What is Business?

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The nature and purpose of business

Why businesses exist

Businesses transform inputs into outputs which they can sell on as products or services. This brings many benefits to a country:

Employment - businesses employ people to work for them, reducing the amount of people relying on the state for welfare.

Wealth - taxation and surpluses have been invested in country's infrastructure and assets such as roads, bridges, education, health care etc.

Creation of new products - businesses can produce goods which help enrich the lives of a country's citizens.

Enhancement of a country's reputation - business innovation establishes a positive reputation for a country in the global community which can encourage further investment and trade.

Relationship between a business's mission and objectives

A business's mission refers to its overall purpose and direction. It is broad and can include the following:

Values

Non-financial goals

Benefits to the wider community

How consumers will be satisfied

By setting a mission, everyone involved in the business knows what they are ultimately trying to achieve.

A business's objectives however are medium-long term goals created to coordinate the business's operations. They are far clearer and quantifiable than the business's mission. Objectives must be SMART:

S - Specific.

M - Measurable.

A - Agreed.

R - Realistic.

T - Time specific.

Objectives are based off what the business sets to achieve in the mission statement. It puts a wider goal into small, practical objectives.

Common business objectives

The following are common objectives businesses set themselves.

Profit/Profit Maximisation - small businesses might wish to make a minimum level of profit to allow for expansion or focus on other objectives. Larger businesses may wish to maximise profit to satisfy shareholders with higher financial benefits.

Growth - many businesses wish to grow in order to exploit its market position and earn higher profits to benefit shareholders etc.

Survival - all businesses will have this upon startup. The business will need to continue trading over a period of time with limited losses and without submitting to commercial pressure and ceasing trading,.

Cash Flow - cash flow is vital in allowing businesses to pay off debts on time. So in order to avoid further debts or legal action, businesses must regulate cash inflows and outflows to avoid this.

Social/Ethics - some firms may wish to shape their objectives towards ethical causes such as providing employment, or contributing towards fairer trading.

Diversification - some firms may diversify their product range in order to spread and limit the risks associated with production and sales of each good, thus reducing the risk of heavy losses from the failure of one brand.

Why businesses set objectives

The following are common reasons why businesses set objectives.

Managers can ensure everyone is working towards the same goal.

Motivating for employees as they know exactly what to do.

Useful for reviewing the performance of the business - whether or not they have met targets.

Measurement and importance of profit

Costs are the expenditure of a firm as part of trading. This can include payments for raw materials, fuel, labour etc.

There are five types of costs:

Fixed costs - these are fixed and do not vary with the level of output of a firm. Examples include rent, salaries of managers etc.

Variable costs - these vary with the level of output of a firm. Examples include wages of workers, raw materials etc.

Semi-variable costs - these costs can be associated with both fixed or variable costs.

Average costs - average costs are the average cost of production per unit.

Total costs - the entire cost associated with trading.

Revenue is the monetary income from sales over a period of time.

Revenue = Quantity sold x Average selling price

Profit is the difference between revenue and costs.

Profit = Revenue - Costs

A profit margin is a percentage of the final selling price that is profit. A large profit margin usually means a higher final profit.

The quantity sold also affects profit. If a firm sells a higher quantity of products, it will make a higher profit and vice versa.

Profit making is vital for a business because of the following reasons:

Shareholders - a higher dividend/return for shareholders encourages further investment, allowing for greater growth.

Reputation - a profitable business may be attractive to customers.

Raising finance - a profitable business is regarded as more able to pay off debts, meaning loans come with less interest, making it cheaper to raise finance.

Growth - a profitable business is able to grow as it has the financial capacity to do so.

Understanding different business forms

Reasons for operating in business forms or to change forms