INTRODUCTION TO BUSINESS

Unit 1
• Concept & Nature of Business
In layman terms, business is to get something
at low cost and sell it at a higher cost, the
margin produced between is the profit.
Business is derived from the word ‘busyness’
meaning engaged in an activity.
Nature of business
• Important institution in society
• Be it for the supply of goods or services
• Creation of job opportunities
• Offer of better quality of life
• Contributing to the economic growth of the
country.
Characteristics of business
• Economic activity (monetary return)
• Production or trading of goods or services for sale
• Sale or exchange of goods and services
• Regularity in dealings
• Profit earning (by increasing the volume of sale or cost
cutting)
• Risk factor
• Uncertainty of returns (huge capital to sustain)
• Legal activity
• To carry on any business the enterprise has to
perform four major functions namely,
• Financing
• Production
• Marketing
• Human resource management
• Financing: mobilizing and utilizing funds for running a
business enterprise.
• Production: the conversion of raw material into
finished goods.
• Marketing: facilitating the exchange of goods &
services from producers to the people who need
them, at a place they require, at a time they need & at
a price they are ready to pay.
• HRM: ensuring the availability of working people who
have proper skills to perform various jobs in a firm.
 Classification of business
Business

Industry Commerce

Primary Secondary Tertiary

Starting a business
• Selection of line of business
• Size of the firm
• Choice of form of ownership
• Location of business enterprise
• Financing the preposition (personal, shareholder, debenture)
• Physical facilities
• Plant layout
• Competent and committed workforce
• Tax planning (grants/exemption)
• Launching the enterprise
• Difference between an entrepreneur and a
businessman
• A businessman makes his place in the market with
his efforts and dedication, whereas an entrepreneur
creates the market for his own business.
• Businessman is a market player, entrepreneur is a
market leader.
• Business starts from an existing idea or concept,
entrepreneur starts with his own idea or concept.
 Classification of business
Every product has a long process of getting
manufactured and delivered to the customer.
Broadly there are two categories:
• Industry (production)
• Commerce (distribution)
Industry
Business activity related to the raising, producing,
processing or manufacturing of products.
• Products: Producer’s goods and consumers'
goods
• Producer’s goods are used by the
manufacturers for producing some other
goods. Eg. Machinery, tools, equipments etc
• Consumer’s goods are used by consumers. Eg.
Foodgrains, cosmetics, etc.
• Industry: group of factories specialising in a
particular product line (all cement factories
come under cement industry).
• Extracting materials like coal, petroleum
(extractive industry)
• Processing and converting raw materials into
finished products (manufacturing industry)
• Construction activity like buildings, dams,
bridges, roads etc. (construction industry)
Types of industry:
• Primary industry: concerned with production of goods with the help of
nature. Eg. Agriculture, farming, forestry, fishing.

• Genetic industry: engaged in re-production and multiplication of certain

species of plants and animals with the object of sale. The main aim is to
earn profit from such sale. e.g. plant nurseries, cattle rearing, poultry,
cattle breeding, etc.

• Extractive industry: extraction or drawing out goods from the soil, air or
water. Generally products of extractive industries come in raw form and
they are used by manufacturing and construction industries for producing
finished products. e.g. mining industry, coal mineral, oil industry, iron ore,
extraction of timber and rubber from forests, etc.
• Manufacturing industry: engaged in transforming raw
material into finished product with the help of machines and
manpower.

• Construction industry: This industry is different from all other

types of industry because in case of other industries goods can
be produced at one place and sold at another place. But goods
produced and sold by constructive industry are erected at one
place.
• Service industry: The main industries, which fall under this
category, include hotel industry, tourism industry,
entertainment industry, etc.
• Commerce
Commerce is mainly concerned with distribution of
goods. It embraces all those functions which are
essential for maintaining a free and uninterrupted flow
of goods. Therefore, the term commerce includes ‘trade’
and ‘aids to trade’.
• Trade
The term ‘trade’ is used to denote buying and selling.
Therefore, one who buys and sells is a trader. A trader is
a middleman between the producer and the consumer.
Trade may be wholesale trade or retail trade.
 • Aids to trade (auxiliaries to trade)
Auxiliaries to trade
Transportation
warehousing Insurance
Banking
Advertising
• Transportation: Transport can be of three types: i. Land transport - road,
rail ii. Air transport - aeroplane iii. Water transport - boat, ship.

• Warehousing: Storage is indispensable in these days of mass production.

The goods should be stored carefully from the time they are produced till
the time they are sold, hence, the need for warehousing. Warehouses are
also called godowns.

• Insurance: The goods may be destroyed while in production process or in

transit due to accidents, or in storage due to fire or theft, etc. Insurance
companies come to their rescue in this regard. They undertake to
compensate the loss suffered due to such risks. For this purpose, the
business has to take an ‘insurance policy’ and pay a certain amount
regularly, called ‘premium’.
• Advertising: The producer, through advertisement,
communicates all information about his goods, to the
prospective consumers and create in them a strong
desire to buy the product.
• Banking: To start the business or to run it smoothly we
require money. Banks supply money. A bank is an
organization which accepts deposits of money from the
public, withdrawal on demand or otherwise, and lends
the same to those who need it. Banks also provide
many services required for the business activity.
 FORMS OF BUSINESS ORGANISATION

To carry out any business and achieve its objective of earning profit it is required to bring
together all the resources and put them into action in a systematic way, and coordinate
and control these activities properly. This arrangement is known as business
organisation.

• (1) Sole proprietorship

• (2) Partnership
• (3) Joint Hindu Family
• (4) Cooperative Society
• (5) Joint Stock Company
 SOLE PROPRIETORSHIP
• The term ‘sole’ means single and ‘proprietorship’ means
‘ownership’. So, only one person is the owner of the
business organisation. This means, that a form of business
organisation in which a single individual owns and manages
the business, takes the profits and bears the losses, is
known as sole proprietorship form of business organisation.
• J.L. Hanson: “A type of business unit where one person is
solely responsible for providing the capital and bearing the
risk of the enterprise, and for the management of the
business.”
 CHARACTERISTICS OF SOLE PROPRIETORSHIP FORM
OF BUSINESS ORGANISATION
• Single Ownership
• No Separation of Ownership and Management
• Less Legal Formalities
• No Separate Entity
• No Sharing of Profit and Loss
• Unlimited Liability
• One-man Control
 MERITS OF SOLE PROPRIETORSHIP FORM OF
BUSINESS ORGANISATION
• Easy to Form and Wind Up
• Quick Decision and Prompt Action
• Direct Motivation
• Flexibility in Operation
• Maintenance of Business Secrets
• Personal Touch
 LIMITATIONS OF SOLE PROPRIETORSHIP FORM
OF BUSINESS ORGANISATION
• Limited Resources
• Lack of Continuity
• Unlimited Liability
• Not Suitable for Large Scale Operations
• Limited Managerial Expertise
Partnership
‘Partnership’ is an association of two or more
persons who pool their financial and
managerial resources and agree to carry on a
business, and share its profit. The persons
who form a partnership are individually
known as partners and collectively a firm or
partnership firm’.
• They will share the profits and losses in the
agreed ratio. In fact, for all terms and conditions
of their working, they have to sit together to
decide about all aspects. There must be an
agreement between them. The agreement may
be in oral, written or implied. When the
agreement is in writing it is termed as
partnership deed. However, in the absence of an
agreement, the provisions of the Indian
Partnership Act 1932 shall apply.
 CHARACTERISTICS
• Two or More Persons
• Contractual Relationship: persons must be
competent to contract. Thus, minors, lunatics and
insolvent persons are not eligible to become the
partners.
• Sharing Profits and Business
• Existence of Lawful Business: Any agreement to
indulge in smuggling, black marketing etc. cannot be
called partnership business in the eyes of law.
• Principal Agent Relationship: There must be an
agency relationship between the partners. Every
partner is the principal as well as the agent of the
firm. When a partner deals with other parties
he/she acts as an agent of other partners, and at
the same time the other partners become the
principal.
• Unlimited Liability: They are jointly as well as
individually liable for the debts and obligations of
the firms.
 MERITS OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION
• Availability of Larger Resources
• Better Decisions: collective wisdom prevails and
there is less scope for reckless and hasty decisions.
• Flexibility: At any time the partners can decide to
change the size or nature of business or area of its
operation after taking the necessary consent of all
the partners.
• Sharing of Risks: The losses of the firm are shared by all
the partners equally or as per the agreed ratio.
• Keen Interest: Since partners share the profit and bear
the losses, they take keen interest in the affairs of the
business.
• Benefits of Specialisation
• Protection of Interest: the rights of each partner and
his/her interests are fully protected. If a partner is
dissatisfied with any decision, he can ask for dissolution of
the firm or can withdraw from the partnership.
• Secrecy: Business secrets of the firm are only known to
the partners.
LIMITATIONS OF PARTNERSHIP FORM OF
BUSINESS ORGANISATION
• Unlimited Liability
• Instability
• Limited Capital
• Non-transferability of share
• Possibility of Conflicts
TYPES OF PARTNERS
• Based on the extent of participation (‘Active
Partners’ and ‘Sleeping Partners’)
• Based on sharing of profits: ‘Nominal
Partners’ (lend their names, neither invest nor
participate) and ‘Partners in Profits’ (shares
the profits of the business without being liable
for the losses, only minors) .
• Based on Liability: ‘Limited Partners’ (The liability of
limited partners is limited to the extent of their capital
contribution) and ‘General Partners’ (partners having
unlimited liability)
• Based on the behaviour and conduct exhibited: (a)
Partner by Estoppel (A person who behaves in the
public in such a way as to give an impression that
he/she is a partner of the firm); and (b) Partner by
Holding out (if a partner or partnership firm declares
that a particular person is a partner of their firm, and
such a person does not disclaim it)
 FORMATION OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION
• Minimum two members.
• Select the like-minded persons.
• There must be an agreement among the partners
to carry on the business and share the profits and
losses, duly signed by the all the partners.
• The partners should get their firm registered with
the Registrar of Firms of the concerned state.
 JOINT STOCK COMPANY
Characteristics of a company
• Incorporated association
• Artificial legal person
• Separate legal entity
• Perpetual existence
• Common seal
• Limited liability
• Transferable shares
• Separate property
• Delegated management
Distinction Company Partnership
Mode of creation By registration by Statute By agreement
Legal statute Legal entity distinct from Firm and partners are not
members, perpetual separate, no separate entity,
succession uncertain life
Liability Limited liability of members Unlimited liability
Authority Divorce between ownership Right to share management,
and management, mutual agency-implied
representative management authority
Transfer of share Transferee gets all the rights of Ordinarily no right of transfer
transferor
Resources Large and unlimited Personal resources of partners
are limited
General power Memorandum defines the Easy to change the agreement
scope of the company, and also the powers of the
alteration difficult partners
Legal formalities Audit, publication, Registration not compulsory,
registration..lots of formalities no audit, no publication of
accounts
Types of company
• Chartered: incorporated under a special charter by a monarch. Eg: East India
Company, The Bank of England. Has wide powers, in case the company deviates
from its business as prescribed by the charter, the Sovereign can close the
company.
• Statutory: incorporated by Special Act passed by the Central or State legislature.
RBI, SBI, LIC are some examples. They derive their power from the Acts
constituting them and enjoy certain powers that companies incorporated under
the Companies Act have. The provisions of the Companies Act shall apply to
these companies also except in so far as provisions of the Act are inconsistent
with those of such special Acts (Sec 616 (d)). These companies are generally
formed to serve social needs and not for the purpose of earning profits.
• Registered/incorporated: formed under the Companies Act, 1956 or previous
Act. A certificate has to be issued by the Registrar of Companies.
 FORMS OF ORGANISATION OF PUBLIC ENTERPRISES

DEPARTMENTAL UNDERTAKINGS
• Oldest and traditional form of an organization
• established by the government and its overall
control rests with the Minister
• financed through government funds
• subject to budgetary, accounting and audit control
• accountable to the legislature
• Managed by civil servants
• Sovereign immunity
Merits
• Fulfillment of Social Objectives
• Easy to set up (created by administrative decision of the
government)
• Responsible to Legislature
• Control Over Economic Activities
• Contribution to Government Revenue
• Tax on the public is lesser
• Little Scope for Misuse of Funds
• Monitored by rules and regulations of the Ministry
Demerits
• Lack of flexibility
• Influence of Bureaucracy
• Red tapism
• Excessive Parliamentary Control
• Lack of Professional Expertise
• Inefficient Functioning
 STATUTORY CORPORATIONS

• FEATURES
• incorporated under a special Act of Parliament or State
Legislative Assembly
• an autonomous body and is free from government control
in respect of its internal management.
• accountable to parliament and state legislature
• managed by Board of Directors
• self sufficient in financial matters
• employees of these enterprises are recruited as per their
own requirement by following the terms and conditions of
recruitment decided by the Board
 MERITS
• Expert Management
• Internal Autonomy
• Responsible to Parliament
• Flexibility
• Easy to Raise Funds