The Nature of Business
A Business is an organisation that attempts to satisfy the needs and wants of the community by providing goods and/or services
Goods: are items that are tangible (e.g. can be seen or touched)
Services: are things that are done for you (i.e. intangible)
To provide goods and services (g/s’s) to the community, business make use of inputs or raw materials
Inputs: the resources (such as raw materials, labour, finance and equipment) that a firm use’s to create outputs.
By combing inputs with human skill, businesses add value.
The role of business include:
1. Profit: essential if a business is to meet day-to-day expenses (e.g. production costs, wages, insurance, electricity and rent) and provide a return on the owner’s financial investment.
2. Wealth Creation: by increasing sales and developing strategies to promote brand awareness and further sales, the management of a business endeavours to increase the value of the organisation and in turn increase the value of the finds that owners have invested in the business
3. Employment: with labour being employed by businesses they are able to offer the community a diverse range of g/s’s. In return for their service, the workforce will be paid a form of income to satisfy needs and wants.
4. Innovation: this is the process of improving the features of a product.
5. Quality of Life: business research and development (R&D) has also contributed to a significant improvement in our quality of life.
6. Choice: a primary function of business is to produce g/s’s for consumers to satisfy their needs and wants and this in turn provides choice for consumers.
7. Entrepreneurship and risks: entrepreneurs take risks and develop strategies for their ideas to come to fruition in order to explore untapped markets.
Businesses also provide export revenue to assist growth in the Australian economy.
The distribution of wealth created by a business:
Governments: Taxes e.g. income tax, GST – used for welfare payments (transfer payments)
Business Owners/Shareholders: profit and dividends
Business: Depreciation, retained profits
Lenders: Loan repayments
This money circulates throughout the economy.
Two main risks associated with operating a business:
Business venture may fail because no one wants to buy your products leading to
a. Loss of money
b. Loss of employment
‘Profit is the reward for risk taking.’
If you take a risk and find a product that ends up being successful (due to limited competition, big markets etc) then you get the reward of keeping the profits.
Profit is the reward that business owners receive for assuming the considerable risk of ownership.
Profit = Revenue – Expenses (either fixed or variable)
Type of Business
Most common classifications are:
Size – small to medium enterprises (SMEs), large
Local, national, global
Industry – Primary, secondary, tertiary, quaternary, quinary
Legal structure – Sole trader, partnership, private company, public company, government enterprise.
Classification is important in understanding the contribution of different sized businesses to the national economy.
Small: Less than 20
Medium: 20-200 – however, flexibility within the Australian government.
Large business are more complex to manage and are often slower to respond to changes in the environment
Smaller businesses have greater flexibility, enabling them to respond more quickly to changes in things such as consumer taste.
Small-Medium Enterprises (SMEs)
SME’s provide employment for about 64% of all employees within the private sector.
ABS defines small business as a business employing less than 20 people.
Non-employing businesses – sole traders and partnerships without employees
Micro businesses – employ less than 5 people