BEFA UNIT I

B U S I N E S S

INTRODUCTION

Human beings are continuously engaged in some activity or other in order to

satisfy their unlimited wants. Every day we come across the word 'business' or
'businessman' directly or indirectly. Business has become essential part of
modern world.

Business is an economic activity, which is related with continuous and regular

production and distribution of goods and services for satisfying human wants.

All of us need food, clothing and shelter. We also have many other household
requirements to be satisfied in our daily lives. We met these requirements from
the shopkeeper. The shopkeeper gets from wholesaler. The wholesaler gets from
manufacturers. The shopkeeper, the wholesaler, the manufacturer are doing
business and therefore they are called as Businessman.

DEFINITIONS

Stephenson defines business as, "The regular production or purchase and sale
of goods undertaken with an objective of earning profit and acquiring wealth
through the satisfaction of human wants."

Dicksee defines business as "a form of activity conducted with an objective of

earning profits for the benefit of those on whose behalf the activity is
conducted."

Lewis Henry defines business as, "Human activity directed towards producing
or acquiring wealth through buying and selling of goods."

Thus, the term business means continuous production and distribution of goods
and services with the aim of earning profits under uncertain market conditions.

CHARACTERISTICS

1. Exchange of goods and services

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All business activities are directly or indirectly concerned with the exchange of
goods or services for money or money's worth.

2. Deals in numerous transactions

In business, the exchange of goods and services is a regular feature. A

businessman regularly deals in a number of transactions and not just one or two
transactions.

3. Profit is the main Objective

The business is carried on with the intention of earning a profit. The profit is a
reward for the services of a businessman.

4. Business skills for economic success

Anyone cannot run a business. To be a good businessman, one needs to have

good business qualities and skills. A businessman needs experience and skill to
run a business.

5. Risks and Uncertainties

Business is subject to risks and uncertainties. Some risks, such as risks of loss
due to fire and theft can be insured. There are also uncertainties, such as loss
due to change in demand or fall in price cannot be insured and must be borne by
the businessman.

6. Buyer and Seller

Every business transaction has minimum two parties that is a buyer and a seller.
Business is nothing but a contract or an agreement between buyer and seller.

7. Connected with production

Business activity may be connected with production of goods or services. In this

case, it is called as industrial activity. The industry may be primary or
secondary.

8. Marketing and Distribution of goods

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Business activity may be concerned with marketing or distribution of goods in
which case it is called as commercial activity.

9. Deals in goods and services

In business there has to be dealings in goods and service.

Goods may be divided into following two categories :-

1. Consumer goods : Goods which are used by final consumer for

consumption are called consumer goods e.g. T.V., Soaps, etc.

2. Producer goods : Goods used by producer for further production are

called producers goods e.g. Machinery, equipments, etc. Services are
intangible but can be exchanged for value like providing transport,
warehousing and insurance services, etc.

10. To Satisfy human wants

The businessman also desires to satisfy human wants through conduct of

business. By producing and supplying various commodities, businessmen try to
promote consumer's satisfaction.

11. Social obligations

Modern business is service oriented. Modern businessmen are conscious of their

social responsibility. Today's business is service-oriented rather than profit-
oriented.

STRUCTURE OF BUSINESS FIRM

A business firm is an organization that uses resources to produce goods and

services that are sold to consumers, other firms, or the government. Most
businesses exist because a group of people working together can be more
effective than a group of people working individually.

Firms are grouped into three types: sole proprietorships, partnerships, and
companies.

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A sole proprietorship is a business that is owned by one individual. This owner
makes all the business decisions, receives all the profits or losses of the firm,
and is legally responsible for the debts of the firm.

A type of business organization in which two or more individuals pool money,

skills, and other resources, and share profit and loss in accordance with terms of
the partnership agreement. In absence of such agreement, a partnership is
assumed to exit where the participants in an enterprise agree to share the
associated risks and rewards proportionately.

A company is a legal entity, allowed by legislation, which permits a group of

people, as shareholders, to apply to the government for an independent
organization to be created, which can then focus on pursuing set objectives, and
empowered with legal rights which are usually only reserved for individuals, such
as to sue and be sued, own property, hire employees or loan and borrow money.

THEORY OF FIRM

The following are the various theories of the firm.

1. Profit Maximization Theory

Profit maximization is one of the most common and widely accepted objectives
of a firm. According to the profit maximization theory, the main aim of the firm
is to produce large amount of profits. Profit is considered as the internal source
of funds and the market value of the firm also rely mainly on the profits earned
by the firm. in order to survive in the market, it is very essential for the firms to
earn profits. Profits are obtained by deducting total revenue from the total cost
i.e.,

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Profit = Total revenue – total cost

2. Baumol‟s Theory of Sales Revenue Maximization

According to Baumol, maximization of sales revenue is the main objective of the

firms in the competitive markets. It's based on the theory that, once a company
has reached an acceptable level of profit for a good or service, the aim should
shift away from increasing profit to focus on increasing revenue from sales.
According to the theory, companies should do so by producing more, keeping
prices low, and investing in advertising to increase product demand. The idea is
that applying this sales revenue maximization model will improve the overall
reputation of the company and, in turn, lead to higher long-term profits.

He found that sales volumes helps in finding out the market leadership in
competition. According to him, in large organization, the salary and other
benefits of the managers are connected with the sales volumes instead of
profits. Banks give loans to firms with more sales. So, managers try to maximize
the total revenue of the firms. The volume of sales represents the position of the
firm in the market. The managers‘ performance is measured on the basis of the
attainment of sales and maintain minimum profit. Thus, the main aim of the firm
is to maximize sales revenue and maintain minimum profits for satisfying
shareholders.

3. Marris theory of Growth Maximization

According to Marris, owners/shareholders strive for attaining profits and market

share and mangers strive for better salary, job security and growth. These two
objectives can be attained by maximizing the balanced growth of the firm. The
balanced growth of the firm relies mainly on the growth rate of demand for the
firm‘s products and growth rate of capital supplied to the firm. if the demand for
the firm‘s product and the capital supplied to the firm grows at the same rate
then the growth rate of the firm will be considered as balanced.

Marris found that the firms faces two difficulties while attaining the objectives of
maximization of balanced growth which are managerial difficulties and financial
difficulties. For maximizing the growth of the firm the managers should have
skills, expertise, efficiency and sincerity in them. The prudent financial policy of
the firm depends on at least three financial ratios which restricts the growth of
the firm. 1. Debt-Equity Ratio 2. Liquidity Ratio, 3. Retention Ratio.

4. Williamson‟s Model of Managerial Utility Functions

Williamson‘s model combined profits maximization and growth maximization

objectives. According to the model of managerial utility functions, managers

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makes use of their discretionary powers for maximizing their own utility function
and maintains minimum profits for satisfying shareholders.

 Minimum profits for minimum investment and growth of the firm.

 Managers want to maximize their own utility (satisfaction).
 Satisfaction or utility of managers depends on three variables.
1. Staff salaries, S: Includes management salaries, administration
expenses, selling expenditure. More the staff exp. more sales. Power
and prestige of managers increases with S.
2. Management emoluments, M: i.e., luxury offices, fancy cars. Perks.
3. Discretionary investments, D: Amount spent at his own discretion,
e.g. on latest equipment, furniture, decoration material etc. to satisfy
ego and give them a sense of pride. These give a boost to the
manager‘s esteem and status in the organization.
 Managers use that combination of above variables that maximizes their
own satisfaction.

The Williamson‘s model is written as,

UM = f(S,M,D)
Where, UM = Utility of Manager, S = Salaries, M = Managerial
emoluments, D = Discretionary power for investments.

The utility function of the managers rely on salary of the mangers, job security,
power, status, professional satisfaction and power to affect the objectives of the
firm.

5. Behavioral Theories

According to the behavioral theories, the firm tries to attain a satisfactory

behaviour instead of maximization. There are two important behavioral models,
1. Simon‘s satisfying model and 2. model developed by Cyest and March.

The Simon‘s satisfying model states that firms carry out their operations under
‗bounded rationality‘ and can only attain a satisfactory level of profit, sales and
growth. Simon carried out a research and found that modern business does not
have adequate information and is uncertain about future due to which it is very
difficult to attain profit, sales and growth objectives.

The model developed by Cyest and March states that firms should be oriented
towards multi-goal and multi-decisions making. Instead of dealing with
uncertainty and inadequate information, the firms should fulfil the conflicting
goals of various stakeholders (such as shareholders, employees, customers,
financiers, government and other social interest groups).