Introduction to Business

Chapter - 1
 Business: Meaning
Simple meaning of business is “state of being busy in
any work”
Illustrated Oxford Dictionary states the following
Meanings:
1.One’s regular occupation, profession
2. A task or duty
3. A reason for coming,
Example: What is your business here?
4. A matter
5. Buying & selling
6. A commercial firm.
 Business in Business Terminology
‘’Business is any effort for the purpose of earning
money,,

‘’Business is an activity of people directed toward

satisfying human wants at a profit ,,

“Business involves the acts like production

(industry), buying & selling (trade), distributing
the products (commerce) which are exercised for
business motive”
The goal of a business is to be profitable!
Profit = Revenues – Expenses

Profits go to the business owners and are a

major incentive and reward for success.
Business in Business ……….
Skinner and Ivancevich : Business is the exchange of
goods, services, or money for mutual benefit or profit.

Keith Davis: Business may be defined as any form of

commercial activity to satisfy the economic wants of
people at a profit.

Professor Owen : Business is any enterprise engaged

in production and distribution of goods for sale in a
market or rendering services for a price.
 Branches of Business

Business

Direct
Commerce Industry
Service
 Commerce

Trade Auxiliary Acts

 Trade

Foreign Home
Trade Trade

Export Wholesale

Import Retail

Re-export
 Auxiliary Acts

Transport

Banking

Insurance

Warehousing
 Industr
y

Construction

Manufacturing

Extraction

Genetic
Direct Service

Doctors

Engineers

Lawyers

Teachers

Consultants
Branches of Business-Trade
Branches of Business-Industry
Branches of Business-Industry
Branches of Business- Direct Service
Illegal Efforts are not Business !
Private Enterprise: The American Business System

A Business or businesses not under government

control.
“An Economic system in which citizens are allowed to
own capital and property and to run their own business
with a minimum of state interference”- OBD-403
Similar Term: Free Enterprise.
Features:
1.Rights to private property
2.Right of freedom of choice.
3.Right to profit
4. Rights to compete
 Factors of Production
‘’ The Resources used to provide goods and
services are the factors of production’’

1.Land
2.Labour
3.Capital
4.Entrepreneurship
Factors of Production

Land Labour Capital

Entrepreneurship

Production
Process

Finished Goods
 How Private Enterprise Functions ?
The Factors of production are owned by individuals in
households.

House Hold: Household is any person or group of people

living under the same roof and functioning as an economic unit.
 
Key Works:
Involvement of people in business for profit
(combination of resources)
Creation of jobs and income for households.
Purchase of goods and services by households, which in
turn support business and make it profit.
How Private Enterprise Functions…

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Finished Goods and

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Consumer Market
Demand
Factors of Production Income Received

Land Rent

Labour Wages/Salaries

Capital Interest

Entrepreneurship Profit
  
Economic System
 Economic System
‘’An economic system is the method society uses
to allocate its resources (land , labor, capital,
entrepreneurship)to satisfy its needs. ‘’

What distinguishes one economic system

from another is the control of the factors of
production and the interaction of business,
government and consumers.
 
ECONOMIC SYSTEMS AT A GLANCE

1. Capitalism
2. Mixed Economy
3. Communism
4. Socialism
5. Modern Economic System.
 Capitalism
Is an economic system where the factors of
production are in private hands.

Key terms:
• Pure Capitalism/Market Economy:
‘’One in which economic decisions are made
freely according to the market forces of supply
and demand’’—Adam Smith
Laissez-faire policy: No Interfere of
Government.
Capitalism
 The economic questions are-
What is to be produced?
How much will be produced?
Who will produce it?
How much will it cost?
Who will get it?
 
In pure capitalistic economy and individuals use
resources as they choose.
Mixed Economy:
Mixed economy: Evolved by USA, Which is
an Economic system based on a market
economy with limited government
involvement.
 
Here the government has two economic tools:
The power of Tax
The power to spend
Communism:

In this economic system the government

controls the factors of production.
Land , labor and capital are under the control
of government and Entrepreneurship is
supplied by the government.

Supply and Demand, Competition Have No

Influence.
Socialism:
Socialism: Economic system in which much
ownership is private, but the government
controls the operations and direction of basic
industries.

This control and direction are based on the belief

that there are contain products and services
that everyone should have.
 Modern Economic System:
‘’A suitable combination of capitalism and Socialism’’
Islamic Economic System: Islamic economics refers
to the economic system that conforms to Islamic scripture and
traditions.

The central features

(1)"Behavioral norms and moral foundations" derived from the
Quran and Sunna,

(2) Zakat as the basis of Islamic fiscal policy, and

(3) Prohibition of interest.

Islamic movements and authors generally describe
an Islamic economic system as neither socialist nor
capitalist, but as a "third way," an ideal mean with
none of the drawbacks of the other two system
  
Unincorporated Business: Business other than company
There are three basic forms of business
Sole proprietorship
Partnership
Corporation
Sole proprietorship:
‘’Business owned by individual, oldest and most common form of
business. Sole proprietorship accounted for almost 80 percent of all
businesses in United States’’
 
However,
 They have less than 10 percent to total sales.
 They have Only 18 percent of the profits when compared with
partnership and corporations.
“A Sole-proprietorship is a form of organization in
which an individual produces independently with his own
capital,skill and intelligence and is entitled to receive all
the profits and assumes all the risks of ownership”—
M C Shukla
 

Sole-proprietorship-76%
corporate-16%
partnership-8%
Advantages of Sole-proprietorship
a) Ease of formation
b) Retains all profit
c) Freedom of decision making
d) Personal satisfaction
e) Ease of dissolution
f) Tax advantage
g) Sound management
h) Self reliance
i) Change in business area
j) Minimum expense
k) No government control
Disadvantages of Sole-proprietorship
1.Unlimited liability
2.Limited fund for expansion
3.Lack of business and management skill
4.Difficulty in attracting consumers and employees
5. Limited life
6.Lack of separate entity
7.Lack of status
8.Whims of the owners
9.Limitation of personal capacity
10.Problem of risk distribution.
Causes of Popularity of Sole-proprietorship
Business in Bangladesh

1) Investment of small capital

2) Easy formation
3) Agriculture based economy
4) Limited infrastructure
5) Effects of river
6) Supply of essential goods
7) Way of livelihood
8) Lack of industrial loan.
 Partnership
“An association of two or more people formed for the
purpose of carrying on a business”
 Partnership
“Partnership is the mutual relationship established
among the agreed persons for the purpose of
distributing profit reached at by the business
operated by the partners or any single partner on
behalf of all partners”--------Partnership Act-1932.
Members
Types Minimum Maximum
Banking Business 2 10
Other than Banking 2 20
Business
Formation of Partnership Business
oFormed as per Partnership Act-1932
Steps:
1.Gathering of members
2.Determination of the nature of the business
3.Performance of contract
4.Registration(not mandatory)
 
Partnership Deed: Contract among the partners
Advantages of Partnership Business:
1.Ease of formation
2.Pooling of knowledge and skill
3.More funds available
4.Ability to attract and retain employees
5.Tax advantage-only on personal income
6.Sharing of risk
7.Collective efforts
8.Goodwill
9.Free from regulation
10.Easy dissolution
Disadvantages of Partnership Business
1.Unlimited liability
2.Limited life
3.Potential conflict between partners
4.Ownerships are not transferable
5.Want of good faith
6.Lack of initiative
7.Lack of separate entity
8.Uncertainty of duration
9.Delay in decision making
10.Problem of maintaining secrecy.
Types of Partnership Business
Partnership

General Limited
Partnership Partnership

Partnership Particular
at Will Partnership

Part. For
Part. For Particular
Particular Term Purpose
General partnership: “A business formed by two or more
persons who are agreed upon profit distribution and bearing
unlimited liability”
 Partnership at will: Partnership at will is one for which no fixed term
has been agreed. Any partner can end partnership at any time provided
that notice is given of the intention to do so to all the other partners
 Particular partnership :A partnership formed for specific term or
purpose.
 Partnership for particular term :It is formed for particular term.
 Partnership for particular purpose : It is formed for particular
purpose.
Limited partnership: A partnership consisting general and
limited partners. Limited partner is a partner whom liability
is limited only to the extent of his investment.
Key terms:
Silent partner: A partner who assumes no active role in
managing the firm , but who may be known to the general public
as a partner.
Secret partner: A partner who may be an active manager but
does not want his identity revealed to the general public.

Sleeping partner : A partner who is both silent and secret . This

person is only interested in investing funds in the company.

Nominal partner : A person who is neither a part-owner of the

partnership or an active participant in the firms affairs.
 Persons not capable

Minor (below the age 18 years)

Person of unsound mind.
Insolvent person
Government employee
Alien enemy
Foreign ambassador
President
 Joint Venture
Joint : A place at which two things or parts of a
structure are joined.
Venture : An under taking of a risk.

‘’Joint venture is nothing but a commercial

undertaking entered into by two or more parties
specially for short term”

Example :Hero-Honda
Bajaj motor Cycle (Indian )
Hero-Honda (India- Japan Joint Venture )
 The Modern Corporation
“ A Corporation is a legal form of business organization
created by government and considered an entity and
apart from its owner.”

Corporation/Company/Joint Stock Company:

“Company means a company formed and registered under
this Act or any existing company Act.” – 1994- 2(1)

Existing Company means Company formed as per

Company Act – 1913.
Types of Company Organization

Company

Chartered Statutory Registered Other

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 Types of Company Organization
Private Limited Company –
Members Minimum 2, Maximum 50

Shares Not transferable

Prospectus Can not be issued

Public Limited Company-

Members Minimum 7, Maximum–limited by shares
Shares Transferable
Debenture Can be Sold
Prospectus Can be Issued
Advantages of Corporate Business
1.Supply of huge capital
2.Limited liability
3.Distribution of risk
4.Efficient management
5.Benefit of large scale-business
6. Transferability of shares
7.Public confidence
8.Facility of small investment.
Disadvantages of Corporate Business
1.Complexity in formation
2. Absence of direct relation with the customers
3.Lack of personal investment
4.Nepotism and corruption
5.Problem of maintaining secrecy
6.Excess application of law
7.Complexity in decision making
8.Tax burden (double taxation )
 Business Combination
• The combining of two or more companies by means
of acquisition or merger.

Objectives :
1.Greater Profitability
2.Efficiency
3.Achieving Competitiveness.
Forms of Combination
Business Combination

Acquisition

Merger

1.Horizontal Merger

2.Vertical Merger

3.Conglomerate Merger

Amalgamation
 Forms of Combination
 Acquisition : Results when one firm buys a majority interest in
another, but both retain their identities.

 Merger : A Merger occurs when two or more companies become

a single enterprise; the controlling corporation retains its identity
and absorbs the others.

1.Horizontal Merger :Occurs when one firm purchase other

firms that produce similar or competing products.
2.Vertical Merger :Occurs when one firm unites with others
that contribute to its products manufacture or distribution
3.Conglomerate Merger : Occurs when one firm buys other
firms that make unrelated products.
Acquisition
Merger
Horizontal Merger
Vertical Merger
Vertical Merger
Conglomerate Merger
Forms of Combination
Amalgamation or consolidation :
‘’Amalgamation or consolidation occurs when
one firm combines with others to form an entirely
new company ; former identity is relinquished’’

Example:
Company A + Company B+ Company C = Company D