BUSINESS CONCEPTS AND DEFINITIONS 1. Enterprise:
This refers to the taking of risks in establishing a business.
2. Entrepreneurship:
The act of combining all the other factors of production (land, labour and capital) with the aim of establishing a profitable venture for the production of goods and services.
3. Barter:
The exchange of one on e good/service for another.
4. Proit:
The surplus funds which remain after all expenses have been covered.
!. "oss:
The situation which exist when total sales are not enough to cover all expenses. expen ses.
#. Tra$e:
The buying and selling of goods and services.
%. Or&anisation:
A social arrangement which pursues collective goals such as the production of goods and services.
'. E(ono)*:
The system within within a country which which determines the production, exchange and consumption of goods and services.
+. Pro$u(er:
Any individual or organisation which makes goods and services.
1,. Consu)er:
Any individual or organisation which uses goods and services.
11. E-(han&e:
The voluntary trade of goods and services.
12. oo$s:
Tangible products which have been b een produced. e.g. car, rice, clothing etc. There are different types of goods
Free &oo$s These are available to all without charge. They are gifts of
nature e.g. air, sea, sunshine etc.
Pu/0i( &oo$s These are goods which can be consumed by all and are
usually paid for by taxation. !onsumption by one person does not exclude consumption by others. ".g. national defence.
erit &oo$s These goods can provide benefits to the consumer as well
as to the rest of society e.g. health h ealth services and education.
13. Seri(e:
#ntangible products which have been produced. e.g. banking, transportation, insurance etc.
14. aret:
Any place where buyers and sellers meet to engage in trade. #t is also referred to as the demand for a product.
1!. Co))o$it*:
Any final good used for some purpose.
1#. Capita0:
$oney which is used in the organisation to ac%uire assets. #t also refers to items (factories, e%uipment, machinery etc.) used to create final products.
1%. "a/our:
This is the physical and mental contribution of individuals to the creation of goods and services.
1'. Spe(ia0isation: Spe(ia0isation:
This is the division o f labour into specific tasks. A whole process is divided into several tasks. This helps to speed up the process an d may result in an increase in productivity and a decrease in unit cost.
T5E DE6E"OPENT OF INST7UENTS OF E8C5ANE &ver the centuries, as commerce has developed, so have the various instruments of exchange. #n early times, people cultivated the land and reared animals to provide for their needs. The most basic of these needs were food, clothing and shelter. This production was the earliest form of man as an ' e(ono)i( ani)a09 and is known as $ire(t pro$u(tion or su/sisten(e e(ono)*. As production increased, there was a surplus of goods. owever, no individual could
produce all their needs and the system of /arter resulted. This is where an individual exchanged one item for another, starting the earliest forms of trade. #t was simple and helped to create wealth but there were also problems. These include
A $ou/0e (oin(i$en(e o ants
*eople could only trade with those who had something they wanted.
An e-(han&e rate
ow much of one good was another worth e.g. how many chicken was a cows worth.
Diisi/i0it* o &oo$s
+ome goods could not be broken done into smaller parts. ".g. ive animals could not be sold in portions.
Stora&e o ea0th
$any goods could not be saved/stored for
the future e.g. fruits/meat spoil easily. To solve many of these problems, a system of 'money- was developed where things such as shells, beads, arrowheads, fishhooks, gold and animal teeth were used. "ventually when these also had limitations, money was created. Today, money does not only come in the form of notes and coins. #t also includes
Cre$it (ar$s !redit company pays for goods/services while consumer makes
payments to credit company
De/it (ar$s *ayment for goods through access of consumer-s bank account
Che;ues *ayment represented on paper to be taken from consumer-s bank account.
E0e(troni( transer unds are transferred from one bank to another via computer.
Te0e/anin& The use of the telephone to manage bank accounts to make payments.
E(o))er(e The use of the internet to make purchases. *ayment can then be made
via electric transfer, credit card etc.
P7INCIP"ES OF BUSINESS 7EASON TO STA7T A BUSINESS . inancial independence 0. 1anting to be your own boss 2. +elffulfilment 3. There is a need for a product/service, which is not being met 4. 5edundancy 6. *oor 7ob prospects
FUNCTIONS OF A BUSINESS . The provision of goods and services 0. The provision of 7obs 2. Assistance with social activities through sponsorship 3. To make a profit 4. !ontribute to economic growth
P7INCIP"ES OF BUSINESS FO7S OF BUSINESS O7ANI
Chara(teristi(s . "asy to set up 0. inanced by the owner 2. 8ears all risks and keeps all profits 3. *rovides a personal service 4. as no one to account to
A$anta&es . "asily and %uickly formed and dissolved 0. !lose relationship with customers 2. 9ecisions can be made %uicker 3. Takes all profits 4. *ays lower personal tax not company tax
Disa$anta&es . imited capital and it is not easy to get loans 2. ong working hours 3. 8usiness usually dissolves if owner dies 3. ack of speciali:ed staff
For)ation The are usually no legal formalities needed excepted that in some cases, a special licence (e.g. li%uor licence, health certificate) may be needed. The sole trader is usually re%uired to register their trade
name.
ana&e)ent The business is managed personally by the sole trader and the organisational structure is simple since it is usually only the owner and in some cases a few employees. This makes reporting and decision making %uick. +ince the owner is usually providing a personal service, he/she is able to set their own hours of work. There is no need to disclose the business affairs of the business to the public as is the case of a company, except for tax purposes ad creditors when seeking loans
2. PA7TNE7S5IP: An association between 0 0; people operating a business with the common goal of making a profit.
There are two types of partnership a) &rdinary *artnership where all profits and losses are shared e%ually b) imited *artnership where the limited partner stand to lose only up to the amount which was invested.
Chara(teristi(s . $inimum of 0 and maximum of 0; for formation. owever for professional such as lawyers, accountants a maximum is not give since they are not allowed to form companies. 0. !apital is provided by the partners 2. A limited partner cannot take part in the management of the partnership 3. *rofits share e%ually unless stated in agreement
A$anta&es . 5elatively easy to set up 0. $ore capital can be obtained than sole trader 2. 8usiness will not end if one partner dies (continuity) 3. +peciali:ation can occur thus leading to greater efficiency 4. +hared work load 4. *ays lower personal tax not company tax
Disa$anta&es
.
For)ation A partnership deed is usually written up to form the arrangement. This agreement usually indicates the number of partners, amount of capital from each partner, how profits are to be divided, name of partnership, salary to be paid, how partnership is to be dissolved, role of each partner, etc.
ana&e)ent This is carried out by the ordinary partners .
3. COOPE7ATI6ES 8usinesses that are formed, owned and operated by its members.
Chara(teristi(s
. All members have a vote 0. imited interest on money invested 2. *rofits distributed among members 3. The members are the clients 4. $embers usually have a common bond
E-a)p0es o T*pes o Cooperatie
. inancial coops e.g. credit unions which offers methods of savings and loans 0. !onsumer coops These are involved in the provision of goods and services 2. Agricultural coops provide agricultural products and e%uipment to farmers
A$anta&es
. There is a market for members 0. "mployment is provided 2. &wned and operated by members, therefore there is a greater commitment to making it a success. 3. A medium through which government can channel aid to the society. 4. All profits shared among members 6. +hared decision making
Disa$anta&es
. *oor, inexperienced and un%ualified management. This can hinder growth. 0. !onflict among members can lead to slow decision making 2.
For)ation
"ach member purchases shares to form the capital base of the cooperative.
ana&e)ent
They are governed by the membership through a management board elected by members
4. COPANIES A company is a business entity which has been incorporated. #t is a legal entity, separate from its owner(s) i.e. it can enter into contract, can sue and can be sued. There are two types of companies a) *rivate imited !ompanies ="t$ is usua00* ritten as part o the na)e> b) *ublic imited !ompanies =P"C is part o the na)e>
A. P7I6ATE "IITED COPANIES A company where 04; shareholders form a company.
Chara(teristi(s
. imited liability 0. A separate legal entity 2. =overned by a) memorandum of Association b) Articles of Association 3. 9irectors elected at A=$ 4. *roper accounts must be kept for tax purposes 6. 04; shareholders >. They tend to be owned by families and close friends.
A$anta&es
. The company is separate from owners 0. +hareholders have limited liability up to the amount they have invested 2. "asy access to loans 3. arger capital base than sole traders or partnerships 4. *rivacy 6. 9eath of an owner will not affect the continuity of the business
Disa$anta&es
. +hares are not traded publicly and therefore the capital base will be limited 0. +kills may be limited 2. +hares are not transferable without the director -s consent
For)ation
!ertain legal re%uirements are needed such as a) $emorandum of Association b) Articles of Association c) +tatement of Authorised 5egistered or ?ominal capital
ana&e)ent
The owners manage the business or hire speciali:ed personnel. $embership must approve disposal of shares and their sale is restricted to the members.
B. PUB"IC "IITED COPAN? An incorporated company which offers shares to the public.
Chara(teristi(s
. imited liability 0. A separate legal entity 2. =overned by a) memorandum of Association b) Articles of Association c) *rospectus. 3. 9irectors elected at A=$ 4. *roper accounts must be kept for tax purposes 6. +hares are sold to members of the public
A$anta&es
. The company is separate from owners 0. +hareholders have limited liability up to the amount they have invested
2. "asy access to loans 3. 9eath of an owner will not affect the continuity of the business 4. 5isk is spread among shareholders 6. "asy transfer of shares >. +pecialists are hired to run the firm
Disa$anta&es
. &b7ectives of managers may be different from owners (shareholders) 0. 1orkers are not part of decision making 2. Accounts must be submitted for inspection
For)ation
!ertain legal re%uirements are needed such as a) $emorandum of Association b) Articles of Association c) +tatement of Authorised 5egistered or ?ominal capital d) *rospectus
C. CON"OE7ATE A group of companies, each of which operates in different industries. There is usually no common identity or purpose except that of making a profit. ".g. 8+@T (8-dos), ?eal @ $assey (T-dad), =race ennedy (B-maica)
A$anta&es
. &pportunities for training and transfer of staff between industries 0. =ood cash position since all companies 2. #ndustries can advertise under the group name 3. 5isk of group failure is spread over a range of industries.
Disa$anta&es
. ?o common ob7ective other than profit 0. !omparative analysis not possible 2. &utside control from the head office is resented
D. U"TINATIONA"S A firm of this nature is one which owns, controls and operates business activities in several countries at the same time. 9ecisions are made by the parent company. e.g. !able and 1ireless, ?eal @ $assey A$anta&es
. *rovides investment in local economy 0. *rovides training, expertise, employment and tend to pay higher wages 2. A source of taxation and foreign exchange 3. *rovides markets
Disa$anta&es
. arge amount of profits leave the country in which it operates to return to parent company 0. $ay exploit natural resources of small countries 2. The welfare of the country is not the concern of the company 3. $ay leave country after tax holidays are over 4. $ay harm the environment 6. They nay leave if political ideas are not the same as theirs
E. F7ANC5ISE A right which is bought by an individual/organisation (franchisee) from the person/firm(franchiser), in order to sell goods by using the franchiser-s name. e.g. $c9onald-s, ! etc.
ranchisee en7oys most of the profits but incur most losses. ump sum paid to franchiser (rent and shares of profits). ranchisee benefits from marketing and promotional network of franchiser.
NATIONA"I
!ompanies which have been taken over by the government via legislation to achieve certain economic and political aims
Features
. egal entity 0. $anaged by board of directors chosen by government minister 2. Annual reports are given to the minister who lay them in *arliament 3. =enerally no shareholders 4. unded by government by loans @ grants
A$anta&es
. The production of public goods in a manner which is not hapha:ard 0. 5easonable prices because profit it not the motive and so that the masses would have access to product/service 2. +afe guard 7obs 3. &btain better borrowing terms than private companies
Disa$anta&es
. !onsumers must accept the product, especially if there is no competitor 0. ack of initiative to improve product due to monopoly 2. C5ed tapeD causes delays 3. ?ot run efficiently 4. Accountability often lacking
PUB"IC 6S P7I6ATE SECTO7 All business can be classified as either being owned by members of the public(private sector) or by the government (public sector). #n some cases however, there are operations, which may be 7oint ventures between the governments and private individuals. The differences between private and public are stated below.
Pu/0i( Se(tor . 8usiness is run by government 0. *rovides most public goods 2.
Priate Se(tor . 9riven by the profit motive which may be reflected by the prices 0. 5aises funds by borrowing or issuing shares, loans 2. !ontrolled by families or shareholders
Nationa0i@ation The transfer of ownership from the private sector to the public sectors. This may be done for the following reasons
. To increase efficiency 0. To keep some industries going for the economy-s sake 2. To provide goods which may not be otherwise produced 3. To maintain a stable level of prices 4. To overcome ine%ualities in wealth distribution
6. To control entrepreneurs and to regulate the economy >. To secure employment
The $ra/a(s o nationa0i@ation in(0u$e:
. ack of motivation of workers 0. #nefficient production 2. &ver employment 3. igh cost of production
7O"ES OF STAE5O"DE7S IN BUSINESS ACTI6ITIES
Staeho0$ers . &wners 0. "mployees 2. !ustomers 3. =overnment 4. &thers (creditors, trade unions, society, suppliers)
7o0es o OnersE)p0o*ers
*rovide relatively secure 7obs and fair wages according to the position of employee
!omply with government legislation e.g. payment of taxes, publishing annual accounts statements
*rovide a safe working environment
*rotect the surrounding physical environment
*rovide good conditions of employment e.g. working hours, holidays, paid overtime, breaks during the day etc.
To provide safe products and services to customers
To maximise profit
7o0es o E)p0o*ees
*rovide honest labour
$inimise wastage during production of goods and services
7o0es o Custo)ers
8e well informed of rights and duties
To make public any unethical practices
7o0es o oern)ent
*rovide ade%uate legislation to control the business and natural environment
"nforce laws relating/governing business activities
7O"E OF BUSINESS IT5IN T5E COUNIT? E(ono)i( 7o0e 8usinesses have the responsibility to make a contribution to the economy in which they exist. This can be done through the payment of taxes, provision of 7obs and its contribution to =9*(=ross 9omestic *roduct) through the production of goods and services. =oods exported all provide valuable foreign exchange for the economy.
Finan(ia0 7o0e "ach business not only seeks to maximise sales but also profits where possible. #t also has a responsibility to its shareholders(if any) to provide dividends on shares issued.
So(ia0 7o0e 8usinesses are re%uired to ensure that their production in no way harms consumers or the environment. $any of them also see social responsibility as becoming involved in community activities such as sports, charities and the provision of scholarships. There is also the responsibility to ensure that employees are working in a safe and comfortable environment.
Po0iti(a0 7o0e 8usinesses are re%uired to follow the legislation which may govern their business environment e.g. recognising trade unions, minimum wages, payment of ?.#.+.,
disclosing financial statements etc. Also by providing a successful business environment, a stable political climate is created within the country. +ome companies even go as far as sponsoring political candidates/parties at elections. This can have both positive and negative effects
Ethi(a0 7o0e
Any business must ensure that their product is free from defects, they do not infringe on copyrights and do not engage in false advertising. They should also be willing to hear genuine complaints from consumers and attempt to remedy such situations where they are clearly at fault. "thical issues are not necessarily illegal but not be good for business. ".g. #s it right to sold products which are considered unsafe in one country to another country with less strict standardsE
T?PES OF ECONOIC S?STES
E(ono)i( uestions
#n any society there are three economic %uestions which must be answered
1hat to produce
or whom to produce
ow much to produce
hat is an e(ono)i( s*ste)
The system in which it is determined how goods and services will be produced. There are FOU7 main economic systems
. Traditional/+ubsistence 0. ree or !apitalist 2. !ommand or *lanned (+ocialist) 3. $ixed (*ublic @ *rivate +ector)
1. T7ADITIONA"SUBSISTENCE ECONO?
#n this type of economy, people live in groups and tend to grow most of their own food. #t is called a subsistence economy because people only provide for their basic needs. This was a feature of the life of early man. 1ithin this economy there is little or no trade. owever there was little choice or variety in the types of goods produced
2. F7EE ECONO?
. ittle government interference 0. 5esources are owned by private individuals and companies. 2. 1hat, how and for whom to produce is determined by the price system 3. *rices are determined by the interaction of supply and demand
4. !ompetition among producers 6. reedom to enter or leave the market or particular industry >. *rofit motive A$anta&es
. !ompetition keeps prices low and %uality high 0. reedom to choose and greater variety 2. !reation of 7obs 3. ack of government intervention
Disa$anta&es
.
3. P"ANNED ECONO?
Chara(teristi(s
. All resources or factors of production owned by the government 0. *rices are set by government 2. *rofits spent on all citi:ens 3. The decision of what, how and for whom to produce is made by the central planning
agency
A$anta&es
. !ompetition is avoided 0. The welfare of citi:ens is the primary goal 2. +ocial/*ublic goods can be ade%uately produced e.g. police, roads, hospital etc.
Disa$anta&es
. +ince there is no real way of determining the needs of the consumers, situations of shortages or glut of certain goods may occur 0. !hoice of goods tend to be limited 2. 1orkers may be inefficient due to lack of motivation since there may be no incentives to work hard 3. &ver employment can lead to inefficiency and high cost
3. I8ED ECONO?
. !ombination of public and private sector 0. actors of production owned by both private and public enterprise 2. An element of competition 3. The government provides public goods not for profit while the private sector focus is on producing goods and services for profit 4. "ven though supply and demand is allowed to set price, the government may sometime intervene to control the price of certain products which it feels are needed by all (basic needs) 6. +ome freedom to enter or leave the market or particular industry. =overnment may control entry to some industries
A$anta&es
. The welfare of citi:ens is considered 0. +ocial/*ublic goods can be ade%uately produced e.g. police, roads, hospital etc. 2. !ompetition keeps prices low and %uality high 3. reedom to choose and greater variety 2. !reation of 7obs 4. =overnment can set price ceilings on certain products Disa$anta&es
. There is some uneven distribution of wealth 0. *rofit is pursued which at times may result in the welfare of society being ignored by
private sector 2. 1orkers (especially in public sector) may be inefficient due to lack of motivation since there may be no incentives to work hard. 3. 8ureaucracy and 'red tape- exist in public sector.
