No business can avoid risk although degree of
risk may vary.
● Risk can be reduced but cannot be eliminated.

3. Degree of risk depend upon the nature and
size of business –
● The degree of risk depends upon the type of
business.
● A business operating a large scale bears more
risk as compared to small-scale business.
4. Profit is the reward for bearing the risk –
● Business earn profit because they are
bearing risk.
● Larger the risk more is the profit & vice versa.
● An entrepreneur bears risk with the
expectation of earning profit.

Causes of Business Risk
1. Natural Causes – Human beings have no
control over it. Natural calamities like
earthquake, flood, drought etc. affect a
business a lot and can result in heavy losses.
2. Human Causes – They are related to a
chance of loss due to human being or
employees of the organisation.
The employees may be careless and may
mishandle the machinery and resources which
can also bring heavy losses by wastage of
resources.

3. Economic Causes –These are related to a
chance of loss due to change in market
condition.
There can be price fluctuations, change in
fashion, taste and demand. There can be a
change in the level of competition. All these
have a direct impact on the earnings.
4. Political Causes – All the causes which
result in damage of assets are considered as
physical causes.
For example, change in technology leads to
outdated machinery, use of old technology,
mechanical defects etc.

Types of Business Risk
1. Insurable Risks – These risks are those which
can be recovered. The losses which can be
made good, or losses for which company can
get compensation from insurance company are
called insurable risks. Generally the natural and
physical risks are insurable risks.
2. Non-insurable Risks – The risk for which no
protection is available are called non-insurable
risks.
Generally the economic and human risks are
non-insurable risks.

* Whether the risk is insurable or non
insurable, only the loss can be shared but
risk remains.
3. Speculative Risks – Speculative risks involve
both the possibility of profit as well as loss.
Example – change in demand, change in
fashion etc.
4. Pure Risks – Pure risks involve only
possibility of loss or no loss. Their
occurrence results in loss and no occurrence
means no loss. Example – chance of fire,
theft, strike etc.

Presented by –
Ritvik Tolumbia
CS, CWA, M.Com (ABST),M.A (Eco), B.Ed

Chapter 1 Nature and Purpose of Business

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