BBA 31st Batch
Department of Accounting
Chapter-1
Allah has made trade Halal and Riba (interest) Haram—(Surah Al-Baqarah: 275)
Lecture Objectives
By the end of this session, students will be able to:
- Define organization, business and its purpose.
- Understand different types of businesses.
- Identify the basic functions of business.
- Stakeholders of the business
- Recognize the role of business in the economy and society.
1. What is an organization?
• There are many different types of organisation in both the not-for-profit and business sectors.
• Organisations differ in terms of ownership, control, activity, profit orientation, size, legal status
and technology.
Here are some examples of organisations, categorised as to whether they are profit-oriented
(private sector) or not-for-profit (charity/public sector).
• A multinational car manufacturer (eg, Ford)
• An accountancy firm (eg, KPMG)
• A charity (eg, UNICEF)
• A trade union
• A local authority
• An army
• A club
2. Why do organisations exist?
Organisations exist because they:
• Overcome people’s individual limitations, whether physical or intellectual;
• Let people specialise in what they do best;
• Let people pool their expertise; and Save time
• Accumulate and share knowledge (eg, about how best to build cars);
• Enable synergy: the combined output of two or more individuals working together exceeds
their individual output.
In brief, organisations enable people to be more productive.
3. What do organisations have in common?
4. How do organisations differ?
5. What is a business?
Business is the activity of making one's living or making money by producing or buying and
selling products (such as goods and services). Simply put, it is "any activity or enterprise entered
into for profit.”
The activity of making, buying, or selling goods or providing services in exchange for money.
Some definitions:
“Business denotes human activities which produce or acquire wealth through buying or
selling of goods.” --B. B. Ghosh
“Business is basically an activity of people working singly or with others for the purpose of
producing and selling the goods or services that our country requires.”--Glos and Baker
“Business is an institution organized and operated to provide goods and services to the
society under the incentive of gain.”--B. O. Wheeler
A business is an organization that strives for a profit by providing goods and services desired by
its customers.
A business is an organization or economic system where goods and services are exchanged for
money, with the goal of making a profit and fulfilling market needs.
Key Characteristics:
- Organized efforts of individuals
- Produces goods or services
- Seeks profit (or value creation in case of non-profits)
Businesses meet the needs of consumers by providing medical care, autos, and countless other
goods and services. Goods are tangible items manufactured by businesses, such as laptops.
Services are intangible offerings of businesses that can’t be held, touched, or stored. Physicians,
lawyers, hairstylists, car washes, and airlines all provide services. Businesses also serve other
organizations, such as hospitals, retailers, and governments, by providing machinery, goods for
resale, computers, and thousands of other items.
An organisation (however small) that is oriented towards making a profit for its owners so as to
maximise their wealth and that can be regarded as an entity separate from its owners.
Examples of Business in Bangladesh:
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Examples of not-for-profit organisations:
• charities
• clubs and associations
• trade unions
• professional bodies and institutes such as ICAEW
• government
• governmental agencies
• local authorities
• hospitals
• schools, colleges and universities
5.2. Types of Businesses
By Ownership Structure:
- Sole Proprietorship
- Partnership
- Corporation
- Cooperative
By Sector:
- Primary Sector (agriculture, mining)
- Secondary Sector (manufacturing)
- Tertiary Sector (services)
- Quaternary Sector (information/knowledge)
The quaternary sector of the economy focuses on knowledge-based activities and intellectual
services, often involving information technology, research and development, and specialized
financial planning. It is closely linked to the concept of the "knowledge economy" and
technological innovation.
5.3. Basic Functions of Business
- Production: Converting raw materials into finished goods
- Marketing: Understanding and satisfying customer needs
- Finance: Managing money, investments, and risk
- Human Resources: Recruiting, training, and retaining people
- Operations: Day-to-day management and efficiency
- Research & Development (R&D): Innovation and improvement
5.4. Role of Business in Society
- Provides employment
- Produces goods and services
- Pays taxes to government
- Drives innovation and economic development
- Contributes to community and sustainability (CSR)
6. What are the business’s objectives?
6.1 Primary objective
For a business the primary objective is financial: making as much profit as possible (profit
maximisation) so as to increase shareholder wealth.
• Profit is revenue less costs. It measures how the business creates value by making sure the cost
of inputs (labour, materials and finance) is less than the output (revenue generated).
• Shareholder wealth can only be maximised if profit is earned at an acceptable level of risk:
focusing solely on maximising profit and ignoring risk can lead to decreased shareholder wealth
(and financial collapse). Avoiding unnecessary risk should go hand-in-hand with making profits
so as to maximise shareholder wealth.
6.2 Secondary objectives
Secondary objectives support the primary objective. Here are some
examples: • Market position
Achieve a particular market share of each market that the business operates in; grow sales,
customers or potential customers; avoid reliance on a single customer for too big a proportion of
total sales; enter or leave markets when the time is right
• Product development
Bring in new products; develop a product range; invest in research and development; provide
products of a certain quality at a certain price level
• Technology
Improve how much is produced from the resources available; reduce the cost per unit of output;
develop or exploit appropriate technology
• Employees and management
Train employees in necessary skills; reduce the number of employees leaving and having to be
replaced (labour turnover); create an innovative, flexible culture; employ high quality leaders.
7. Is wealth Maximization always the primary objective?
Where the person who has put their money at stake (often called the ‘entrepreneur’) is in full
managerial control of the business, as in the case of a small owner-managed company or
partnership, assuming wealth Maximization as the primary would seem to be very reasonable.
Even in companies owned by shareholders, but run by non-shareholding managers, we might
expect the wealth Maximization assumption to be valid.
However, managers do not necessarily make decisions that will maximise shareholder wealth.
• They may have no personal interest in the creation of wealth, except insofar as they are
accountable to owners.
• The market may lack competitive pressure to be efficient by maximizing costs and
maximizing revenue, for example where there are few businesses in the market.
7.1 Profit satisficing
Decisions might be taken by managers with their own managerial objectives in mind rather than
the aim of wealth Maximization. A company’s managers may choose to achieve simply a
satisfactory profit, by operating at profit and risk levels which are acceptable to shareholders, and
which provide enough profits for future investment in growth, but which are not designed
actively to maximise profit and shareholder wealth. This is called ‘satisficing‘ and is linked to a
view of the strategy process called ‘ bounded rationality‘ put forward by the economist Herbert
Simon – .
7.2 Revenue maximisation
A business may act to maximise revenue (not necessarily profit or wealth) in order to maintain
or increase its market share, ensure survival, and discourage competition. This is a view put
forward by the economist William Baumol. Managers benefit personally from following this
objective because of the prestige of running a large company, and also because salaries and other
benefits may be higher in bigger companies than in smaller ones.
7.3 Multiple objectives
Management writer Peter Drucker (1954) points out that:
‘To manage a business is to balance a variety of needs and goals… The very nature of business
enterprise requires multiple objectives’. He suggests that objectives are needed in eight key areas.
• Market standing: this includes market share, customer satisfaction, size of product range and
distribution resources
• Innovation: in all major aspects of the business especially in relation to technology eg,
automation, cognitive technology and ‘the internet of things’ which we shall study in the chapter
Developments in Technology
• Productivity: meeting targets for the number of outputs (items produced or tasks completed)
within set timescales
• Physical and financial resources: efficient use (minimising waste) of limited resources
(including people, space, materials, plant and equipment, finance and so on)
• Profitability: as discussed earlier
Manager performance and development: managerial effectiveness in meeting objectives and
creating a positive environment in the business; grooming of managers for continuity (managerial
succession)
• Worker performance and attitude: labour productivity, stability (controlled labour turnover),
motivation and morale, development of skills and so on
• Corporate responsibility: in areas such as community and environmental impacts, labour
standards and employment protection
7.4 Constraints theory
Herbert Simon (1947) has also pointed out that decisions for some business areas are taken
without reference to the wealth objective at all. This is not because managers are ignoring profit,
but because profit is not the most important constraint in their business. This situation is seen
most clearly in constraints such as the need for good staff relations, or in regard to compliance
with regulations (such as environmental protection laws). It is also seen in the need to satisfy
customers with quality products and service, which may lower profitability.
7.5 Environmental, social and governance (E SG)
While wealth maximisation may be the primary objective for many businesses, there is increasing
recognition that objectives other than financial performance should be considered. Even where
shareholders only wish to consider their wealth, the value of a business is not only affected by
financial performance, but also by other factors that affect the risk and return of investments.
These other factors are referred to as environmental, social and governance issues.
• Environmental: An organisation’s activities may have an impact on the natural environment.
Poor environmental behaviour can lead to fines, loss of reputation and legal claims by those
affected by the poor environmental behaviour.
• Social: Social refers to the relationship the organisation has with stakeholders and society as a
whole. Issues such as labour relations and modern slavery can impact on the reputation of
businesses or lead to a breakdown in relations with key stakeholder groups.
• Governance: Governance refers to the way an organisation is managed and led – for example,
the structure of the board of directors and how the activities of the directors are monitored by
other
stakeholders, such as shareholders. Poor governance can lead to significant problems, such as
poor decision making, taking on too much risk or even fraud.
• Ethical behaviour: While not specifically included in the ESG acronym, ethical behaviour
underlies all three of the factors. Ethics is about doing the right thing, from a moral perspective.
Organisations may pursue objectives relating to ESG even if they reduce financial wealth because
they believe that it is ethically correct to pursue those objectives.
Unethical business practice:
Talcum Powder and Ovarian Cancer / Asbestos Contamination
• Allegation:J&J sold baby powder and other talc-based products for decades, knowing they
were contaminated with asbestos and linked to ovarian cancer .
• Evidence:Internal memos from as early as the 1970s reportedly showed company officials
were aware of contamination risks but did not disclose them publicly or to regulators.
• Outcome: Tens of thousands of lawsuits; J&J agreed to settle some cases for billions of
dollars while denying wrongdoing.
• Ethical Issue: Lack of transparency, failure to warn customers about health risks.
Another example in Bangladesh
Asia Energy/Phulbari Coal Mine Controversy
Asia Energy (later renamed GCM Resources Plc) proposed an open-pit coal mine in Phulbari,
Dinajpur in northern Bangladesh in the early 2000s.
The project promised to extract vast amounts of coal, generate electricity, and create jobs — but
it faced massive resistance due to its potential social and environmental impact.
Ignoring Community Rights
• The project was planned on agricultural land without the informed consent of local
communities.
• Over 100,000 people, including indigenous Santal communities, risked displacement from
their ancestral lands.
Understating Environmental Damage
• Critics alleged that the company downplayed the devastating ecological risks of open-pit
mining, such as:
o Groundwater depletion and contamination.
o Destruction of farmland and natural habitats.
o Air pollution and dust impacting health.
8. Stakeholders in the business
Stakeholder: Literally a person or group of persons who has a stake in the organisation. This
means that they have an interest to protect in respect of what the organisation does and how it
performs.
Stakeholders What is at stake? What do they typically
in a business expect of the
business?
PRIMARY Shareholders (or Money invested • A return on their
partners or investment so that their
proprietor) wealth increases. • Steady,
growing profits paid out by
the business
• Growth in the capital value
of their share of the business
SECONDARY Directors/manag Livelihoods, • Fair and growing
ers Employees careers remuneration
and and reputations • Career progression
trade • Safe working
unions environment • Training
• Pension
Customers Their custom • Products/services that are
of good quality and value
• Fair terms of trade
Continuity of supply
Suppliers The items they • Fair terms of trade
supply • Prompt payment
• Continuity of custom
Lenders Money lent • A return on their
investment: • Interest
• Repayment of Capital
Government and • National • Reasonable employment
its agencies infrastructure and other business practices
used by • Compliance with
business • The regulations
welfare of • Steady or rising stream of
employees tax revenue
Tax revenue
Analysts/ Time spent • Accurate and honest
advisers/experts Their reputation information from the
business • Continuity of
custom
• Prompt payment
The local National • Reasonable employment
community infrastructure and other business practices
and the public at used by
large business The
welfare of
employees
The natural The • Reasonable environmental
environment environment and other business practices.
shared by all
9. Mission, goals, plans and standards
• A business’s planning and control cycle ensures that its objectives, mission and goals are met
by setting plans, measuring actual performance against plans, and taking control action.
• The direction of the business is expressed in its mission, which sets out its basic function in
society in terms of how it satisfies its stakeholders.
• The mission encompasses the business’s purpose, strategy, policies, standards of behaviour and
values.
• The business’s goals can be classified as its aims (which are non-operational and qualitative)
and its operational, quantitative objectives.
• Operational objectives should be SMART: specific, measurable, achievable, relevant and
timebound.
• Plans and standards set out what should be done to achieve the operational
objectives. • The organisation’s plans are a result of its strategic planning process.
9.1 Planning and control system
9.2 Mission
The overall direction of a business is set by its mission.
The mission of a business is a clear, formal statement of the organization’s core purpose and
reason for existence, describing what it does, for whom, and how — in a way that guides its
strategy and decision-making.
Examples of Mission Statements:
• Grameen Bank:
“Providing comprehensive financial services to empower the poor to realize their
potential and to break out of the vicious cycle of poverty.”
• Unilever:
“To make sustainable living commonplace.”
• Tesla:
“To accelerate the world’s transition to sustainable energy.”
9.2.1 Vision
Some businesses also have a vision of the future state of the industry or business which
determines what its mission should be. For instance, ‘being the leading provider of X by 2020’ is
a vision of
a business’s future, which ties it in to a mission of ‘providing high-quality environmentally
friendly X to all our customers’.
The vision of a business is a forward-looking statement that defines what the organization
aspires to become in the future — its ultimate goal, dream, or desired long-term impact.
Example:
Grameen Bank:
Banking for the poor
BRAC bank
BRAC envisions a world free from all forms of exploitation and discrimination, where everyone
has the opportunity to realize their potential.
EBL
To become the most valuable brand in the financial services in Bangladesh creating long-lasting
value for our stakeholders and above all for the community we operate in by transforming the
way we do business and by delivering sustainable growth.
9.3 Goals: aims and objectives
Definition
Goal: ‘A desired end result’ (Shorter Oxford English Dictionary, 2007)
Identifying goals give flesh to a business’s mission. There are two types of goal:
• Non-operational aims, or qualitative goals: for example, a university’s aim may be ‘to seek
truth’.
(You would not see: ‘increase truth by 5%’.)
• Operational objectives, or quantitative goals: for example, ‘to increase sales volume by 10%’.
9.3.1 The purpose of setting operational objectives in a business
• Implement the mission, by setting out what needs to be achieved
• Publicise the direction of the organisation to managers and staff, so that they know where their
efforts should be directed
• Appraise whether decisions are valid, by assessing whether these are sufficient to achieve the
stated objectives
• Assess and control actual performance, by using objectives as targets for achievement
9.4 Plans and standards
Definition
Plans: State what should be done to achieve the operational objectives. Standards and targets
specify a desired level of performance.
The desired level of performance for what is done can be expressed as a standard to be met, in
terms of:
• Physical standards eg, units of raw material per unit produced
• Cost standards. These convert physical standards into money measurement by the application
of standard prices. For example, the standard labour cost of making product X might be 4 hours
at £12 per hour = £48
• Quality standards. These can take a variety of forms, such as percentage of phone calls
answered within three rings (customer service quality standard)
10. Sustainability and climate change
"We have not inherited the world from our forefathers — we have
borrowed it from our children"
• Sustainability means meeting the needs of the present without compromising the ability of
future generations to meet their own needs. There is increasing pressure on organisations to act
in a sustainable manner.
• Sustainability can be considered under three headings — social, environmental and economic
(SEE) or under the headings people, planet and profit.
• Climate change refers to the long-term shifts in temperature as a result of increased
greenhouse gas emissions. Climate change is considered to be the defining issue of our time by
the United Nations.
• The UN has adopted an agenda for sustainable development that includes 17 sustainable
development goals.
• Business activity contributes to climate change, for example by exacerbating the emissions of
greenhouse gasses. Organisations also suffer from the consequences of climate change.
• The role of accountants in respect of climate change and sustainability is not to be
campaigners or to analyse the causes and consequences of climate change, but to help
companies in selecting and implementing solutions.
10.1 Sustainability
Sustainability: The ability to meet the needs of the present without compromising the ability of
future generations to meet their own needs. Brundtland Report 1987
Sustainable development: Aims to ensure that economic activity can continue without causing
permanent harm to society and the planet. It describes a world of thriving economies and just
societies based on what nature can afford.
Organisations are increasingly being held to account for the wider impact their activities are
having on society. While economic activity makes positive contributions to society, such as
providing employment and producing vital goods and services, it can also have adverse effects.
Exacerbation of climate change, destruction of ecological systems and failure to look after the
welfare of employees are some of the ways in which economic activities by organisations have
the potential to cause harm.
Sustainability can be considered under three categories: social , environmental , economic
(often referred to using the SEE acronym).
10.1 Sustainability and business
10.1.1 Impact of business activity on the environment
Business activity can harm the environment in many ways. Below are some common examples:
• Emission of greenhouse gases during the production process. This can be reduced by more
efficient technology and the use of filters.
• Manufacturing products or using packaging that is made from non-sustainable materials (eg,
single-use plastic which cannot be reused or recycled). The effect of this can be reduced by
switching to the use of reusable materials.
• Use of fossil fuels for heating. The effect of this can be reduced by effective insulation, but
using renewable sources of energy such as solar and wind power are a more effective means of
reducing environmental damage.
• Transporting goods in petrol- and diesel-powered trucks; this can be reduced by using
electric vehicles.
• Sending waste to landfill sites increases carbon emissions because methane is produced as the
waste degrades.
10.2 Sustainability concept in Business
10.2.1 Social sustainability
Social sustainability involves meeting the needs of a wider group of stakeholders and society
as a whole. The organisation’s activities should not exploit or harm any groups or individual.
Examples of socially sustainable behaviour include fair treatment of employees, avoiding
unethical activities and relationships such as bribery and corruption, and contributing to the
societies in which the organisations operate.
10.2.2 Environmental sustainability
Environmental sustainability means that an organisation’s activities do not harm nature or the
biodiversity of the planet. Climate change is a major environmental concern. Climate change is
discussed in more detail later in this section.
10.2.3 Economic (financial) sustainability
Economic activity and growth are sustainable if they can occur without harming social and
environmental sustainability. An organisation’s activities are economically sustainable if the
organisation can provide a return to its stakeholders over the long term while meeting its
obligations to society. Some businesses and entrepreneurs take a very short-term view, but one of
the objectives of most businesses is to thrive in the long term.
10.3 Actions to support sustainability
There are many actions that businesses can take to reduce their impact on the environment and to
increase their sustainability. The 4Rs of recycling, ‘reduce, reuse, recycle, replace’ is a useful
framework for supporting sustainability:
• Reduce – reduce the amount of waste that is produced. Waste is generally disposed of in
landfill sites, which utilises land that could be used for other purposes and creates methane
gasses, or burned in incinerators, which causes greenhouse gasses.
• Reuse – make products or sell products in packaging that can be reused or recycled rather
than single use packaging (such as single use plastics) which cannot be recycled. Plant and
machinery could be upgraded or repaired rather than being thrown away.
• Recycle – avoid sending waste to landfill sites if it can be recycled. Recycling reduces the use
of new products (eg, the cost of recycling aluminium drinks cans is approximately 10% of the
cost of producing new aluminium from aluminium ore). It also reduces the use of landfill sites,
which use another finite resource, land.
• Replace refers to replacing resources that have been used. For example, planting new forests
to replace forests that have been cut down for their timber.
All the actions above are interlinked – reduce leads to less need to recycle, for example. It also
shows that sustainability and climate change are interlinked.
10.4 A balanced approach
In reality, organisations need to achieve a balance between the three. It may not be possible for
an organisation to make a return to shareholders without harming nature (eg, an airline cannot
operate without causing carbon emissions). However, organisations can reduce the harm they
cause, and take actions to remedy this (eg, many airlines encourage passengers to contribute to
the cost of planting trees, as these remove carbon dioxide from the atmosphere). Further
discussion of the steps businesses can take to become more sustainable is discussed later in this
chapter.
10.5 Triple bottom line
‘The bottom line’ is a term that is commonly used to refer to the bottom line of the statement of
profit or loss (the profit after tax). Historically the bottom line was seen as the most important
indicator of an organisation’s performance in the eyes of its shareholders.
In the 1990s John Elkington suggested that a broader view of an organisation’s performance
required a ‘triple bottom line’. The first bottom line is the ‘people account’, which indicates how
socially responsible an organisation is. The second is the ‘planet account’, showing the
ecological impact that an organisation has. The third is the ‘profit account’ – the traditional
profit after tax. Elkington’s triple bottom line model was one of the first attempts to define a
corporate reporting system that would measure more than just the profits of a business. The
idea is that if organisations have to report on their people and planet behaviour, then they would
have an incentive to improve it. In practice it can be difficult to quantify social and
environmental bottom lines, but organisations are encouraged to disclose more information about
their activities in this area.
Thanks to the introduction of the triple bottom line, many large multi-national companies began
to pay more attention to the ethical standards of their suppliers, particularly where many
activities had been outsourced to suppliers in countries with low labour costs and lax regulations
relating to the rights of workers. Profit, people and planet is essentially the same as the social,
environmental and economic aspects of sustainability described above.
11. Climate change and the environment
Definition
Climate change: Long-term shifts in temperatures and weather patterns. Some of these shifts
occur due to natural causes, such as variations in the solar cycle. Since the 1800s, human
activities have been the main driver of climate change.
According to the United Nations, ‘Climate change is the defining issue of our time, and we are
at a defining moment’.
Human activities contribute to climate change through the creation of greenhouse gases,
principally carbon dioxide, methane, nitrous oxide and ozone. These are produced by activities
such as the burning of fossil fuels (eg, oil and coal), deforestation and the use of landfill sites
for waste disposal.
Greenhouse gasses accumulate in the earth’s atmosphere and trap the heat from the sun.
Climate change has many adverse effects, including severe weather conditions (eg, droughts
and floods) and melting polar ice caps leading to rising sea levels.
The Paris Agreement of 2015 is a legally binding treaty in which 193 parties (192 countries plus
the EU) have committed to reduce their carbon emissions. The aim of the agreement is to limit
increases in global temperatures by the end of this century to 2.0 degrees Celsius above pre
industrial levels.
Scientists believe that this can be achieved but will require a huge reduction in carbon emissions
and the use of technology to remove carbon from the atmosphere.
In the UK, the government has committed to a legally binding target of net zero emissions by
2050.
11.2 Impact of climate change on organisations
Climate change impacts on organisations in a number of ways, including the following:
• Extreme weather such as floods and storms can lead to disruption of an organisation’s
operations and damage to assets, or in extreme cases it can threaten the safety of employees.
• The changing regulatory environment brings additional costs to organisations in terms of
compliance with stricter regulations, reporting and fines for failure to comply.
• Reputational damage for organisations that are not striving to act in a sustainable manner. This
can lead to loss of sales or even disruption of operations by activist groups.
11.3 Definition
Net Zero: The amount of greenhouse gases emitted into the atmosphere would be balanced by
schemes to remove them, for example by planting trees or using technology to remove carbon
from the atmosphere. If there are net zero emissions of carbon dioxide, global warming could
halt.
11.4 Role of accountants in sustainability and climate change
Accountants have a key role to play in helping organisations to manage their sustainability
activities and their response to climate change.
Interactive question 3: Great Sportswear Limited
Great Sportswear Limited (GSL) is a UK-based company which sells branded sportswear
(clothes and footwear) throughout the world. Many of its brands are promoted by well-known
sports stars, who appear in GSL’s advertisements and wear its products when competing in
events. GSL designs its products in-house but outsources their manufacture to partners outside
the UK where labour costs per unit are much lower. Recently, it has come to the attention of
GSL’s board of directors that one of the company’s partners employs children at its factories.
These children are paid very low wages and work long hours, so they are unable to attend school.
Requirement
Discuss the factors the board of GSL should consider when deciding whether to continue to work
with this partner
7. Case Study / Discussion
bKash
- How does this company fulfill the definition of a business?
- What functions are most important in its success?