Nature of Business PDF

NATURE OF BUSINESS THE BARTER SYSTEM Early people had a simple way of life, they would provide all their needs themselves without the help of others, this is called direct production. People would hunt animals and gather plants and berries. Some farmers would g...

NATURE OF BUSINESS THE BARTER SYSTEM Early people had a simple way of life, they would provide all their needs themselves without the help of others, this is called direct production. People would hunt animals and gather plants and berries. Some farmers would grow crops and keep animals for the purpose of feeding themselves. They were living in a subsistence economy [that is providing just enough to survive but there was no surplus for trade.]. In time people began to improve their way of living by building permanent homes and making tools to satisfy their way of living. They began to produce more goods than required, thus resulting in a surplus. As a result of the surplus, people began exchanging goods for surplus of others. The exchange of one thing for another without the use of money is called Barter. ADVANTAGES BARTER i. It allows people to get rid of any surplus goods and at the same time allows them to obtain a wide variety of things they needed. ii. It facilitated an improvement in the way people lived iii. It allowed people to specialise in producing the thing they could do best iv. It increased productivity and resulted in more surplus and further wealth DISADVANTAGES OF BARTER i. Double Coincidence of Wants An individual must have what another person needed and be prepared to exchange it. E.g. Jim must need the bananas that Tom has and Tom must need the peas that Jim has. ii. An Exchange Rate This involves deciding on the right quantity of goods acceptable in the exchange process. E.g. How many chickens should be exchanged for an axe-head iii. Divisibility of Goods The rate of exchange would be difficult because some goods used could not be split into smaller parts. E.g. trading one axe-head for half of a ‘live pig’, you cannot have a half pig and keep it alive. iv. Storage of Wealth Many goods which had to be exchanged could not be saved for use at a future date because they could not be stored for a long period of time. 1 BRIEF HISTORY OF TRADING INSTRUMENTS 1) Money- is anything that is generally accepted as a medium of exchange and used to purchase goods and services. Money is a legal tender- that means, it is acceptable as a means of payment. 2) In early societies the barter system was used as a method of exchange in which one good or service is exchange for another before a system of money was used. 3) The barter system allowed farmers and hunters to swap surplus goods, beads or shells in exchange for goods they could not produce themselves. However, the barter system had several limitations such as: double coincidence of want, exchange rates, divisibility of good and storage of wealth 4) To overcome the disadvantages of the barter system a common medium of exchange had to be developed. The problem was solved with the use of money, gold and silver were minted and used as money. 5) Today money is in the form of notes, coins and other modern means of instruments of exchange [bill of exchange, credit card, debit card, cheques etc.] Characteristic of Money Functions of Money Durable-does not rot or wear out easily A medium of exchange - for quick and easy purchase Divisible-so that change can be given A measure of value - to determine prices Portable- it can be carried A store of value-it can be saved In limited supply-this prevents people from A standard of deferred payment-it can be spending more without working to earn it used to pay in the future INSTRUMENTS OF EXCHANGE Barter System- was used as a method of exchange in which one good or service is exchanged for another before a system of money was used. Bill of exchange - a document that instructs one person to pay a fixed amount of money to another at a future date. Electronic transfers- involves the movement of funds from one account to another electronically. Telebanking – carrying out banking transaction via telecommunications net- work, customers can telephone from home/office and instruct the bank to make payments. E-commerce –the buying and selling of goods and services or transmitting of funds or data via the internet. It involves business to consumer transaction or business to business transactions. A Cheque- is a written instruction to the bank to transfer certain sum of money to the account of the payee [person receiving the money]. 2  Money order -is used as a method of payment which is sold by the bank to persons who wish to make overseas payment for good and services. It clearly states the amount to be paid and the name of the person it is to be paid to. Debit Cards - are ATM cards issued by the banks that can be used to buy goods and services. They are swiped by the shop assistant to obtain authorisation from the issuing bank computer centre. If there is sufficient funds, the card is approved for purchase. Credit Cards - are used to pay for goods and services on credit from a business, card holders have a limit and cannot exceed that amount. The amount paid must be repaid by a due date, if not interest rates are charged. Bank – Draft - is a cheque from one bank to another bank for payments in the name of a particular person or organization. It is used to make payments for goods and service in a foreign currency. Telegraphic Money Transfer [T/T] - is an electronic means of transferring money from one bank account to another. The bank communicates by computer telex or cable in order to carry out the transactions. Internet Banking- allows customers to have direct access to their own accounts on line where they can check the balance on their accounts and make payments to suppliers. Mobile Money and Mobile Wallets - this is an app on the phone that is connected to the individual’s bank account that allows paying for an item with use of the phone. E.g. Grace Kennedy’s PayPak DIFFERENCE BETWEEN PRIVATE SECTOR AND PUBLIC SECTOR The private sector is that part of the economy which comprises of businesses owned and operated by private individuals. [private enterprise] The public sector is that part of the economy which comprises of businesses owned and operated by the government. [public enterprise] DIFFERENCES Private Sector Public Sector Ownership Private individuals The government Aims To make profits To provide social services Source of finance Profits and loans The government Distribution of profits Dividends paid to Paid to the government shareholders Type of products Goods and services Public goods such as street demanded by consumers lights, health care Type of business E.g. Sole trader, partnership, E.g. Ministry of Education, company, multinational, Health, Agriculture etc. franchise, cooperatives, conglomerate PRIVITIZATION VS NATIONALIZATION 3  Privatization- is the transferring of government owned firms to the private sector Nationalization- is the taking over of private firms by the state Privatization Benefits It removes political interference in business operations It improves access to better quality services at affordable prices It helps to empower citizens It improves efficiency because of competition and the drive to increase profits Privatization Disadvantages It can lead to massive job losses Profits go to the individual and not the whole nation Government may lose control of essential services Nationalization Benefits Profits go to the state to fund development projects and used to expand other nationalized industries It secures employment for the population It is used to pay interest and repayment of loans The state can control essential industries that are important for development Nationalization Disadvantages Too much political interference by parliament makes it difficult to make profits The lack of profit motive leads to a waste of resources Consumer may lose their freedom of choice as fewer market options are available FORMS OF BUSINESS ORGANIZATIONS 1. SOLE TRADER Definition- a business in which one person provides the capital and gets all the profit Formation – no legal formation but the firm must be registered It is funded by the owner’s savings or profits made or loans from the banks Examples of sole trader business – retailing, hairdressing, catering services Advantages Easy to set up, that is small amount of capital needed and no legal formalities Owner has complete control and can take decisions quickly, he is not answerable to anyone Owner keeps all the profits, this can be used to develop the business The business is based on the personal interest or skills of the owner rather than working for someone Disadvantages 4  Unlimited liability –owner’s personal assets can be used to pay off debts if the business fails Usually experience difficulty in raising capital – therefore the business remains small Owners usually work long hours and suffers all losses if the business fails Lack of continuity- when the owner dies the business comes to an end 2. PARTNERSHIP Definition - a business formed by 2 to 20 persons providing capital and shared responsibilities Formation- the business may use a partnership deed, this is a document that governs the legal requirement of a partnership Examples of partnerships – law and accounting firms Types of partnerships: joint ventures, syndicates, and limited liability i. Joint venture : is a special type of partnership established to perform a single business activity and closes when the activity has been completed. E.g. NHT joins with the Matalons to build house, the government provided the land and WICHON built the houses. ii. Syndicates: is a group of persons or business organization that are given legal authority to carry out a specific business transaction. Advantages Better management - partners may specialise and have different skills Better decisions- partners discuss issues before arriving at a decision Larger capital - more capital can be raised since more people contribute to the running of the business Sharing of losses and problems –the burden is for all and not just one person Disadvantages Unlimited liability – partners personal assets can be used to pay off debts if the business fails Lack of continuity - new partnership will be formed upon death or resignation of a partner Delay in taking decisions - partners have to discuss issues before arriving at a decision Lack of capital to expand – the capital is more than a sole trader, but it is still difficult for the business to expand 3. CO-OPERATIVE Definition- a business owned, controlled and operated by a group of users for their own benefit. The group may be users or producers of the product. Characteristics Formation- open membership to any person over 16 may join for a small fee Democratic - all members have one vote and contribute to sharing responsibilities and decisions Distribution of profits- profits are shared equally among members in the form of dividends Shares are sold to its members as the members are also the clients Limited interest on capital – members are paid low rate of return [5%] on money borrowed Types of Cooperatives i. Consumer cooperative - are persons who buy goods in large quantities then resell them at reduced prices 5  ii. Agricultural cooperative - are farmers who corporate in the production of agricultural products, share workload, make decisions and share profits iii. Financial cooperatives – are organizations that sells shares and its members receive dividends, they charge interest on loans and have fund raising activities E.g. Credit Union- St Catherine Cooperative Credit Union] Advantages Betters decisions - members work together to solve problems and make decisions Offers lower prices - compared to larger supermarkets that aim for higher profits Profits are shared in the form of dividends -members are motivated to work hard to benefit Disadvantages Unable to expand due limited finance – members do not have resources and profits may be low Inefficient management - members may not have the experience of running a business Delay in decision making – all the members have to be consulted on major issues 6. FRANCHISE A business that uses the name, logo and trading system of an existing business. E.g. Burger King, Pizza Hut, Dominoes, KFC, Pizza Hut, Federal Express, Wendy’s Advantages Less chances of the business failing as a well-known name is being used Advice and training are offered by the franchisor Supplies are obtained from established suppliers Disadvantages Revenues have to be shared with the franchisor Initial license fee is expensive There is no choice of supplier 7. LIMITED COMPANIES Features (i) There are two types of companies these are Private Limited and Public Limited ⮚ The word ‘Limited ‘ means a company has limited liability and in case the business fails the shareholders will lose capital contributed and not personal assets (ii) A company raises capital by selling shares and debentures (iii) The business must be incorporated i.e. it has a separate legal identity from the owners (a) Private Limited Company Definition - a business with 2-50 shareholders who are often family members 6  Formation- a business must be incorporated and give the registrar of companies the following documents: The Memorandum of Association, The Articles of Association, Statement of Authorised Capital Management - by owners or persons appointed by owners A private limited company receives a Certificate of Incorporation from the register of companies to start operations Advantages Limited liability – in case the business closes down the shareholders will only lose their capital and not personal assets Can raise capital by selling shares privately to individuals It has a separate legal entity, that is, a company may be sued and can sue, additionally a company can be taken to court, but its owners cannot Greater continuity means that shares can be sold to someone and the company continues Disadvantages Too many legal formalities, this may be costly and time consuming Too many legal requirements that is, end of year accounts must be published Selling of shares is restricted to private individuals only and not to the general public (b) Public Limited Company/Joint Stock Company Definition – a business with at least seven members that offers shares to the public [ it must have the words ‘plc’ or ‘inc’ after the company’s name] Formation – must be registered an give the registrar of companies the following documents: the Memorandum of Association, the Articles of Association, the Statement of Authorised Capital ,and the Prospectus Management - by a board of directors who appoints an executive director Receives a Certificate of Trading from the register of companies to start operations Advantages Limited liability – in case the business closes down the shareholders will only lose their capital and not personal assets It can raise capital by selling shares publicly It has a separate legal entity- means a company can be sued and can sue or while a company can be taken to court its owners cannot Greater continuity – it does not close down on the death of a shareholder Disadvantages Too many legal formalities – this may be costly and time consuming Too many legal requirement – that is, end of year accounts must be published Risk of takeover- control may be lost if another company obtain enough shares in the company Documents that Must be Summited by Limited Companies i) Memorandum of Association 7  It governs the company’s relationship with the outside It contains: The company’s name with the word ‘limited’, the address, and the objectives of the company ii) Articles of Association This document controls the internal running of a company It contains: procedures for calling AGM, procedures for election of directors and A statement concerning borrowing powers of the company iii) Statement of Authorised Capital This is the maximum amount of capital which the company is allowed to raise iv) The Prospectus This is an invitation to the public to buy shares in a public limited company It contains the following information: ✔ Information about the business venture ✔ Objectives of the company ✔ Details of the types of shares and the amount of shares being sold ✔ Instructions how to apply for shares Capital Structure of Limited Companies i) Authorised capital The maximum amount of share capital a company is allowed to raise through issuing/ selling shares (ii) Shares A share is a unit of a limited company’s capital. The two types of shares are Preference and Ordinary When a person buys a share, he/she is given a share certificate and receives dividend when the company makes profit (iii) Debentures This is a loan given to a company from members of the public. The person who lends the company money receives a fixed rate of interest whether or not the business makes profit ECONOMIC SYSTEMS An Economic system is the way in which a society allocates scare resources to produce goods and services to satisfy wants of the population Types of Economic Systems are: 1. Traditional [Subsistence] 2. Free Market [Capitalist Economy] 3. Planned/Command or Controlled Economy 4. The Mixed Economy 8 1. Traditional This is based on traditions and customs where nearly the entire population is engaged in agriculture and produce enough food for their needs. E.g. in early societies, the Taino tribe produced enough food to satisfy their need using the barter system 2. Free Market Economic resources are owned by the private individuals with very little government intervention. E.g. USA and Japan The consumer influences the producers’ decisions on what to produce Goods and services are bought and sold in the market Advantages Incentive to work is high, as a result, the labourer is free to work where he is paid the best Competition among firms results in greater efficiency and reduced prices Consumers are free to spend their money in any way therefore the firm produces more goods that are in demand A large variety of goods and services are made available Disadvantages Great inequality with income and wealth, this will result in poverty being a major issue Large sums of money are spent on advertising, this creates an artificial demand for goods Wealthy people have more economic power than the poor People’s basic needs may not be met e.g. health and education 3. Planned/Command Economy One in which all the economic decisions are made by the government All resources and products are decided by the government e.g., health, education E.g. countries with planned economy- North Korea, Cuba, China Advantages Basic needs of the population are met There is little inequality of wealth and income There is less waste of resources Disadvantages Private firms do not exist to compete with each other and force prices down There is less incentive to work hard to earn more or make profits There is limited consumer choice 4. The Mixed Economy 9  One in which economic resources are owned and controlled by both private and public sector. E.g. Caribbean countries including Jamaica, Trinidad E.g. the government provides services such as; defence, hospitals, schools, public health Advantages The government is free to make laws to protect consumers from unfair trading practices A wide variety of goods are provided by both government and private individuals Disadvantages Too much government intervention may result in conflict between private and public sector State owned firms are allowed to operate inefficiently wasting resources FUNCTIONAL AREAS OF A BUSINESS ▪ Functional area of a business refers to how the organization is structured for efficient operation. This means that the activities of the business are grouped accordingly to the nature of what is required. ▪ A small business will be managed by a one person, but a large business will be managed by more than one person with specific skills. ▪ Functional areas of business include: marketing, production, personnel, finance and research and development. Production ▪ This department is responsible for converting raw materials into goods and services needed by customers to satisfy their needs and wants. ▪ The functions include: buying raw materials, ensuring high quality production, storing material and finish products, research and development of new products Marketing ▪ This department is responsible for finding out what customers want and how this can be promoted and sold ▪ The functions include:pricing the product, promotion and advertising, distribution and selling, market research Personnel/Human Resource ▪ This department responsible for recruiting the right person with the expertise to carry out the job, it is responsible for the employee’s welfare ▪ The functions include: recruitment of staff, staff training, disciplining of workers, staff wages, sick leave and pension schemes Finance 10  ▪ This department is responsible for managing the finances and cash flow of the business. ▪ The functions include: keeping up-to-date accounts, keeping cash flow records, keeping within the budget and obtaining new finances Research and Development ▪ This department is responsible for seeking to improve its product or service in order to maintain its competitive edge. ▪ The functions include: redesigning or rebranding, financial research, feasibility study ROLE OF STAKEHOLDERS IN BUSINESS ACTIVITY It is important to identify stakeholders in a business so that the organisation - knows who depends on it for survival and knows who has interest in the business Stakeholder - An individual or group with direct interest in the operations and performance of a business Examples of Stakeholders- Employees, Employers/Owners, Customers, Suppliers, Government, Members of the society Role of Employers To provide goods and services of high quality and reasonable price To manage resources (employee, raw material, equipment) efficiently To provide goods working conditions, fair payment of wages etc. Employees To provide labour to allow goods and services to be provided To efficiently use resources placed in their care Customers To purchase and use the products it was intended to be used for To provide feedback on the product through complaints and suggestions Government To protect customers through laws To provide law and order to allow legal business activity to take place The Society To provide local services and infrastructure to the business 11 ETHICAL AND LEGAL ISSUES ▪ Ethical and legal issues are laws and regulations that guide the decisions of an entrepreneur. Ethical issues are basic principles of what is legally right ▪ Legal issues refer to; activities that are guided by the laws of a country. These laws must be followed, or persons will suffer the penalties such as pay paying a fine or going to prison ▪ Ethical and legal principles include adopting an organization’s code of ethics, policies of environmental issue, handling of personal information, legal source of funding, payment of taxes and registration of the business Consequences of Unethical/ Illegal Practices in Business Advertising ▪ The law states that a business should create honest and realistic advertisements. ▪ Consequences of misleading advertising will lead to a loss of customer support or customers may boycott the product Payment of Taxes ▪ All taxes must be paid over to the state, this will be used for the development of the country ▪ Consequences of not paying taxes may lead to legal actions being taken against the business leading to heavy fines or imprisonment Environmental Issue ▪ The law provides guidelines about disposal of waste and packaging to be used, however some businesses may go undetected for years ▪ Consequences of Unethical disposal of waste may lead to pollution in the environment and fines imposed by the courts Use of Safe and good quality raw material ▪ A business should use safe and good quality raw material to make its product ▪ Consequences of making cheap and unsafe product may create health problems or loss of customer support Not Accepting or Offering Bribes 12  ▪ An entrepreneur should not accept or offer bribes, this will encourage the customer that the business is always doing the right thing. Money Laundering ▪ A business should avoid the practice of money laundering, this is where an entrepreneur receives money illegally through serious crimes such as drug trafficking but makes it appear legal. ▪ Consequences of money laundering may result in the entrepreneur being imprisoned. ASSIGNMENT #1 1. (a) Describe any One of the following careers in the field of business listed below. [The description should include: definition and two advantages (5 marks) ▪ Compliance officers ▪ Strategic planners ▪ Educators (online and face to face) ▪ Information Officers ▪ Entrepreneurs ▪ Resource Personnel ▪ Web designers ▪ Web Planners ▪ Software Developers ▪ Advertising and public relations (b) What are ethical/legal issues in a business. (2 marks) © State one unethical issue and its consequence (3 marks) Total 10 marks 13