Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 1 Nature and Significance of Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.
Nature and Significance of Management NCERT Solutions for Class 11 Business Studies Chapter 1
Nature and Significance of Management Questions and Answers Class 11 Business Studies Chapter 1
Which of the following does not characterise business activity?
(a) Production of goods & Services.
(b) Presence of risk
(c) Sale or exchange of goods & Services
(d) Salary or wages.
(d) Salary or wages.
Which of the broad categories of industries cover oil refinery and sugar miles?
(d) None of them.
Which of the following cannot be classified as an auxiliary to trade?
The occupation in which people work for others and get remunerated in return is known as –
(d) None of them.
The industries which provide support services to other industries are known as –
(a) Primary industries
(b) Secondary Industries
(c) Commercial industries
(d) Territory industries.
(d) Territory industries.
Which of the following cannot be classified as an objective of business?
(b) Secondary Productivity
(d) Profit earning.
Business risk is not likely to arise due to –
(a) Changes in government policy
(b) Good management
(c) Employee dishonesty
(b) Good management
Short Answer Type Questions
State the different types of economic activities.
Economic activities are those by which we can earn our livelihood. Economic activities may be further divided into three categories, namely business, profession, and employment, e.g., a person running a garment business, a doctor operating in his clinic, and a teacher teaching in a school – all three are doing so to earn their livelihood and are, therefore, engaged in economic activity.
Why is business considered an economic activity?
Business is essentially an economic activity because it involves the production and distribution of goods and services for earning profits.
Business As An Economic Activity
(1) Efficient use of Resources: A business enterprise makes efficient use of scarce resources like men, money, material and machine. Business involves the efficient utilisation of various resources for the production of goods and services. Labour, materials, capital, and machinery are important inputs of the business. The businessman organizes these resources to utilise them for producing and supplying the goods desired by society.
(2) Creation of Utilities: Business makes goods more useful by creating utility, such as form utility, place utility, and time utility. When raw materials are converted into finished goods, form utility is created. Goods are transported from the producer to the consumer and thus place utility is created. Moreover, business firms carry on production throughout the year and store goods in warehouses to make them available when demanded by the consumers. This is how time utility is created.
(3) Satisfaction of Human needs: Business activities are intended to serve the general public. They do so by making available those goods and services which can satisfy the needs of society. Moreover, the business also satisfies the needs of businessmen through economic gains or profits. The satisfaction of customers is an important economic activity of a business.
(4) Regular dealings: A single transaction cannot a business firm is continuously engaged in production and exchange goods and services for its customers.
(5) Profit motive: People pursue business as an occupation o means of livelihood. The main purpose of every business activity is to earn profits. In other words, business is a source of income for t businessman. It keeps him busy in an economic occupation. A business that does no earn profits cannot survive for long. Profits are essential for growth and expansion.
(6) Risk element: As an economic activity, business involves an element of risk of economic loss. Such loss might occur because of theft, fire, earthquake, flood, etc. Various other risk factors are chan in consumers tastes, fashion and demands changes in technology increase in competition, shortage of raw-material, etc. affect the business.
Explain the concept of business.
The term ‘business’ is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense, business refers to any occupation in which people regularly engage in an activity with an objective of earning profit: The activity may consist of production or purchase of goods for sale or exchange of goods or supply of services to satisfy the needs of other people in the society.
How would you classify business activities?
Business Activities – Classification
All business activities may be classified mainly into two groups
The industry covers production, manufacturing, or processing of goods and services, while commerce is concerned will d distribution of goods and services to ultimate users or consumers. Industry 3 and commerce may further sub-divided into the followings:
What are various types of industries?
The industry refers to economic activities, which are connected with the conversion of resources into useful goods. Industries may be divided into three broad categories namely primary, secondary and tertiary. Primary Industries include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc.
Explain any two business activities which are auxiliaries to trade. .
Auxiliaries to trade
These are services facilitating trade. In other words, these services remove the hindrances before the business and are known as transportation, communication, banking, insurance, warehousing and marketing, etc.
(1) Transportation – It creates a place of utility in goods by overcoming the business of distance. From each other. The hindrance of this distance is removed by transportation facilities. Goods produced at one place may be transported to different comers of the world. The means of transport available to us are as under:
Transport widens the market and helps to equalise prices at different places.
(2) Communication – The successful operation of the business requires that there must be contact between buyers and sellers of the commodity. Communication between diem is required for placing order, making complaints, making payments, deciding the terms of transactions and other related information. The various means of communication are correspondence, telegram and telephone services. The modem means of communication are fax, STD services, pagers and cellular phones etc. Communication facilities like postal services, telephone and others are necessary’, so that producers, traders and consumers, interact with each other.
(3) Insurance – There is risk in every walk of business. There is risk from fire, damage, accident and storms etc. Loss of goods due to misshaping damages the prospects of the business. It is, therefore, necessary that there must be certain agencies to undertake these risks. Insurance is based on the pooling of risks. There are insurance companies, which issue fire, marine, accident and other policies and undertake the responsibility to compensate for the loss upon payment of certain premiums.
(4) Warehousing – There is time gap between the production and consumption of goods, so it is necessary that goods must be kept safe, secured and intact for this period. This hindrance of the business is removed by storing the goods in various private and public godowns. Certain goods are stored in cold storage for their off-season use. Warehousing these days has become an important element of the business. Warehousing helps to stablise prices through the continuous supply of goods.
(5) Marketing – Marketing in modern business has assumed a very’ important place. In order to accelerate the pace of growth of the business, it is necessary that sales should go on multiplying. Competition being in the market it is very difficult to push sales. It has now been necessary for the business to adopt sales promotion and advertising measures together with attractive packaging and standard quality of goods. Advertising and publicity are the tools helpful in marketing the products and to create the demand of the product in the consumer’s minds.
What is the role of profit in business?
An objective is the starting point of business. Every business is directed to the achievement of certain objectives. Objectives refer to all the business people want to get in return for what they do. It is generally believed that business activity is carried on only for profit.
Businesspersons themselves proclaim that their primary objective is to produce or distribute goods or services for a profit. Every business is said to be an attempt on the part of business people to get more than what has been spent or invested or, in other words, to earn profit which is the excess of revenue over cost.
However, it is being increasingly realized nowadays that business enterprises are part of society and need to have several objectives, including social responsibility to survive and prosper in the long run. Profit is found to be a leading objective but not the only one.
Although earning a profit cannot be the only objective of a business its importance cannot be ignored. Every business is an attempt to reap more than what has been invested, and profit is the excess of revenue over cost.
Profit may be regarded as an essential objective of business for various reasons:
- It is a source of income for business persons
- It can be a source of finance for meeting the expansion requirements of the business
- It indicates the efficient working of the business
- It can be taken as society’s approval of the utility of business and
- It builds up the reputation of a business enterprise.
But, earning a profit cannot be the sole objective of a truly successful business. In the words of Urwick, “Earning of profit cannot be the objective of business more than eating is the objective of living. In fact, service to the community is the real objective of the business.
Therefore, modem business houses aim at making a profit through service. As Ford had observed mere money chasing is not business’. This may result in the neglect of social objectives. However, too much emphasis on profit to the exclusion of other objectives can be dangerous for good business.
Obsessed with profit, Business managers may neglect all other responsibilities towards customers, employees, investors, and society at large. They may even be inclined to exploit various sections of society to earn an immediate profit.
This may result in the non-cooperation or even opposition from the affected people against the malpractices of business enterprises. The enterprises might lose business and may be unable to earn a profit. That is the reason why there is hardly any sizable business enterprise whose only objective is the maximization of profit.
What is business risk? What is its nature?
Business Risks – Meaning & Nature
Business risk arises due to uncertainly about the future course of action. It has already been observed that one of the basic features of the business is ‘risk’, i.e.. possibility of some loss or adverse happening. There is always a possibility- of loss in business because of uncertainties in the natural, political, economic, social, and technological environment.
For instance, who could foresee the terrorist attack on the World Trade Centre (WTC) in New York on 11th September 2001,? This single happening had adverse effects on investors, stockbrokers, airlines, hotels, importers, exporters, and other business firms throughout the world. There are uncertainties regarding prieefall, technological changes, competition, and change in government policies, etc.
Meaning and Types of Business Risk – According to B O. Wheeler, ”Business risk means the possibility of some occurrence which might lead to some loss for the business”. In other words, business risk refers to the possibility of loss or inadequate profits due to some unexpected events which are beyond the control of the businessman. For example, the demand for a firm’s product may go down due to changes in fashion or the availability of better substitutes. This might lead to a loss for the firm.
In the words of C.O. Hardy “Business risk refers to uncertainty as regards cost, loss or damage.” In fact, the risk is an inherent feature of any business. Business risks are common to all businessmen from a small vendor to a big industrialist. There may, however, be differences in degrees of different types of risks. The possibility of loss for the business does exist though it is not measurable.
The most common types of business risks include :
- Purl and Speculative Risks.
- Property and Personal Risks
- Internal and External Risks
- Static and Dynamic Risks.
- Insurable and Non-insurable Risks.
Nature of Business Risks – The nature of business risks shall be clear from the following features :
(i) Uncertainty – Uncertainty is an important feature of any business. Fluctuations in demands or prices, the possibility of book debts turning into bad debts, wrong estimates of demand and supply, changes in Government policies, improvements in technology, natural calamities, etc., are some of the examples of uncertainties which influence the business.
(ii) Risk is an essential element of business – Risk is an inevitable feature of the business. No business can be run without some element of risk in it. In fact, business means assuming risk Peter F.Drucker remarked, “Bearing of risk is an essential element of the business.” For example, when a businessman decides to introduce a new product, he is taking a calculated risk. Business activities are planned for the future and the future is always uncertain. Therefore, the risk is inherent in the business.
(iii) Reward for undertaking risks is profit – ‘No risk, no gain is an important principle which is applicable to all types of business. An entrepreneur assumes risks and in consideration, he gets a reward, that is profit. Generally, heavy risks result in higher profits.
(iv) Degree of risk depends upon the nature of business – The nature of business (/.<?., types of goods and services produced and sold) and the volume of operations determine the degree of risk. For instance, a business dealing in fashionable items has a higher degree of risk as the current fashion may not last long.
(v) Variability – The degree of risk is influenced by the time factor. For instance, a business may experience a greater degree of risk when there is political instability in the country or fear of terrorism, communal riots, natural calamity, etc. The degree of risk also varies with the time period and degree of competition.
(vi) Difficult to measure – It is very difficult to measure accurately the degree of business risks. A businessman cannot predict all the risks likely to arise in business.
Long Answer Questions
Explain the characteristics of the business.
The features or essential characteristics of business activities are:
- Economic activity: Business is an economic activity of the production and distribution of goods and services. It provides employment opportunities
- Buying and Selling: The business involves the purchase of raw material, plants, and machinery, stationary, property, etc. And also, it sells the finished products to the consumers, wholesalers, retailers, etc.
- Continuous process: Business is not a one-time activity. A single transaction of trade cannot be termed as a business. It is a continuous process of production and distribution of goods and services.
- Profit Motive: The primary goal of a business is usually to obtain the highest possible level of profit, Profit is an indicator of success and failure of business. It is a return on investment. Profit acts as a driving force behind all business activities.
- Risk and Uncertainties: Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated with every business.
Compare business with profession and employment.
Comparison Between Business, Profession And Employment
Given below are the main points of difference between business and other economic activities, e.g. profession and employment or service.
(1) Mode of Establishment-A business enterprise is established when an entrepreneur takes a decision to start some business activity. In a profession, on the other hand, the membership or enrolment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service between employer & employee.
(2) Nature of Activity – A business deals with providing goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.
(3) Qualifications – No formal education is required in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In the case of employment, the qualifications required depend upon the nature of the job.
(4) Main Objective – In business, the basic motive is to earn profits. Every business involves the element of profit on capital invested. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.
(5) Capital – A business can’t be run without the amount of capital. Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering professional services. There is no need for capital in case of employment.
(6) Degree of Risk Involved – There is an inherent element of risk in business and profession, but practically no risk is involved in case of employment. There can be losses in business, but returns are never negative in profession and employment.
Comparison between Business, Profession and Employment
Explain with examples the various types of Industries.
Industries may be divided into three broad categories namely primary, secondary and tertiary.
1. Primary industries:
These include all those activities which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc. These industries may be further subdivided as follows.
(i) Extractive industries:
These industries extract or draw out products from natural sources. Extractive industries supply some basic raw materials that are mostly products of the geographical or natural environment. Products of these industries are usually transformed into many other useful goods by manufacturing industries. Important extractive industries include farming, mining, lumbering, hunting, and fishing operations.
(ii) Genetic industries:
These industries remain engaged in breeding plants and animals for their use in further reproduction. For the breeding of plants, the seeds and nursery companies are typical examples of genetic industries. In addition, activities of cattle, breeding farms, poultry farms, and fish hatchery come under the class of genetic industries.
2. Secondary industries:
These are concerned with using the materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, mining of iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry.
Secondary industries may be further divided as follows:
(i) Manufacturing industries:
These industries are engaged in producing goods through the processing of raw materials and thus creating form utilities. They bring out diverse finished products that we consume or use through the conversion of raw materials or partly finished materials in their manufacturing operations.
Manufacturing industries may be further divided into four categories on the basis of the method of operation for production. E.g.: Iron and steel industry, Cotton. Textile Industry, sugar Industry.
- Analytical industry analyses and separates different elements from the same materials as in the case of oil refinery.
- Synthetically industry combines various ingredients into a new product, as in the case of cement.
- The processing industry involves successive stages for manufacturing finished products, as in the case of sugar and paper.
- Assembling industry which assembles different component parts to make a new product, as in the case of television, car, computer.
(ii) Construction of industries:
These industries are involved in the construction of buildings, dams, bridges, roads as well as tunnels and canals. Engineering and architectural skills are an important part of the construction industry.
These are concerned with support services to primary and secondary industries that provide service facilities. As business activities, these may be considered part of commerce because as auxiliaries trade these activities assist trade. Included in this category are transport, banking, insurance, warehousing, communication, packaging, and advertising.
Describe the activities relating to commerce.
Commerce deals with the buying and selling of goods, exchange of commodities, and distribution of finished goods. In other words, commerce is the sum total of trade and auxiliaries to trade. It means that commerce is the combination of trade and distribution activities of goods and services.
Commerce links producers and consumers. The main object of commerce is to ensure smooth distribution of goods and services to satisfy consumer needs.
Definition of Commerce:
“Commerce is a term that embraces all those functions involved in making, buying, selling and transport of goods. “- Dr.E. Thomas
According to J.Stephenson, “Commerce means the sum total of those processes which are engaged in the removal of the hindrances of person (trade) place (transport and insurance) and time (Warehousing) in the exchange (Bank and finance) of commodities. ”
It means that commerce is not restricted to trade but it includes all those activities which, facilitate trade, and aids of the trade such as transportation, communication, financing, insurance, warehousing, and marketing
Trade means the purchase and sale of goods with a profit motive. It involves the exchange of goods and services between buyers and sellers. It is the nucleus of commerce as all activities revolve around trade.
Trade activities must be performed to earn a profit. It means that activities having service motive and emotional aspect are not trade activities.
Trade is the central activity of commerce. Other activities of commerce such as transportation, communication, financing, insurance, warehousing the marketing are the supporting activities of trade.
Trade activities may be shown as under
Internal/Home trade – Purchase and sale of goods within the boundaries of the country is called internal trade. The purchaser and seller of the commodity belong to the same country and the payment is
made in the currency of the country, to which buyers and sellers belong. For example, the trade between two cities, two villages, villages, and cities or even between two persons of the same place within the boundaries of the country is called internal trade. On the basis of volume. Internal trade is classified as wholesale and retail trade:
(1) Wholesale trade – It involves the purchase and sale of goods belonging to a specific type of variety, in bulk. A wholesaler purchases a huge quantity of goods from producers/manufacturers, stores it in the big godowns, and sells in small quantities to retailers. Wholesalers constitute a link between producers and retailers provides useful services to both the manufacturers and retailers. They are criticized for hoarding goods, creating artificial scarcity, indulging in black-marketing and other malpractices. In spite of all these defects, they render valuable services to society and must remain in the market.
(2) Retail trade – It relates to the selling of goods by retailers to ultimate consumers. They acting as a link between wholesalers and consumers and render valuable services to both. The retail trade is situated among consumers. It arranges different goods from different places and makes them available to members of the society residing in its locality. These traders inform the producers through the wholesalers about the attitudes, likes and dislikes, preferences, traditions, and habits of the consumers.
They educate consumers about the utility and working of new products. They are organised in the forms of Departmental Stores, Multiple Shops, Cooperative Store, Super Bazars and self-service stores, etc.
Foreign Trade or International Trade – The trade between two countries is known as foreign trade. The purchasers and sellers in this type of trade belong to different countries. The payment in foreign trade is made in foreign currency. The foreign trade may be sub-divided into import and export and entrepot! or re-export trade.
(1) Import trade – It involves the purchase of foreign goods for use in the domestic market. Purchasing goods by an Indian trader from a trader of USA, Russia, UK and Japan etc. is the example of import trade.
(2) Export trade – The type of trade in which goods are sold and sent to firms located outside the country is known as export trade. Selling and sending goods by Indian firms to other firms located outside India, say Germany, Iraq and Saudi Arabia, etc. is export trade.
(3) Entrepot trade – It involves the import of foreign goods with a view to re-exporting them. For example, importing goods from Germany and Japan by Indian firms and “exporting it to Nepal and Bhutan is entrepot trade. There are certain countries I five Nepal and Bhutan, which do not have seaports. These countries import their goods through third countries. Nepal and Bhutan also import their goods from abroad through India for which we charge a certain commission.
Auxiliaries To Trade
Activities which assist or support business and trade are known as auxiliaries to trade. They are an integral part of commerce as they remove various hindrances in the production and distribution of goods. These include Transport. Insurance, Financing, Banking, and marketing discussed as follows
(1) Transportation and Communication – It helps in removing the hindrance of place in the exchanges of goods and services. It facilitates trade by assembling and distributing goods. It overcomes the barrier of distance and creates place utility. Transport widens the market and helps to equalise prices at different places.
It makes available the distribution of goods among far-flung areas. Quick and economical means of transport such as railway s, roadways, airways and shipping have widened the scope of trade to include international transactions. Communication facilities such as postal services, telephone and others are also necessary so that producers, traders, and consumers may exchange information with one another.
(2) Warehousing – There is generally a line lag between the production and consumption of goods. This problem can be solved by storing the goods in warehouses. Many products such as wheat, sugar, rice, etc. are produced in a particular season but they are needed throughout the year.
Proper storage arrangements must be made in order to make such goods available. Besides, it is necessary to store commodities such as woolen garments and umbrellas to meet the desired
seasonal demand. Warehousing removes the hindrance of time and thereby creates time utility. It helps to stabilise prices through the process of continuous supply of goods.
Warehouses are of three types, namely, private, public and bonded. Private warehouses are owned by merchants and producers for their own ‘storage needs. Public warehouses are owned by wharfingers, port trusts, etc. Bonded warehouses are set up by customs authorities to store goods which are liable to customs duty.
(3) Banking and Finance – There is usually a time gap between production/purchase and sale of goods. During this period businessmen need funds to carry on their business. Banks and other financial institutions facilitate the required credit in various forms.
Banks also perform the business activity by providing safe and quick means for the remittance of money. They collect bills, cheques, etc. from their customers. Banking removes the hindrance of raising finance and credit on one’s own. Therefore, banks may be regarded as traders in money and credit.
(4) Insurance – Business involves several types of risks — due to fire, flood, theft, etc. Insurance removes the hindrance of risk. Insurance provides a cover against the loss of goods in transit and storage. Insurance is based on the “pooling of risks.” A large number of people who are subject to a particular risk contribute to a common fund, out of which compensation is paid to those few who actually suffer the loss.
There are various types of insurance, e.g. fire insurance, marine insurance, workmen’s compensation insurance, life insurance, etc. Insurance company performs the useful service of compensating the loss to the insured goods through fire, theft, flood or any other hazard.
(5) Advertising and Publicity – It is a useful function of bridging the knowledge gap about the availability and use of goods. They remove the hindrance of knowledge. The main purpose of advertising is to create and sustain demand. Advertising has become essential for quick disposal of goods in the modern era of large-scale production.
In the absence of advertising, consumers may remain ignorant of the availability of goods and services and businessmen may not be able to sell their products. There are various forms of advertising and publicity, such as the press, outdoor displays, radio, television, letters to customers, fairs, exhibitions, cinema, etc.-Advertising facilitates mass consumption of goods. Advertising is necessary to bridge the information gap.
(6) Packaging – Good packaging facilitates delivery’ of quality products to the consumers and also increase the like of the product. Packaging helps protect the goods from damage during transport and warehousing. It also makes the goods attractive. Packaging helps in the conveyance and handling of goods.
It removes the hindrance diFrisk by keeping goods safe and free from spoilage. Trade and transport of goods have become easier and safer due to improvements in the art and methods of packaging.
Why does the business need multiple objectives? Explain any five such objectives.
Objectives Of Business
The objective of business means the purpose for which a business is established and carried on. The objective provides the direction towards which all business activities will be directed. Therefore, every businessman must select and define the objectives carefully and cleanly.
Though profit motive constitutes the primary objective of business activities, it should not lead us to conclude that profit is the sole objective of business. Objectives of a business are multi-dimensional in nature. They can be classified into three categories, namely,
(1) economic objectives
(2) social objectives and
(3) human objectives.
Economic Objectives – Business is an economic activity and following are the economic objective of a business.
(i) Earning of Profits – No business can survive without making adequate profits. Profit is essential to meet the cost of factors of production. Entrepreneurship is one of the important factors of production. Just as other factors get their rewards, the entrepreneur must get reward for his efforts and taking of risk. Moreover, every businessman will like to see that the business he is managing should grow. This is possible only if the business earns sufficient profits for investing them into the business for expansion.
(ii) Creation of Customers or Markets – A business can earn profits by satisfying consumer needs. Thus, the business must aim at winning and satisfying the customers. Peter F. Drucker has rightly said, “There is only one valid definition of business purpose, i.e., to create a customer. ” Customers are created through advertisement and sales promotion and delivering them ‘want satisfaction.’
(iii) Innovations – Innovation is the activity of exploring and discovering ways and means of making products more useful, exploring new markets etc. A business can succeed only with the help of new designs, improved techniques, better machinery etc. Innovation is the result of creative thinking, research and development, computer-aided design and computer-aided manufacturing.
(iv) Best use of Resources – Business is expected to make best use of scarce resources of men, machine, material, methods and money. Proper allocation and efficient planning to use these resources achieve the purpose of profitability and sustainability in the business.
Social Objectives – Business does not exist in a vacuum. It is an integral point of society. In other words, the business must be socially responsible. The decision taken by the business has a great influence on the socio-economic conditions in the country. For example, the quality of the product offered and its prices will have an influence on the standard of living of the people.
The type of technique of production (labour intensive or capital-intensive) will have an influence on employment opportunities for the job-seekers. Therefore, it is in the interest of businesses to pursue certain objectives expected by the society.
Social objectives of a business denote its obligations to society including customers, employees and the government. The important social objectives include the following:
(i) Better Quality Goods – The business must provide better quality products as desired by the customers. The products should be durable, genuine (not duplicate) and safe. The prices charged for the goods should also be reasonable. The important objective of a business is to produce and supply goods of proper quality to satisfy consumer’s expectations.
(ii) Fair Trade Practices-The business should follow fair business practices at all times. It should avoid anti-social practices like hoarding, black-marketing, over-charging the buyers, etc. Businessmen must avoid unfair trade practices like spurious products or misleading advertisements to mislead or exploit the people.
(iii) Generation of employment opportunities – A business is expected to provide means of livelihood to members of society. Business has tremendous scope for the generation of employment opportunities for the unemployed. Further, a business should employ suitable people without any discrimination based on caste, creed, sex or religion. Business firms pursue this objective can improve their public image.
(iv) Employees’ Welfare – success of any business depends on significant contribution towards the welfare of employees. Besides providing fair wages, the business should also provide good working conditions, canteen facility, housing, transport and medical facilities, etc. to the employees. These measures would increase the productive efficiency of the workers.
Human Objectives :
A business is directly linked with two important groups, namely, (a) customers, and (b) employees. Both these groups must have a feeling of having been treated as human beings by the business enterprise. As human beings, customers expect courteous service and fair dealings from the business. The employees look forward to the business enterprise for the following objectives:
(i) the employees are treated as partners in the business and not as inferior lot; they should get fair wages and healthy working conditions;
(ii) they are able to acquire and develop new skills in the process of employment; and
(ii) they derive job satisfaction.
Explain the concept of business risk and its causes.
Business Risks – Meaning
Business activities are not very safe. Business units are surrounded by innumerable risks generated by economic, natural, physical and human aspects.
“Business risks may be defined as uncertainty in regard to cost, loss or damage.” — C.O.Hardy
“Risk is the chance of loss. It is the possibility of some unfavourable occurrence.” — Wheeler
Causes of Business Risks :
Business risks arise due to a variety of causes which may be classified into the following categories:
(1) Natural Causes – Nature is an important cause of business risks. Human beings have no control over the nature. Natural calamities such as flood, drought, famine, earthquake, volcanic eruption, lightning, snowfall, hailstorm, tide, epidemic, etc. result in heavy loss of life, property and income.
Even the death of the owner or a partner may cause the business to be shut down. Human beings have little control over nature. Therefore, natural causes of business risks are beyond the control of a businessman.
(2) Human Causes – Human causes are very important causes of business risks. Negligence or carelessness on the part of an employee may lead to serious fire or accidents involving loss of life and property. There may be loss due to spoilage, breakage, etc. Ignorance may result in grave errors in estimating demand for products. A feeling of false pride or prejudice may lead to strike or lockout. Inefficient management is often the cause of loss in business.
Irrational approach of the management, or the owners of business is also a type of human failure causes business risk. A business like Enron Corporation in U.S.A. incurs heavy losses which leads to bankruptcy mainly due to unplanned decision of the management at the top.
(3) Economic Causes – Economic causes relates to changes in market conditions. Fluctuations in demand and prices are well-known. Availability’ of cheaper substitutes may affect the sale of relatively costly products. Excessive competition may bring down the prices of products.
Competing businesses may employ more effective techniques of sales promotion. For example, Colour T.V. has replaced Black & White T.V. from the market.
(4) Physical and Technical Causes – Technical changes and mechanical defects also result in business risks. Changes in technology may make the machines obsolete before their expected life. Mechanical failures such as the explosion a boiler, leakage of gas, etc. may lead to heavy loss of life and property. Assets used in business may depreciate in value due to shrinkage, loss in weight, vaporisationvgtc. Stoppage of work due to power failure may cause loss. There be loss or damage to goods in transit.
(5) Political and Legal Causes – Such causes of risk include changes in government policies, policies relating to foreign trade, collaboration of MNC’s licencing and taxation policies and changes in law. A businessman may suffer loss due to restrictions on imports and exports and fluctuations in exchange rates. Government control on production and distribution of certain products may deprive businessmen from profits. Changes in government policies and laws are, thus, an important cause of business risks.
What factors are important to be considered while starting a new business. Explain.
Starting A New Business
The person who undertakes to bear the risk and uncertainty of a new business is known as ‘entrepreneur. Webster’s dictionary defines an entrepreneur as one who organises, manages and assumes the risks of a business enterprise. At the time of starting a new business, a businessman must take decisions regarding the various factors of production and resources like men, machines & materials.
The entrepreneur going to start a new enterprise must have various qualities like wide knowledge, skills, experience, foresightedness, dynamism outlook, self-confidence, and willingness to take risks. If an entrepreneur or businessman lacks these qualities, he cannot successfully launch a new enterprise.
Starting a new business is complex and as difficult as the birth of a child. The entrepreneur has to act both as a mother and a midwife. The ultimate success of a business depends upon the various considerations essential for the successful running of a business enterprise.
Factors to be Considered for Starting a Business – While starting a business following factors have to be considered
(1) Selection of Line of Business – He will determine the market demand for the products, he wants to produce and the margin of profit he expects from the sale of products. He will prepare a systematic report of the exercise he undertakes. This is known as ‘feasibility report’ or ‘project report’.
While selecting the line of business, a number of criteria must be kept in view. The most important criterion is the expected rate of return on capital to be invested. That line of business will be preferred which is expected to yield higher rate of return on capital invested and has chances of further growth: Besides this, the degree of risk involved in the line of business is also important. The businessman has to decide what type of risk he can afford to take. The line of business chosen must be technically feasible.
(2) Choice of Form of Ownership – A good form of ownership should be easy to form simple to operate flexible & durable. The choice of the form of organisation will determine the authority of the entrepreneur starting the business. However, in certain lines of business, there is no choice left in the selection of the form of organisation. For instance, the insurance and banking business can be done only by the joint-stock companies.
Size of the business will also determine the form of organisation. Company form of organisation is more suitable in case of large scale operations. Sole tradership or partnership is suitable for small scale and medium scale operations. The other factors which affect the choice of the form of ownership are capital, requirements, managerial skills requirement, the limit of liability, tax liability, legal formalities, etc. A careful analysis and reconciliation of technical, managerial, financial, market & other factors should be determined by the size of the unit.
(3) Financial Planning – Proper planning and control of finance are essential to success in business. Adequate funds must be provided at the right time for the start and continuity of the business unit.
Capital is required for investment in fixed assets like land, buildings, machines, and equipment and in current assets like materials, supplies and book debts. Capital is also needed for meeting the day-to-day expenses of the business. In the case of small enterprises, the promoters can provide funds from their own savings.
But in case of large enterprises, funds have to be raised from various sources like the general public, commercial banks, financial institutions, etc. It is of utmost importance to have adequate capital for meeting the initial needs and future requirements of the business.
(4) Location of Business – The location of a business enterprise is an important decision as it influences the costs, profitability and growth needs for expansion diversification & modernisation, etc. should be taken into account. As far as possible, the location must be optimized so that the costs of production and distribution are the lowest possible. Location is selected on the basis of access of raw-material, availability of labour, transportation & banking facilities.
(5) Size of Business Unit. The size of the firm is influenced by various factors like technical, managerial, financial and marketing facilities. Some factors favour the larger size while others operate to restrict the scale of operations. An attempt should be made to achieve the size at which the average cost per unit is minimum.
Usually, businessmen start their operations at a small or medium scale. If new ideas are to be tried out, it is preferable to start with a small-scale operation. This will help in adapting to changes without much loss. Thus, the entrepreneur must determine the size of business operations before he arranges capital and other resources for the business.
(6) Machines and Equipment – Machinery and Equipment should be placed in a proper sequence so as to permit a smooth flow of materials through necessary operations. It will depend upon various factors like availability of funds, size of production, and the nature of the production process.
The benefits to be derived from the machine and equipment must justify the amount of investment made on therti. Availability of repair and maintenance services and spare parts is also an important consideration while selecting a particular machine or equipment.
(7) Workforce – The entrepreneur cannot run the business himself alone. He has to take the help of a number of persons including skilled and unskilled workers and managerial staff. The employment of the right types of persons fertile enterprise is necessary, otherwise, there will be a huge wastage of time, money, and efforts.
They have to be given the necessary training to increase their efficiency. The workforce must be motivated through monetary and non-monetary incentives to make their best possible contribution towards the accomplishment of organizational objectives.
(8) Procedural Formalities – In the case of a sole proprietorship or a partnership, there are practically no procedural formalities. Only permission from the municipality is to be taken to start the specified line of business. Registration of a partnership firm is also not compulsory.
Government regulation is the minimum possible if the partnership firm operates on a small or medium scale. But a joint-stock company is exposed to greater procedural formalities both at the time of incorporation and during its life. Incorporation of a company is compulsory. For this purpose, many documents have to be prepared and fee deposited with the Registrar of Companies. A public company also needs a ‘Certificate to Commence Business’ before it could start business operations.
(9) Launching the Enterprise – The completion of physical, organizational, and financial aspects leads ultimately to the actual launching of the enterprise.