Business Studies and Management (+2) PDF

BUREAU’S HIGHER SECONDARY (+2) BUSINESS STUDIES AND MANAGEMENT PART - I (For +2 First Year Commerce) (Approved by the Council of Higher Secondary Education, Odisha) BOARD OF WRITERS...

BUREAU’S HIGHER SECONDARY (+2) BUSINESS STUDIES AND MANAGEMENT PART - I (For +2 First Year Commerce) (Approved by the Council of Higher Secondary Education, Odisha) BOARD OF WRITERS Dr. Upendra Nath Sahu Sri Bijoy Kumar Das S.L.O-Cum Deputy Secretary to Govt. Reader in Commerce Deptt. of H.E., Govt of Odisha, Bhubaneswar I. M. I. T, Cuttack Dr. Ajit Kumar Kar Sri Jyoti Prakash Rath Reader in Commerce Lecturer in Commerce R.D. Women’s University, Govt. College, Phulbani Bhubaneswar REVIEWER Dr. Dhruba Prasad Pattnaik Ex-Controller of Examinations, CHSE, Odisha Published by Odisha State Bureau Of Textbook Preparation and Production, Pustak Bhavan, Bhubaneswar Published by The Odisha State Bureau of Textbook Preparation and Production Pustak Bhavan, Bhubaneswar, Odisha, India First Edition : 2016/ 1000 Copies Publication No : 182 ISBN 978-81-8005-358-0 © Reserved by The Odisha State Bureau of Textbook Preparation and Production, Bhubaneswar. No part of this publication may be reproduced in any form without the prior written permission of the Publisher. Type Setting & Design : M/s Orissa Printing Works, Cuttack Printed at : M/s Jagannath Process(P) Ltd, Cuttack Price : Rs 174 (Rupees one hundred seventy four only)  FOREWORD The Odisha State Bureau of Textbook Preparation and Production, Bhubaneswar has made a pioneer attempt to publish text books for +2 Commerce Stream with an excellent team of teachers in different subjects. The present book “Business Studies and Management- Part I” is meant for Higher Secondary Commerce students. This book has been written by a team of learned academicians namely Dr. Upendra Nath Sahu, Sri Bijoy Kumar Das, Dr. Ajit Kumar Kar and Sri Jyoti Prakash Rath and reviewed by Dr. Dhruba Prasad Pattnaik. I would like to record my sincere gratitude to all of them for accomplishing this maiden venture in time. The main purpose of developing this text book is to provide a thorough exposure to the students of Commerce in this subject. The book, prepared according to the new syllabus prescribed by the CHSE, Odisha, shall cater to the needs of young students. I believe that the students and teachers of commerce stream shall welcome and appreciate the book. I would also like to welcome constructive suggestions for further improvement of the book. (Dr. Geetika Patnaik) Director Odisha State Bureau of Textbook Preparation and Production, Pustak Bhavan, Bhubaneswar  PREFACE “Business Studies” has emerged as an important subject for students of Commerce Stream. It is our proud privilege to present the new volume of Business Studies and Management (Part-I) for +2 Ist year Commerce students of the State as per the new syllabus of Council of Higher Secondary Education(CHSE), Odisha. This paper is considered as foundation paper in Commerce stream on which all other subjects rest. Keeping this in view the panel appointed to frame the syllabus has taken into consideration many new areas of business operations which are relevant to the students at +2 level. The salient features of this book are simple language, lucid style, comprehensive coverage and latest information on the topics covered. A sincere attempt has been made to present the relevant materials of this book in such a way that it can enable the students to clearly understand all the topics as well as prepare them for answering all possible examination questions. This book is divided into 14 chapters. The objective type, short answer type and essay type questions have been given at the end of each Chapter with answers to objective type questions. We are also confident that this book will prove useful to students and teachers of business studies. The authors owe personal debt of gratitude to friends, colleagues, eminent scholars and authors on business studies. We are deeply indebted to various authors whose works have been adopted in this book. We take this opportunity to express our grateful thanks to Dr. D. P. Pattnaik for his invaluable assistance in reviewing the text for this book. The present edition of this book would not have seen the light of day but for the direct assistance of Odisha State Bureau of Text Book Preparation and Production, Department of Higher Education, Government of Odisha. We are thankful to all staff members of the Bureau for their active co-operation. The authors would be very glad to receive continuously constructive criticism and creative feedback from the student readers, esteemed teachers and also from practicing managers and businessmen. Board of Writers  CONTENTS CHAPTER TOPICS PAGE NO. 1. NATURE AND PURPOSE OF BUSINESS 1 - 25 2. CLASSIFICATION OF BUSINESS ACTIVITIES 26 - 42 3. SOLE PROPRIETARY CONCERN 43 - 51 4. PARTNERSHIP 52 - 85 5. COMPANY 86 - 114 6. FORMATION OF A COMPANY 115 - 142 7. CO-OPERATIVE SOCIETY 143 - 153 8. PUBLIC ENTERPRISES 154- 179 9. GLOBAL ENTERPRISES, JOINT VENTURE AND PPP 180 - 190 10. INTERNAL TRADE :WHOLESALER 191 - 198 11. INTERNAL TRADE: RETAILER 199 - 223 12. INTERNATIONAL TRADE 224 - 252 13. WAREHOUSING 253 - 263 14. TRANSPORTATION 264 - 280  SYLLABUS BUSINESS STUDIES & MANAGEMENT (BSM) First Year 2 nd Elective (Compulsory),Paper - 1 Unit-I : Nature, purpose and forms of Business Organization Nature and Purpose of Business Meaning, Characteristics, objectives, Requisites of successful business, Classification of Business activities-Industry, commerce, Trade and Aids to trade and Business Risk Concept Forms of Business Organizations Sole Proprietorship: Concept, Importance and Limitations, Partnership Concept. Types Importance and Limitations of partnership, Registration of a Partnership Firm, Concept of Partnership Deed and its contents. Unit-II : Company, Co-operative Society, Public, Private and Global Enterprises Company (As per Companies Act, 2013) - Concept, Merits and Limitations; Types, private and public concept, Distinction between a Public and Private Company, Formation, of a Company-Stages, Important Documents(Memorandum of Association, Articles of Association, Certificate of Incorporation and commencement. Co-operative Society: Meaning, Characteristics, Advantages, and Disadvantages Public, Private and Global Enterprises: Concept of Public & Private Sector enterprises, changing Role of Public Sector enterprises, Forms of public Sector Enterprises (Departmental Undertakings, Statutory Corporation and Government Company), Concept of Global Enterprises, joint Ventures and Public Private Partnership (PPP). Unit-III : Internal Trade Wholesalers- Meaning, Characteristics, Functions & Types Retailer-meaning, Characteristics and Function types of Retailers, Itinerant retailer, Small Independent Retailers, Large Scale Retail Organizations- Departmental Stores, Multiple Shop Mail Order Business, Super Market, Network Marketing, E- marketing, Service of Retailers to Wholesaler and Consumers, Distinction Between Wholesaler and Retailer. Unit-IV : International Trade & Business Services International Trade: Meaning, Nature, Importance & Limitations of International Trade Distinction between Internal and International Trade, Export Procedure- Enquiry, Receipt of order, Clearance for export, Foreign Exchanges Formalities, Exchange rate, Shipping order Invoice, Shipment of goods and Securing payment, Import procedure- Permission to Import, Indent, Letter of Credit, Custom Formalities, Clearing Goods, Making Payment and Closing Transactions. Ware Housing: Meaning & Functions Transportation: Importance of Railway, Air & Water  CHAPTER-1 NATURE AND PURPOSE OF BUSINESS STRUCTURE 1.1 Introduction 1.2 Kinds of Human Activities 1.3 Business, Profession and Employment 1.4 Meaning and Definition of Business 1.5 Profit : Its relevance to Business 1.6 Scope of Business 1.7 Importance of Business 1.8 Functions of Business 1.9 Requisites of Successful Business 1.10 Questions 1.11 Answers to Objective Questions 1.1 INTRODUCTION Business is a human activity. Human beings keep themselves engaged in some occupations or activities to satisfy their various needs. The needs may be economic or material, social or psychological. Such occupations or activities are called human occupations or human activities. The following are the important characteristics of human activities. (a) These are undertaken only by human beings. (b) The activities are undertaken to satisfy human needs or wants. (c) Human needs may be economic, social and psychological.  BUSINESS STUDIES AND MANAGEMENT, PART-I 2 (d) The activities continue throughout the life span of a human being. (e) Human activities are undertaken either for earning money or for getting mental satisfaction. 1.2 KINDS OF HUMAN ACTIVITIES On the basis of their characteristics, the human activities are broadly grouped into two kinds. They are- (1) Non-economic activities, and (2) Economic activities. 1.2.1 Non-economic activities: Non-economic activities refer to those human activities which are undertaken for not any economic reward i.e. not for earning money but for mental satisfaction. All these activities are performed due to social, religious, cultural, emotional or psychological reasons. The different types of non-economic activities may be undertaken due to love and affection, personal satisfaction, social obligation, religious obligations, patriotism, physical needs etc. 1.2.2 Economic Activities: Human activities which are performed in exchange for money or money’s worth are called economic activities. Economic activities are related to production, distribution, exchange and consumption of goods and services. 1.2.3 Classification of Economic Activities: Economic activities or occupations of human beings can be classified into three broad categories. These are (i) Business (ii) Profession and (iii) Employment. (i) Business: Business refers to those economic activities, which are connected with the production and exchange of goods and services with the main object of earning profit. People engaged in business earn income in the form of profit. The person who carries on the business is called the ‘Businessman’ or ‘entrepreneur’ and the business unit is called the enterprise or the firm. (ii) Profession: Profession is an economic activity or occupation which is concerned with the rendering of specialized personal services to clients in return of a payment  3 NATURE AND PURPOSE OF BUSINESS called fees. The specialized service is based on professional knowledge, education and training. The persons who are engaged in a profession are called professionals. Chartered Accountancy, Cost Accountancy, medicine, Law, tax consultancy are examples of professions. The main features of a profession are as follows- (a) A professional should have specialized knowledge and training prescribed for entering into the profession. For example- CA for Chartered Accountants, LLB for Law, MBBS for medical. (b) The membership of a particular professional body is compulsory. (c) Every professional body has a code of conduct which every member must follow. (d) Professionals charge fees from clients for providing their services. (e) A professional cannot advertise himself if it is banned by the professional body. Some such professional bodies are : 1. Institute of Chartered Accountants of India- For Accounting Profession. 2. Institute of cost and works Accountants of India- For Cost Accounting profession. 3. Institute of company secretaries of India- For Company Secretary profession. (iii) Employment or Services: When a person undertakes to render personal service under an agreement, he is said to be in service or employment. The person who renders personal service to others is called ‘an employee’. The person or organization which engages others to work is called ‘an employer’. The employee is paid remuneration in the form of wages or salary, allowances and other benefits according to the service agreement. The employee acts under the guidance and control of his employer. The employment or service may be in a Government or private organization. Some important features of employment are as under: 1. An employment begins when a person joins in an organization to render personal services.  BUSINESS STUDIES AND MANAGEMENT, PART-I 4 2. The employer assigns duties to the employee. 3. An employee is not required to make any capital investment. However, in certain cases employees may be allowed to participate in the capital investment later on. 4. The employee will have to follow service rules and regulations prescribed by the employer. 5. There are no standard qualifications for getting employment. 6. Regular remuneration is guaranteed which is certain. 7. The employer laid down norms of behavior to be followed by an employee. 1.3COMPARISON BETWEEN BUSINESS, PROFESSION AND EMPLOYMENT Sl. Basis Business Profession Employment No of difference Production and selling of Rendering of Rendering personal 1. Meaning goods and services. specialized services to service under an the clients. agreement of employment Starts after completing Starts after getting Starts after service some legal formalities if certificate from the contract with the 2. Commencement required professional body or employer institution No formal qualification is Formal qualification is Formal qualification 3. Qualification absolutely necessary necessary may or may not be necessary 4. Capital Adequate capital is Capital requirement is Capital requirement is requirement required comparatively less not at all necessary  5 NATURE AND PURPOSE OF BUSINESS Sl. Basis Business Profession Employment No of difference The reward is known as 5 Reward Profit is the reward of The reward of a salary or wages Business profession is known as fees 6. Degree of risk Degree of risk is absolute It involvers little risk There is no risk at all because profit is when there is no work uncertain 7. Transfer of Transferable possible Transfer of interest Transfer of interest is from one person to cannot take place not possible Interest another 8. Code of May or may not follow Code of conduct is There is a contract conduct code of conduct essential instead of code of conduct. 9. Test of Profit earning Quality of service Dedication to job Efficiency proved 10. Nature Mostly physical in nature Mainly mental in nature Both physical and mental in nature. 1.4 MEANING AND DEFINITIONS OF BUSINESS The word ‘Buiness’ literally means’State of being busy’. Every human being is busy with some kind of work in order to earn a living. These works are called economic activities or occupation. Business is an occupation in which goods and services are exchanged for money or money’s worth on expectation of profit. In the broader sense of the term, Business is the sum total of all the economic activities which start right from the production of goods and services down to the task of taking them to the consumers. It includes all those activities which are related with the production, purchase and sale or exchange of goods and services with the aim of earning profits. A factory, a shop, a transport company, an insurance company, a bank, a warehouse, an advertising agency are examples of business organizations or business enterprises.  BUSINESS STUDIES AND MANAGEMENT, PART-I 6 Different authors have defined business differently from time to time. Some important definitions of business are as follows: 1. According to L.H. Haney, “Business may be defined as a human activity directed towards producing or acquiring wealth through buying and selling of goods”. 2. According to W.R. Spriegel, “All of the activities included in the production and sale of goods and services may be classified as business activities. 3. According to L.R. Dicksee, “ Business is a form of activity pursued primarily with the object of earning profits for the benefit of those on whose behalf the activity is conducted”. From the above definitions, it is clear that the term ‘Business’ includes all those activities that are related to the production and distribution of goods and services with a view to earning profit. It also includes all those activities, which indirectly help in production and exchange of goods such as transport, insurance, banking, warehousing etc. 1.4.1 Characteristic or Nature of Business The important features or characteristics of business are as given below: 1. An entrepreneurial activity: To set up a business there must initially be an entrepreneurial endeavour and for this there must be someone to take the responsibilities. The person who takes the responsibilities to establish a business is an entrepreneur. He is a person who creates a new business in the face of risk and uncertainly. Such a person is also called a ‘Businessman’. 2. Economic activities: Business includes only economic activities. It is concerned with all activities from production to distribution of goods and services with the object of earning profit. Any activity without profit motive cannot form business. 3. Dealings in goods and services: Business deals in goods and services. Goods may be consumers’ goods or producers’ goods. The consumers’ goods are meant for direct consumption like cloth, shoes, foods, tooth brush, tooth paste etc. But  7 NATURE AND PURPOSE OF BUSINESS the producers’ goods are used for further production of goods like machinery, tools, building, raw materials etc. the term services refers to intangible and invisible items such as transportation, insurance, banking, supply of electricity etc. 4. Regularity in dealings: Business is concerned with dealing in goods and services on regular basis. An isolated transaction cannot constitute business. For example, if a person sells his used motor car and earns a profit, he is not engaged in business. But if he engages himself continuously in buying and selling motor cars, it will become his business. 5. Sale or exchange for value: Business involves sale or exchange of goods and services for value. Production or purchase for personal consumption or presenting to others as gifts or at free of charge cannot come under business. 6. Profit motive: The primary objective of a business is to earn profits. Profits are essential for survival, growth and expansion of business. It is the reward of the entrepreneur for undertaking the risk of business. 7. Element of risk and uncertainty: Business involves an element of risk arising from uncertainty. Generally, the greater the degree of risk, larger the scope of profit in business. The risks and uncertainties arise due to variety of factors like changes in technology, changes in tastes and preference of customers, supply of capital and raw materials, government policies, natural disasters etc. 8. Creation of utilities: Business creates utilities to facilitate the use of goods according to the needs of the customers. It adds time, place and form utilities to production of goods. For example, storing goods and supplying them according to the need of customers creates time utilities, transporting goods from one place to another leads to place utilities and converting raw materials into finished product creates form utilities.  BUSINESS STUDIES AND MANAGEMENT, PART-I 8 9. Organization: Organization is essential for smooth functioning of the business. The entire business activities are to be formed as a unit. It depends upon the size and degree of business operations. 10. Finance: Business cannot run without finance. The finances are required for providing fixed and working capital. The availability of other factors of production like land, labour and raw materials also depend upon the availability of finance. 11. Consumer satisfaction: The ultimate aim of business is to supply goods and services to the consumers. The business men always try to satisfy the consumers to maintain the demand of the products. The existence and expansion of business depends upon the likings of the consumers for the products of that business. 12. Satisfying social needs: Business tries to satisfy social needs because it is a socio-economic institution. It is only the public who needs business. In the same way business also needs public support. So a business must serve public purpose. 13. Art as well as Science: Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws. 1.4.2 Objectives of Business Every business has a set of objectives to be achieved. These objectives clearly indicate the direction in which the business has to move and what is its target. The objectives of business are many and depend upon the nature of the business enterprise. However, the objectives are broadly classified into the following categories. (1) Economic objectives (2) Social objectives (3) Human objectives (4) National objectives (5) Global objectives and (6) Organic Objectives 1. Economic Objectives: The primary objectives of business are economic because it includes all economic activities. The important points under economic objectives are as under.  9 NATURE AND PURPOSE OF BUSINESS (a) Earning adequate profit: Profit is the most important objective of a business. Earning adequate profits is a precondition for survival and growth of the business. It is the barometer of efficiency, progress and stability of the business concern. It helps generate sufficient resources to finance further expansion of business. Moreover, profit is the reward of the entrepreneur for undertaking risk of the business. (b) Creation of Customers: The primary objective of earning profit depends largely on the creation of new customers and retaining them. A business can create customers by supplying the goods and services which the customers want. Through market research a business can know what th customers want. A business can remain in the field only if there are enough customers to buy the products or services offered by the enterprise. (c) Making innovations: Innovation means the discovery of new ways and techniques for economy in production and improvement of products and services. A business can earn profit and create customers only when it produces new and better products and services. Through innovation a business enterprise can increase its image in the mind of the customers. Research and development help business concern to find out new products, a new markets, a new techniques of production and distribution etc. (d) Production of goods: Production of goods is another economic objective of a business. An enterprise produces goods according to taste and requirement of the customers. Profit can be earned only when the goods are produced and sold to customers. (e) Growth and expansion: The growth and expansion of business activities is also one of the important economic objectives of business. It depends upon the relationship between business and its important constituents such as owners or shareholders, employees, customers, creditors, supplier’s and government etc. the business can grow if these interested parties are satisfied. Owner must get adequate return on capital,  BUSINESS STUDIES AND MANAGEMENT, PART-I 10 Employees should get fair wages and salaries. Customers feel satisfied with timely payment and government with due taxes and duties. 2. Social objectives/Social Responsibilities of Business: Business is an important part of society. It cannot survive and grow without the support of the society. The business should undertake those activities, which are essential for the betterment of the society. Business functions under social environment and so has certain social responsibilities. The important social objectives of any business should be as under: (a) Supply of goods which the society needs: Supply of quality goods and services to the society is an important social objective of every business. If the business fulfills this objective, the goodwill and reputation will increase. On the other hand if it fails to supply quality goods and services, it will incur the wrath of the society. (b) Avoid unfair trade practices: The business should avoid anti-social and unfair trade practices like adulteration, hoarding and black marketing. It should not issue misleading advertisements. Moreover it should not over-charge the customers and indulge in profiteering at their cost. (c) Providing employment opportunities: One of the important social objectives of a business is to create and provide employment opportunities to the people in the society. It is the responsibility of management to help increase direct and indirect employment in the area where it is functioning. Even though this objective is in conflict with the economic objective of reducing cost by the process of mechanization, yet there should not be less of jobs to the people in the society. (d) Paying fair wages and salaries to employees: A business has responsibility towards its employees. The objective implies provision of fair wages and other facilities like housing, medical facilities, education, good working condition and opportunity for promotion etc. to the employees.  11 NATURE AND PURPOSE OF BUSINESS (e) Efficient use of resources: The resources at the disposal of business belong to the society. Therefore, the business should make the best possible and effective use of raw materials, machines, technical knowhow, capital and other resources for the economic development of the society. (f) Social welfare: An important social objective of business is to participate actively in the various social welfare activities in the locality where it functions. The welfare activities are concerned with running of schools, colleges, hospitals, orphanages, old-age homes, charitable institutions, maintaining parks and gardens and so on. (g) Prevent pollution: One of the social objectives of business is to prevent pollution which may be related to air, water or sound pollution etc. In the present society, pollution has become a serious problem with the growth of modern industries. It not only affects the health of human beings but also other living animals. A business enterprise can better serve the society by taking adequate anti pollution measures. (h) Maintain ethical norms: A business is a member of the society. So it has to maintain the ethical and moral norms of the society in which it functions. A business should not indulge in discriminatory practices on the basis of caste, religion, social and economic status. (i) Act as a good citizen: Like a responsible citizen of the country, a business should co-operate with Government in the matter of payment of tax and follow the rules and regulations imposed from time to time by the Government. (j) Minimum wastage: All the resources are valuable for the society. A business should conserve these resources and adopt measures for minimum wastages of it. This may lead to optimum utilization of the resources in the society. (k) Research: In the changing technological world, it is essential to use latest scientific devices for production and marketing of goods. One can compete with the changing business world only through R & D programmes.  BUSINESS STUDIES AND MANAGEMENT, PART-I 12 3. HUMAN OBJECTIVES Human objectives of a business arise from the expectations of the people working in it. The success of a business depends upon the ability, zeal and co-operation of the persons involved with it. No business can undermine the human factor. So every business has to pay due attention to its human objectives as stated below. (a) Humane treatment: Business is run by human beings. They should not be treated like machines. They should not be treated like machines. They are guided by emotions, instincts, peace and happiness in their (b) Job satisfaction: The business should take such steps whereby the job would become more interesting and challenging to its employees. To get the best out of them, they should be given a fair deal by the business. (c) Workers’ participation in management: To motivate and to get best from its workers, they business should allow workers to participate in the decision making process. This participation in management by workers leads to increase the productivity and efficiency of the business. (d) Development of human resources: One of the important human objectives of a business is the development of human resources. The success of a business depends more on the quality of human resources than other physical resources like land and building, machines and equipment etc. So, proper training and placement is necessary to increase the skills and abilities of the persons working in the business. (e) Recognition and prestige: A business should provide fair dealing to workers, customers, suppliers, investors and Government. The management must create healthy relations with all these constituents of the society. As a result of this, the business will get recognition in the society and command prestige.  13 NATURE AND PURPOSE OF BUSINESS 4. National Objectives: National Objectives of a business refer to those objectives which make a business contribute to the national development. Some of the important national objectives of a business are as under: (a) Production according to national priorities: Every government fixes national priorities. The business should produce and supply goods and services according to national priorities as these goods and services are quite necessary for the development of the country. (b) Achieve self-reliance: A business should come forward to produce and supply all those goods which can increase the export and reduce the import of the country. This will help the nation in earning and saving scarce foreign exchanges. (c) Development of small scale enterprises: Business units, large and small should help one another in various ways. Every large business should help in the development of small scale enterprises. The big unit should encourage small units to sell their products to them and sometimes supply inputs to them at a reasonable rate as ancillaries. (d) Development of skilled personnel: Every nation requires skilled personnel for its development. So, the business has the responsibility of giving training to the young men as apprentices and increase their skills. 5. Global Objectives: Earlier India had a very restricted business relationship with other nations. There was a very rigid policy for import and export of goods and services. But, now-a-days due to liberal economic and export import policy, restriction on foreign investments have been largely abolished and duties on imported goods have been substantially reduced. This change has brought about increased competition in the market. To-day because of globalization the entire world has become a big market. Goods produced in one country are readily available in other countries. So, to face the competition in the global market every business has certain objectives in mind, which may be called the global objectives.  BUSINESS STUDIES AND MANAGEMENT, PART-I 14 6. Organic Objectives: The term ‘Organic’ strictly means ‘pertaining to or relating to organs of living being’. In broader sense and with reference to business it refers to anything that is intrinsic and structural. Therefore, by organic objectives of business, we mean the bodily or body- related objectives of the business i.e. the internal growth and survival of the business. A business is established to produce or procure goods, generate services and market them with a view to earning profits. This, in turn requires that the business must survive in the market, and to compete with others, must grow and be strong. It must acquire enough competence to exploit the available opportunities. In this sense, organic objectives are supportive objectives of the economic objectives of the business. Along with the survival and growth, a business should also aim at creating a respectful position i.e. business personality for itself in the minds of people. 1.5 PROFIT: ITS RELEVANCE TO BUSINESS: In the words of Peter F. Drucker, “the problem of any business is not the maximization of profit, by the achievement of sufficient profit to cover the risks of economic activity and thus to avoid loss.” Maximization of profit should not be the sole aim of business. But yet the business should earn adequate profit due to the following reasons. (a) Measure of efficiency: Profit is considered as a measure of efficiency. The efficiency of business is measured by the profit earning capacity. It is the acid test of ability of the business. (b) Survival and growth: Profit is essential for survival and growth of any business concern, Profit provides internal source of finance for growth and expansion. External finance is also possible when a business has ability to earn sufficient profit. (c) Risk premium: Profit is the risk premium that covers the cost of staying in the business. Adequate profit enables the business to face the challenges of replacement, obsolescence, market risk and uncertainty.  15 NATURE AND PURPOSE OF BUSINESS (d) Incentive: Profit provides sufficient incentive to the businessman to operate business with full enthusiasm. It is a reward for the labour of an entrepreneur. (e) Social welfare: Business can spend on social welfare activities if it earns sufficient profit. Otherwise it is not possible to fulfill the obligations towards the society by taking various welfare schemes. (f) Prestige and goodwill: A profitable business enterprise is capable to create goodwill and prestige in the society. It can obtain recognition from all section of the community such as customers, suppliers, creditors, investors and general public. 1.6 SCOPE OF BUSINESS: The scope of business includes all those activities related to production of goods and services and their distribution to the consumers who ultimately require them. The range of activities which a business covers are as follows. (a) Production: Production of goods for sale is one of the principal activities of a business. But production of goods by a person for his own consumption is not business. The goods may be produced either for use by the final consumers or to be used by the producers for further production. (b) Purchase or procurement: Purchase of either raw-materials or finished products is one of the activities covered under business. A manufacturer purchases raw materials for production while a trader purchases finished goods for sale to the consumers. (c) Sale or exchange: Sale is one of the principal activities of a business. A producer sells the goods manufactured by him and a trader sells the goods purchased by him.  BUSINESS STUDIES AND MANAGEMENT, PART-I 16 (d) Financing: A business requires finance or money to carry its operations. A businessman may not always be able to provide the fund required for his business. So, he has to raise finance from different sources. However, a business has its inherent capacity to generate finance which it utilizes along with outside sources for its survival and growth. This, therefore, is also another scope of a business, though incidental to the basic scope of production and distribution. 1.7 IMPORTANCE OF BUSINESS : Business is primarily concerned with production and acquisition of wealth. It is involved with the recurring acts of buying, selling, procuring, collecting, improving, manufacturing and distributing goods and services for the satisfaction of human wants and personal gain of the business men. The efficiency of business determines the prosperity of the nation and standard of living of the society. Business is of much importane due to the following reasons. (a) Business provides goods and services needed by the community. (b) Business generates employment, income and purchasing power in the society. (c) The efficiency of business ensures growth, stability, prosperity and reputation of the nation. (d) Business leads to productive and efficient utilization of resources. (e) Business utilizes the effective channels of distribution by which the products are available to customers at the right time, at the right place and in good condition. (f) Business provides entrepreneurial ability and managerial skills to the society. (g) Business induces innovation by which quality products are supplied at a cheaper cost.  17 NATURE AND PURPOSE OF BUSINESS (h) Business leads to mass production and mass marketing so that the advantages of large scale operations are obtained by the consumers. (i) Business undertakes various social welfare activities to fulfill its social obligations. (j) Business creates proper climate for human resource development by providing training to increase the skills of personnel. (k) Business helps to attain the national aspiration of growth with stability and social justice. 1.8 FUNCTIONS OF BUSINESS: In order to achieve its objectives, a business has to perform a number of functions. The important functions of a business are: 1. Production Function: This function is concerned with transformation of inputs into specified outputs as required by the society. The various inputs such as men, money, materials, machines and other facilities are necessary to carry out this production function. The production department is also responsible to perform other related functions like production planning, production engineering, plant layout, plant building, materials handling, purchasing, stores management, quality control, repairs and maintenance etc. 2. Marketing Function: Marketing is an economic process by which goods and services are transferred from the producers to the ultimate consumers. The marketing function has fpur components which are popularly known as 4p’s. They are (i) Product (ii) Price (iii) Physical distribution and (iv) Promotion. The basic marketing functions include selling, buying, grading, transporting, storing, financing, risk bearing and marketing information. Market research plays a very important role in the present competitive world. Marketing department is responsible to carry out all these functions of marketing.  BUSINESS STUDIES AND MANAGEMENT, PART-I 18 3. Finance Function: Finance is the life blood of business No business can be successfully run without sufficient finance. The business needs finance (a) to bring it into existence (b) for smooth operation (c) for expansion and growth and (d) for liquidation of the business. Finance function is concerned with financial planning, raising of funds, use and allocation of funds, and financial control etc. 4. Personnel Function: This function deals with the human side of the business. The personnel function can be defined as the management of people at work. The objective is to attain maximum individual development, desirable work atmosphere and good interpersonal relations. The personnel function is concerned with recruitment, training and development, health and safety, wages and salaries administration, labour relations and personnel resource planning etc. It ensures that the right number of people possessing required skills at the right time are available to perform the various tasks of the business. 5. Office Function: Office function is mainly concerned with records. The purpose of office function is to collect, generate and communicate information to the executives for decision making and policy formulation. The scope of office function in a modern business is very wide. The responsibility of this function is entrusted to the office manager. The office manager has to perform (a) information function (receiving, collecting, recording, preserving, arranging, analyzing and providing information) (b) operational function (office systems, record management, form design, office stationeries and office control) (c) public relation functions. Among the functions discussed here, production and marketing are regarded as primary functions, while others as assisting functions. These functions are however, interdependent and inter related. For example: marketing function is value less without production function and the goal of production function cannot be achieved without  19 NATURE AND PURPOSE OF BUSINESS marketing function. Similarly finance function is important because it is related to all the functions. The integration of all these functions is necessary to achieve the objectives of a business. 1.9 REQUISITES OF SUCCESSFUL BUSINESS: Modern business is complex, complicated and very elaborate. There are many uncontrollable factors affecting the prospects of business. The competitions among businesses are keen. The demand for goods and services is ever changing. There is always improvement in techniques. The business has to co-ordinate the important functions such as production, marketing, finance and organization. Thus, the successful establishment and operation of a business is not that easy. There are certain requirements for the success of a business which are discussed below. 1. Well-defined objectives: A clear and definite objective must be laid down for a business. The main and subsidiary objectives must be determined beforehand. The business must be clear as to what type of goods are to be produced or purchased, what to be sold or what services to be rendered. In modern business, effective and efficient management is always “management by objectives”. 2. Proper planning: Planning is deciding what is to be done, how it is to be done, when it is to be done, any by whom it is to be done. It implies thinking about the future, for seeing and fore casting the future events, preparing the programme and guiding the action as per objectives. It is an essential requirement for a successful business. 3. Proper location, layout and size: The business must be located in a suitable place to attract a large number of customers and factors of production available at reasonable cost. A good layout means proper placement of equipment and optimum use of space. Similarly proper size of business leads to better management.  BUSINESS STUDIES AND MANAGEMENT, PART-I 20 4. Sound organization: Sound organization means a good structure, proper allocation of functions, division of labour, delegation of authority, and harmonious relationship among employees etc. The three essentials of an efficient organization are: (a) competent people will to work together. (b) Common goal to be achieved (c) Physical facilities and equipment available for doing the work. 5. Efficient management: Effective and efficient management aims at guiding, directing, controlling and co- ordinating the activities of a group towards realization of the desired goal. It provides risk bearing abilities and managerial skills. The management must be competent, honest, responsible and tactful. 6. Adequate Finance: Finance is required for purchase of assets, raw materials, payment of wages and salaries etc. Finance meets both fixed capital and working capital requirements as well as short-term and log-term purposes. Adequate funds should be available for growth and expansion of business. Neither the shortage nor the abundance of capital is needed for the business enterprises. 7. High employee morale: Success of a business depends on whole-hearted cooperation of the employees. If employees are well treated and offered all facilities to ensure job satisfaction, they develop a deep sense of belongingness to the organization. Their morale will be high, which will lead to high productivity and less supervision and control. 8. Best marketing system: Marketing is essential for earning profits. There is no use of production of goods unless those are sold in the market. If the distribution or sale of products is not undertaken efficiently, stock of unsold goods will be piled up and production is to be curtailed or stopped. Therefore, a scientific marketing system is necessary to sell the products at a profit.  21 NATURE AND PURPOSE OF BUSINESS 9. Satisfied Consumers: Customers are the foundation of a business. They are instrumental for growth and expansion of the business. The motto of the business should be the customers are always right”. Satisfied customers are best medium of advertisement. The marketing and distribution system should be so designed that it should attract new customers of the business. 10. Innovation: Innovation means systematic search for new knowledge. It results from research. Research may be related to products, market, material, method, technique and industrial relations etc. In the changing world it is very difficult to stand in the competitive business without innovation. Thus, innovation is indispensable for survival and growth of the modern business. 11. Risk bearing capacity: Business is full of risk and uncertainty. Higher the risk, the more the profit a business can earn. The business must have sufficient risk bearing capacity so that it can be in a position to produce right thing, at a right time and by correct method. This capacity enables the business to minimize cost and maximize profit and keep pace with others in changing circumstances. 12. Reputation: To become successful, a business must not indulge in any act which damages its reputation. It can earn good will through honest dealing and good behaviors.  BUSINESS STUDIES AND MANAGEMENT, PART-I 22 1.10 QUESTIONS OBJECTIVE AND SHORT ANSWER TYPE QUESTIONS Q.I. Choose the correct alternative from the following: (i). Of the following the one that is not an economic activity is- (a) Production (b) Preaching religion (c) Selling of goods (d) Doing a job (ii). Of the following the one which is an economic activity is- (a) Teaching in a School (b) Playing football with friends (c) Attending to one’s relative (d) listening a radio who is unwell (iii). The primary aim of business is – (a) To help its employees (b) To help society (c) To earn profit (d) To assist management (iv). Business objectives are categorized as- (a) Economic, Political and cultural (b) Social, political and Human (c) Political, Human and Cultural (d) Human, Economic and Social (v) Business includes only- (a) Social activities (b) Political activities (c)Institutional activities (d) Economic activities (vi). Economic objectives of a business do not include- (a) Creation of customers (b) Continuous innovations (c)Generation of employment (d) Best possible use of resources (vii). Social objectives of a business do not include- (a) Welfare of the society (b) Best use of economic resources (c) Creation of customers (d) Profit generation  23 NATURE AND PURPOSE OF BUSINESS (viii). The activity that requires formal qualification is- (a) Business (b) Profession (c) Employment (d) Occupation (ix) The function that deals with the human-side of the business is known as- (a) Office function (b) Finance function (c)Marketing function (d) Personnel function (x) Innovation implies- (a) Risk and uncertainty (b) Search for new knowledge (c) Achieving business activities (d) Good behavior and conduct 2. Fill in the blanks- (a) The economic activity which does not require capital is called____________. (b) _________ requires formal qualification. (c) _________ activity does not aim at earning money. (d) A specialized body that controls the medical profession in India is called_____ (e) _________ is the reward of the entrepreneur for undertaking the risk of business. (f) When a doctor works in a Government Hospital it is called__________. (g) Only_________ activities form part of business. (h) In ___________ activity a person can be called a servant. (i) A profession is related to provide _________ services to the client. (j) Business means exchange of goods and services for mutual_________. 3. Express in one word or term- (i) An occupation which is concerned with the rendering of specified personal services to clients in return of payment called fees. (ii) Transformation of inputs into outputs. (iii) The function of a business organization dealing with the human side of the business.  BUSINESS STUDIES AND MANAGEMENT, PART-I 24 (iv) The occupation in which people work for remuneration. (v) The activity where specialized knowledge is used. 4. Correct the underlined portion in the following sentences. (a) Those human activities which are undertaken with the object of earning a living are known as Non-economic activities. (b) The specialized services of doctors, lawyers, architects, chartered accountants etc. are examples of Social Services. (c) The business function which is concerned with the transformation of inputs into specified outputs is called marketing function. (d) Business activities take place between members of the family. (e) Professional activities are primarily physical in nature. 5. Answer the following questions in not more than three sentences each- (i) What do you mean by economic activities? (ii) Explain the concept of business. (iii) What do you mean by profession? (iv) What are non-economic activities? (v) What is employment? (v) Why is business considered as an economic activity? (vii) Why should a business pursue social objectives? (viii) Give any two examples of employment. (ix) Give any two examples of profession. (x) What do you mean by global objectives of business? 6. Answer the following in not more than six sentences each- (a) Name any six characteristics of business. (b) What are the economic objectives of business? (c) Why is profit making essential in business?  25 NATURE AND PURPOSE OF BUSINESS (d) Explain the human objectives of business. (e) Explain economic activities with examples. LONG ANSWER TYPE OF QUESTION 1. Explain business. Describe the characteristics of business. 2. Explain the different objectives of business. 3. “Profit earning is the sole objective of business”, comment. 4. Distinguish between business, profession and employment. 5. What factors should be taken into account while setting-up of a business? 1.11 ANSWERS TO OBJCTIVE QUESTIONS 1. Correct alternative: i.(b) ii.(a) iii.(c) iv. (d) v. (d) vi. (c) vii. (a) viii. (b) ix.(d) x. (b) 2. Fill in the blanks: (a) Employment (b) Profession (c) Non-economic (d) Medical Council of India (e) Profit (f) Employment (g)Economic (h) Employment (i) Specialised (j) Benefits 3 Express in one word: (i) Profession (ii) Production (iii) Personnel function (iv) Employment (v) Profession 4.Correct the sentences: (a) Economic activities (b) Professional Services (c) Production function (d) Producers and consumers (e) Mental *** 26 BUSINESS STUDIES AND MANAGEMENT, PART-I CHAPTER-2 CLASSIFICATION OF BUSINESS ACTIVITIES STRUCTURE 2.1 Introduction 2.2 Industry 2.3 Commerce 2.4 Difference between Industry and Comerce 2.5 Business Risk 2.6 Questions 2.7 Answers to objective questions 2.1 INTRODUCTION Business activities are concerned with the production of goods and services and their distribution to the consumers. There are two broad categories of business activities. They are (1) Industry and (2) Commerce. Industry refers to production of goods and services and commerce is related to distribution of goods and services to the customers. The broad classification of business activities has been presented in the chart.  CLASSIFICATION OF BUSINESS ACTIVITIES 27 Business Activities Industry Commerce Production of goods Production of Services Primary Secondary Personal Non-personal Industry Industry Extractive Genetic Manufacturing Construction Analytical Synthetic Assembling Integrated Aids to trade Trade Insurance Warehousing Packing Advertising Home Foreign Wholesale Retail Import Export Entrepot Hawking Vending Unit Multiple Shops Departmental Super Mail order Retailer or Stores market Business Chain Stores 2. 2 INDUSTRY Industry is that part of business activities which is concerned with production of goods and services. It is a productive occupation. In a broader sense, it uses the methods of raising, producing, processing or fabrication of products. The goods and services produced by an industry may be either consumers’ goods or producers’ goods. Consumers’ goods are used by the final consumers while producers’ goods are used by the 28 BUSINESS STUDIES AND MANAGEMENT, PART-I businessmen, for further production. The example of consumers’ goods are edible oil, cloth, television, radio, foot wears, motor vehicles, refrigerators etc. On the other hand, the example of producers’ goods are machines, tools, and equipment, ships, rail engines etc. These goods are also called capital goods. 2.2.1Characteristics of industry The characteristic features of industry are as follows- (i) Industries create form utility. Form utility refers to conversion of raw materials into finished products. (ii) Industry is concerned with the raising, producing, processing or fabrication of goods and services. (iii) The goods produced by the industry may be consumer goods or capital goods. (iv) Industry undertakes the production of goods and services for the purpose of sale. (v) Industry undertakes recurrent or regular production. (vi) Industry produces with the object of making profit. (vii) Industry requires capital investment. (viii) Industry involves an element of risk. 2.2.2 Types of industries Industries may be classified on the basis of production of goods or production of services. Depending upon the types of goods produced, industry may be sub-divided into primary or secondary industry. Likewise services may be grouped into personal and non- personal. The primary industry may again be divided into (a) Extractive and (b) Genetic industry. Secondary industry can be either (a) manufacturing and (b) construction industry. Thus industry can be classified under five broad heads, such as: 1. Extractive industry 2. Genetic industry 3. Manufacturing industry  CLASSIFICATION OF BUSINESS ACTIVITIES 29 4. Construction industry and 5. Service industry (Personal & Non-personal) 1. Extractive Industry These industries are involved with the extraction of products from nature. They are concerned with production of wealth from soil, air, water and from beneath the surface of the earth. The examples are: mining, agriculture, fishing, lumbering, hunting, fruit gathering etc. the products of extractive industries may also be used as raw materials for manufacturing and construction industries. Moreover, these are used as finished products by consumers. 2. Genetic Industry Genetic means generation out of the genes of plants and animals. These industries are mainly concerned with breeding of plants or animals, and related to reproduction. Examples of these industries are nurseries raising seedlings and plants, cattle breeding, poultry farming, fish hatchery, or pisciculture goatery, piggery etc. 3. Manufacturing Industry This industry is mainly engaged in manufacturing of physical goods like consumers’ goods, producers’ goods or basic and heavy goods. The manufacturing activity actually converts raw materials and semi-finished products into finished products. In this process, these industries create form utility in goods. Most of the products used by the consumers are the outcome of manufacturing industries. Generally, the products of extractive industries are the raw materials of manufacturing industries. For example: conversion of raw cotton into cotton textiles, production of sugar from sugarcane, production of iron and steel from iron ore etc. Manufacturing industries may be sub-divided into five types. They are (a) Analytical industries (b) Synthetic industries (c) Processing industries (d) Assembling industries and (e) Integrated industries. 30 BUSINESS STUDIES AND MANAGEMENT, PART-I (a) Analytical Industries: Analytical industries are those which employ analytic processes in the manufacturing of goods. Analytic processes break a basic raw material into two or more products. The best example is oil refineries where the same crude oil is analyzed and separated into different products like petrol, diesel, kerosene, lubricating oil etc. (b) Synthetic Industries: Synthetic industries refer to those manufacturing industries where many raw materials are combined together in production process to make a final product. The examples are: cement industry, soap industry, paper and plastic industry etc. Here the used raw materials lose their identity completely in the final product. (c) Processing Industries: In this industry, the raw materials are processed i.e. passed through different stages of manufacturing to become a finished product. For example, in case of textile industry, the cotton passes through ginning fabricating, weaving and dyeing processes to make cloth. The other examples are sugar, paper, rolling mills, pottery, brick making etc. (d) Assembling Industries: Assembling industries are those where different component parts already manufactured are assembled into final products. The examples of such industries are automobile industry, television industry, computer industry etc. Here the used raw materials do not lose their identity in the final product. (e) Integrated Industries: Integrated industries are those manufacturing industries, where processing and assembling are done under one enterprise. The example are: rubber, iron and steel. 4. Construction Industry Construction industries are engaged in the creation of infrastructure such as construction of buildings, roads, dams, bridges, canals, railway lines, tunnels, ports etc. The important feature of this industry is that these constructions are erected, built or fabricated at a fixed site. They cannot be brought to the market for sale. Another feature is, these industries use the products of extractive industry like quarries and manufacturing industries like bricks, cement, iron and steel, plastic products, pipelines etc.  CLASSIFICATION OF BUSINESS ACTIVITIES 31 5. Service Industries Unlike other industries discussed above which produce tangible products, the service industries produce only intangible products. The intangible products are those which do not have any physical form and cannot be stored for future consumption. The services produced may be ‘personal’, like services dyers and cleaners, beauticians etc or ‘non-personal’, like banking, advertising, transportation, insurance etc. 2.3 COMMERCE Commerce broadly refers to interchange of exchange of goods and services with the removal of obstacles between the providers and consumers. In the words of James Stephenson, “Commerce is the sum total of all those processes which are engaged in the removal of the hindrances of persons, place and time in the exchange of commodities.” According to Prof. E. Thomas, “Commercial operations deal with the buying and selling of goods, the exchange of commodities and the distribution of finished products.” Features of Commerce 1. Commerce facilitates the distribution of goods from the producers to the consumers. 2. Commerce comprises trade i.e. buying and selling of goods as well as aids to trade i.e. transport, insurance, warehousing, banking and advertising which help buying and selling of goods. 3. Commerce helps remove hindrances of person, place, risk, time, finance and knowledge. 4. Commerce is concerned with marketing aspect of business. 5. Commercial activities have motives of profit. 6. Commerce involves regularity of transactions. 2.3.1 Functions of Commerce Goods and services are produced for the purpose of consumption. Therefore, these are to be made available from the places of production to the places of consumption. 32 BUSINESS STUDIES AND MANAGEMENT, PART-I But there are certain hindrances or obstacles in the distribution of goods from the producers to the consumers. The main function of commerce is to remove these hindrances. The hindrances are the following types viz (i) hindrance of person (ii) hindrance of place (iii) hindrance of risk (iv) hindrance of time (v) hindrance of finance and (vi) hindrance of information or knowledge. (i) Hindrance of person: Producers cannot always directly sell their products to the millions of consumers as the consumers are scattered throughout the world. This hindrance is called hindrance of persons. The hindrance of persons is removed by the process of trade i.e. buying and selling through middlemen like wholesalers, retailers etc. These middlemen or traders purchase the goods from the producers and sell them to the consumers. Thus, trade which is a part of commerce, plays a major role in establishing contact between producers and consumers. (ii) Hindrance of place: Producers and consumers may be far away from one another. The goods produced in a place may have less demand in that place but may have demand in a far away place. The barrier can be removed by means of transport. The various means of transport such as roadways, railways, waterways and airways help in the distribution of goods from producers to the consumers. (iii) Hindrance of risk: When the goods are in the course of transit or when stored in warehouses, they are subject to risk of fire, damages or deterioration etc. These risks are removed by different types of insurance such as fire insurance, cargo insurance, burglary insurance etc. The varieties of insurance policies cover the losses arising from the risks connected with transport and storage of goods. So, in this way, commerce removes the hindrance of risk through insurance. (iv) Hindrance of time: Goods may be produced at a time when they are not in demand. Thus, the production and consumption of many goods are separated by time. This is called hindrance of time. This hindrance can be overcome through the storage and preservation facilities given by warehouses. So commerce removes the hindrance of time by means of warehousing.  CLASSIFICATION OF BUSINESS ACTIVITIES 33 (v) Hindrance of finance: The traders who are engaged in the distribution of goods require finance for their operations. This hindrance of finance is solved by banking. Banks and other financial institutions provide finance for trading operations and remove the hindrance of finance. (vi) Hindrance of information or knowledge: In the distribution process, it is very difficult for maintenance of direct contact between sellers and buyers. The lack of knowledge about the availability of goods creates hindrance in the mind of prospective consumers. The advertisement and salesmanship provide information about the availability of goods. In this way commerce helps to remove the hindrance of knowledge or information through publicity and advertisement. 2.3.2 COMPONENTS OF COMMERCE: The components of commerce are classified into two types, i.e. (1) Trade and (2) Aids to trade or Auxiliaries to trade. 1. Trade: Trade is the main branch of commerce. Trade means exchange of goods and services between the producers and the consumers. This mainly involves buying and selling activity. A producer of goods cannot reach millions of consumers personally to sell his product. Therefore, he takes the help of middlemen like agents, wholesalers and retailers. The hindrance of persons is removed by trade. Traders also help in directing the flow of goods to the most profitable markets. Trade is the final stage of business activities and involves transfer of ownership. Thus, it is the nucleus or central part of commerce. Trade can be divided into two types on the basis of geographical coverage. They are (i) Home trade and (ii) Foreign Trade. (a) Home Trade or Internal Trade Home trade (or domestic trade or internal trade) refers to the buying and selling activity within the country. It may be (a) local (b) state or provincial and (c) inter state or national trade. When demand for goods and services is limited to a particular place or locality, it is called local trade. Generally, these goods are of daily use type and perishable 34 BUSINESS STUDIES AND MANAGEMENT, PART-I in nature like vegetables, milk and bread etc. The state or provincial trade is limited to the boundaries of a state or province. The goods traded within a state are produced according to the needs of the people of a particular region. State governments put some restrictions on the movement of goods. On the other hand, in case of inter-state trade, it is carried on throughout the country without any restriction on the movement of goods. Such goods are usually of durable in nature like iron and steel, textiles, petrol and diesel etc. Home trade may be further subdivided into two categories, such as (a) wholesale trade, and (b) retail trade. Wholesale trade is the sale of one or a few varieties of goods in comparatively large quantities by the producers to the wholesalers. A wholesaler buys in large quantities but sells in small quantities to the retailers. He serves as a link between producer and retailer. On the other hand, retail trade refers to the selling of goods by the retailer to the consumers. A retailer acts as a link between the wholesaler and the final consumer. The retail trade is conducted in variety of forms such as hawking, vending, unit retailer, multiple shop or chain stores, departmental stores, super bazaar, co-operative stores and mail order business etc. (b) Foreign Trade or International Trade Foreign trade (or external trade or international trade) refers to trade between one country and another. Such trade requires permission from the national government. This trade is carried on mostly in larger quantities both by the Government as well as private individual and business houses of two countries. This may be further sub divided into (a) Import trade, involving purchase of foreign goods for use in the domestic market (b) Export trade, involving sale of domestic products to the foreign countries, and (c) Entrepot or Re-export trade which refers to the import of foreign products with a view to exporting them. 2. Aids to Trade Apart from trade the other component of commerce is known as aids to trade. This includes some ancillary services. These services can be grouped into five heads such as: Transportation and communication, Storage and warehousing, Banking, Insurance, and Advertising. The services rendered by these auxiliaries are described below.  CLASSIFICATION OF BUSINESS ACTIVITIES 35 (i) Transport Transport provides the wheels of commerce. It helps in carrying goods from the producers to the ultimate consumers. It creates place utility by transferring goods from one place to another. The major modes of transport are: land, water and air transport. These transports establish link among all parts of world and facilitate international trade. (ii) Warehousing Generally, there is a time gap between the production and consumption of goods. This problem of time is solved by storing the goods in warehouses. It creates time utility and helps in storing goods by the manufacturers, traders and other middle men. It facilitates equal distribution of goods over different periods and helps in stabilizing prices along with protection from damage. (iii) Banking Bank provides important auxiliary services for the development of commerce. It provides necessary fixed and working capital for running the trade, gives financial references, realize bills, cheques and hundles and many other services to the businessmen. Thus, the hindrance of finance is solved by banking. (iv) Insurance Business is full of risks and insurance provides the best means to reduce the business risks. It makes the business operation very safe and secure by covering the risk for possible losses and damages. Insurance can reduce the risk connected with price, credit, rate of exchange, delivery, dishonesty of employees, accident, fire and other business risks. It covers various types of business risks at a nominal rate of premium. (v) Advertising Advertising means conveying information to the prospective consumers about the goods and services being introduced, produced and supplied by the businessmen. It removes the hindrance of knowledge and helps the consumers to make a choice among the varieties of available products. It also educates them about the use which ultimately 36 BUSINESS STUDIES AND MANAGEMENT, PART-I gives more satisfaction to the consumers. In the present competitive world, advertisement is becoming a necessity and plays a very important role in the promotion of sales. 2.4 DIFFERENCES BETWEEN INDUSTRY AND COMMERCE 1. Meaning Industr y refers to such Commerce includes all those activities as production activties which facilitate the conversion, exchange of goods and services processing or from the producer to the user fabrication of products 2. Type of utility Industr y creates form Commerce provides place and utility by changing the time utility raw material into finished product 3. Component Industr y comprises Commerce consists of trade and manufacturing of aids to trade. goods and services. 4. Demand and Industr y represents Commerce represents the supply the supply side of demand side of goods and goods and services. services. 5. Place of operation Industr y operates at a Commerce involves the fixed place such as movement of goods which factory, mines and operates from place of forest etc production to place of consumption. 6. Branch of activity Industr y is the first Commerce is the second branch branch of business of business activity related with activity which is distribution of goods. concerned with production 2.5 BUSINESS RISK CONCEPT Every business organization contains various risk elements while doing the business. The term business risk refers to the possibility of losses or inadequate profits due to uncertainties. The uncertainties may arise out of changes in tastes and preferences of consumers, labour unrest or strikes, increased competition, natural disasters, change in government policies, obsolescence etc. Business risk implies uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future.  CLASSIFICATION OF BUSINESS ACTIVITIES 37 Business risks may be internal risks that arise from the events taking place within the organization or external risks which arise from the events taking place outside the organization. The factors responsible for internal risks may be: (a) Human factors like labour unrest, strikes etc. (b) Technological factors such as challenges from emerging technologies. (c) Physical factors such as failure of machines, theft, fire etc. (d) Operational factors like cost cutting, advertisement, access to credit etc. All the above factors can be controlled by the management, were as external risks arise from the factors which cannot be controlled. The factors responsible for external risks may be (i) economic factors e.g. market risks, pricing pressure rising costs (ii) natural factors e.g. floods, earthquakes (iii) political factors e.g., compliances and regulations of the government. 2.5.1Types of Business Risks: The Business risk may be classified into five types as follows: 1. Strategic Risks: They are the risks associated with the operations of that particular industry. These risks may arise from changes in supply and demand, competitive structures, introduction of new technologies, merger and acquisition of business, alliances and joint ventures etc. (2) Financial Risks: These are the risk associated with the financial structure and transactions of the particular industry e.g. global financial events, interest rate increase, cash flow shortage, rising costs etc. (3) Operational Risks: These are the risks associated with the operational and administrative procedures of the particular industry e.g., industrial relations and personnel management issues, breaking down of transportation system, supplier failing to deliver goods etc. (4) Compliance Risks or Legal Risks: These are associated with the need to comply with the rules and regulations of the government e.g., submission of Tax Returns, 38 BUSINESS STUDIES AND MANAGEMENT, PART-I contractual breaches employee protection regulations environmental protection regulations etc. (5) Other Risks: These include risk from the environment. They are the different risks arising from natural disasters, theft, fraud, terrorism, extortion, interruptions of power, water, transport and communications etc. 2.5.2 Causes of Business Risks. Business risks arise due to a variety of causes, which are classified as follows: (a) Natural causes: Natural causes include natural calamities like flood, earthquake, lightning, heavy rains, drought etc, which are beyond human control. They result in heavy loss of life, property, income. (b) Human Causes: Human causes include unexpected events like carelessness, negligence or dishonesty of employees, stoppage of work due to power failure, strikes, riots, management inefficiency etc. (c) Economic Causes: These include uncertainties caused due to economic fluctuations such as changes in demand for goods, competition, price, collection of dues from customer’s change of technology or method of production etc. Financial problems like rise in interest rate and higher taxation etc. also come under economic causes as they raise the cost of operation of business unexpectedly. (d) Other Causes: These are unforeseen events like political disturbances, mechanical failures fluctuation in exchange rates etc which lead to the possibility of business risks.  CLASSIFICATION OF BUSINESS ACTIVITIES 39 2.6 QUESTIONS OBJECTIVE AND SHORT ANSWER TYPE QUESTIONS 1. From the given alternatives, choose the correct ones. (a) Industry also means- (i) Purchase and sale of goods (ii) Exchange of goods for cash (iii) Extraction of raw materials (iv) Exchange of goods for goods (b) When trade takes place between two countries it is called- (i) National trade (ii) Local trade (iii) Domestic trade (iv) International trade (c) One of the examples of genetic industry is- (i) Car manufacturing (ii) Power generation (iii) Coal mining (iv) Poultry farming (d) Hindrance of knowledge in trade is removed with the help of (i) Agency (ii) Insurance (iii) Advertisement (iv) Banking 40 BUSINESS STUDIES AND MANAGEMENT, PART-I (e) Which, of the following, is Not considered an aid to trade? (i) Transport (ii) Banking (iii) Exports (iv) Insurance (f) Components of Commerce are- (i) Trade and industry (ii) Aids to trade and hindrance to trade (iii) Trade and aids to trade (iv) Internal trade and external trade 2. Correct the underlined portions in the following sentences (i) The industries which are concerned with breeding of plants or animals, ‘ reproductions etc. are known as manufacturing industries. (ii) The industries which are engaged in producing intangible products are called extractive industries. (iii) Sale of one or a few varieties of goods in large quantities by the producer to the next middleman is called retail trade. (iv) Analytical industries refer to those manufacturing industries where many raw materials are combined together in production process to make a final product. (v) Trade involves manufacturing a finished product from raw material. 3. Fill in the blanks- (i) ________ means exchange of goods and services between the producers and consumers resulting in a transfer of ownership. (ii) Mining, agriculture, fishing are examples of ______ industries.  CLASSIFICATION OF BUSINESS ACTIVITIES 41 (iii) In________ industries raw materials pass through different stages of manufacturing to become finished products. (iv) A_______ acts as a link between the wholesaler and the final consumer. (v) _________ trade involves sale of domestic products to the foreign countries. 4. Express in one word or phrase- (i) Industries concerned with breeding of plants or animals. (ii) Type of industry engaged in the creation of infrastructure such as b u i l d i n g s , dams etc. (iii) Type of industries producing intangible products. (iv) The process of exchange of goods and services. (v) Buying and selling activities within the country. 5. Answer the following within three sentences each: (i) What do you mean by international trade? (ii) What do you mean by advertising? (iii) Name the type of industries where the production process involves in breaking a basic raw material into two or more products. (iv) What do you mean by Entrepot trade? (v) Give two examples of capital goods. 6. Explain the following in not more than six sentences each: (a) Trade (b) Commerce (c) Wholesale trade (d) Constructive industry (e) Extractive industry 42 BUSINESS STUDIES AND MANAGEMENT, PART-I (f) Internal trade (g) Genetic Industry 7. Answer the following questions as directed- (a) Name any three components of aids to trade (b) Give any three examples of genetic industry LONG ANSWER TYPE QUESTIONS: 1. What do you mean by industry? Explain different types of industries. 2. What do you understand by the term commerce? Discuss its nature and scope. 3. Explain the term trade and discuss different types of trade. 4. Write notes on- (i) Industry (ii) Trade (iii) Commerce 5. Distringuish between (a) Trade and Aids to trade (b) Industry and Commerce 2.7 ANSWERS TO OBJECTIVE QUESTIONS 1. (a) -(iii), (b)-(iv), (c)-(iv), (d)-(iii), (e)-(iii), (f)-(iii). 2. (i) Genetic, (ii) Service (iii) Wholesale, (iv) Synthetic (v) Production 3. (i) Sale, (ii) Extractive (iii) Processing, (iv) Retailer, (v) Export 4. (i) Genetic Industries (ii) Construction Industry (iii) Service Industry (iv) Marketing (v) Internal trade. ***  SOLE PROPRIETARY CONCERN 43 CHAPTER-3 SOLE PROPRIETARY CONCERN STRUCTURE 3.1 Meaning 3.2 Features. 3.3 Advantages 3.4 Disadvantages 3.5 Suitability 3.6. Questions 3.7 Answers to objective questions 3.1 MEANING Sole proprietary concern or sole proprietorship is a business owned by one person. It is the most natural, the oldest, the simplest and one of the most popular forms of business organization. They are found in every country, in every state and in every locality. It is a form of business organization which is established, financed, owned and managed by an individual entrepreneur who bears all the risks and receives the entire gains. A sole proprietary business is a one-man business and the owner is called sole proprietor or individual entrepreneur. When engaged in manufacturing, he may be known as a Sole Manufacturer and when engaged in trading, he may be known as a Sole Trader. 3.2 FEATURES The main features of a sole proprietary concern are as follows: 1. The sole proprietor alone contributes or arranges capital for his business. 44 BUSINESS STUDIES AND MANAGEMENT, PART-I 2. Sole Ownership: Since the arrangement of capital is done by the single person, the business is owned and in most of the cases is managed by himself only. He has no other persons to share the profits of the business. 3. No separate entity: A sole proprietary concern has no sparate legal existence from that of its owner. 4. Unlimited Liability: The sole proprietor has unlimited liability. In case of need if his business assets are not sufficient to pay off his business liabilities, his private assets can also be used for the purpose. 5. Individual Risk: A sole proprietor assumes all the risks involved in the business. As he takes all the risks, he enjoys all the profits and he alone bears all the losses of the business also. 6. Management and control: Both management and control vest in the hands of the sole proprietor. He plans, organizes, directs, co-ordinates and controls all the affairs of the business by himself. 7. No special law: The sole proprietary business is not governed by any special law. Only general business laws are applicable to this business. Any person competent to enter into a contract can start sole proprietary business. An insolvent, however, cannot run the business in his name. 3.3 ADVANTAGES OF SOLE PROPRIETARY CONCERN The sole proprietary concern enjoys several advantages. They are as follows: 1. Easy to start: It is very easy to start a sole proprietary concern. No legal formalities like registration are necessary to form this type of business. Any person competent to enter into contract can start the business.  SOLE PROPRIETARY CONCERN 45 2. Incentive for hard work: Sole proprietary concern is the only form of business organization in which rewards and efforts go hand in hand. A sole proprietor puts in his heart and soul to the business as he knows that he is the sole beneficiary of the business whatever may be the profit that is fully enjoyed by him. This acts as an incentive and becomes the driving force to secure economy and efficiency. 3. Secrecy: In a sole proprietary concern, the business policies and trade secrets are not disclosed to others. There is no necessity to make public the accounts maintained by him. A sole proprietor can maximize the profits by maintaining top most secrecy of his business operations. 4. Personal Contact: A sole proprietor comes in personal contact with the customers as well as the employees. By personal contact with customers he is able to ascertain their tastes, aptitude and habits. This helps him to serve them better. The personal relationship with customers and employees helps to increase the turnover and profit of the business. 5. Prompt decisions: A sole proprietor is the king of his own will. For any decision, he is not required to consult or seek the permission of others. Such freedom allows him to take quick decisions and prompt action which is fundamental to business success. 6. Inexpensive management: As the sole proprietor himself is the manager, controller and supervisor, the management of business activity is carried out by the owner and his family members in place of paid employees. Hence, the cost of operation is very les. 7. Flexible operation: As the whole business is run by an individual, the business is highly flexible in character. Flexibility relates to the ability of the firm to change its policies, plans, procedures 46 BUSINESS STUDIES AND MANAGEMENT, PART-I and activities in response to the changing environment. Being small organization, it is easy to bring the required degree of changes if the situation so demands. A sole proprietor can quickly effect the changes to make business more profitable and efficient. 8. Credit worthiness: Since the owner is personally liable for all debts of the business it enjoys favourable rating among creditors. Further, a sole proprietor is able to develop goodwill and wide clientele base. This enhances the credit worthiness of the business concern. 9. Self-Confidence: Since the sole proprietor looks after the total business operations, he develops a good deal of self-confidence. This helps him to take risky business decisions which leads to higher profits. 10. Preferential treatment by Government: Not only it is free from Government regulations but also it gets subsidies, concessions and other facilities from the government. It enjoys preferential treatment in the matter of loans at concessional rate and liberal repayment schedule. 11. Tax advantage: A sole proprietary concern is socially useful in many ways. It promotes equitable distribution of wealth and income in the society. It is a good source of self-employment for the millions of unemployed youths. It creates entrepreneurs to develop the economy. It helps to develop self-reliance, self-determination, initiative, high motivation and a respectable social life. 3.4 DISADVANTAGES AND LIMITATIONS A sole proprietary concern suffers from the following disadvantages. 1. Limited capital: A sole proprietary concern can raise only very limited amount of capital. The personal savings of the individual is meagre and borrowing on a large scale is not possible, due to insufficient securities. Hence, expansion of business is difficult as it requires large capital.  SOLE PROPRIETARY CONCERN 47 2. Limited managerial ability: The managerial ability of the sole proprietor is also limited. He is not expected to possess specialized knowledge in all the functional areas of business. Now, when the business is becoming more and more complex, he has to face many difficulties in taking business decisions due to limited skills and knowledge. 3. Unlimited liability: A sole proprietor has unlimited liability. He is personally liable for all the liabilities incurred due to his business activities. Therefore, if his business debts are not paid in full out of his business assets the balance of his business debts has to be paid out of his private assets. Thus his personal property is constantly in danger. 4. Unlimited risk: A sole proprietor takes all business decisions by himself. There is every possibility of taking wrong decisions because of his limited capacity. He alone has to bear all the risks which may cause heavy loss. 5. Uncertain existence: The existence of sole proprietary concern is always uncertain. The continuity and stability of the business mainly depends on the individual owner. His death or physical incapacity may suddenly bring an end to the business. 6. Unsuitable for big business: Sole proprietary concern i.e. well suited for small business. It is not suitable for big business and generally large scale manufacturing buying and selling operations cannot be carried out account of small size of the business. Limited capital, limited skill and unlimited liability are the factors responsible for small scale operation. 7. No judicious management: As the owner has to look after every aspect of business, he cannot pay equal attention to each and every aspect of business. Some important aspects may remain unattended which may affect the business. 48 BUSINESS STUDIES AND MANAGEMENT, PART-I 8. Suspicion to outsiders: Secrecy is proved to be harmful from the point of view of outsiders. As the sole proprietor maintains secrecy in accounts the outside world does not know the soundness of the business. Hence, he is likely to lose the business sympathy from other traders. 9. Dependence on employees: As and when the business expands a sole proprietor has to depends upon the paid employees. The employees can never take the sames interest as the owner himself can take. Sometimes over dependence on employees leads to inefficient management of the business. 3.5 SUITABILITY OF SOLE PROPRIETARY CONCERN: One man control of business was the best in the world before the industrial revolution. However, after the industrial revolution, it has lost its importance to some extent because of the limited capital and limited skill. However, even in the present days, it is still important under certain circumstances which are as follows: 1. Where there is need for greater personal attention to customers as in jewelleries, tailoring, repairing etc. 2. For professional services such as chartered accountants, Advocates, Architects, Doctors etc. 3. For small business requiring small amount of capital and limited m a na g e r ia l talent as in the case of small scale retail stores. 4. In the case of business producing non-standardized goods like artistic things. 5. Where local needs are required to be satisfied i.e. trading in perishable provisions etc. 6. For personal