Chapter 2

Nature and objectives of Business

Definition
• Business may be defined as production and purchase of
goods and services and selling them with a view to satisfy
human wants and thereby earn profits.
• It is an economic activity which is undertaken to provide
goods and services to society with the aim of earning
profits. It is concerned with the production and distribution
of goods and services.
Characteristics
• Creation of utilities: Business makes goods more useful to satisfy human wants. It
adds time, place,form and possession utilities to various types of goods.
• Dealings in goods and services: Every business enterprise produces goods and
services for selling them to others.
• Continuity n dealings: Regularity of dealings is an essential feature of business.
Dealings in goods and services become business only if undertaken on a regular
basis.
• Sale , transfer or exchange: All business activities involve transfer or exchange of
goods and services for some consideration. The consideration called price is
usually expressed in terms of money.
• Profit motive: Profit is essential for the survival as well as growth of business.
Hence, it is the primary aim.
• Element of risk: Business enterprise function in uncertain and uncontrollable
environment.(Change in customer preferences, government policies etc.). Hence
it is a part and parcel of business.
• Economic activity: Business is primarily an economic activity as it involves
Objectives of Business
• ECONOMIC – earning profit along with customer
satisfaction
• SOCIAL – to discharge the social responsibilities
• HUMAN – well being of labour
• NATIONAL- growth and development of nation
Economic objectives
• Earning profits: Profit is essential for the survival of every
business unit. Just as a person cannot live without food a
business cannot survive without profit.
Profits helps to keep intact the wealth producing capacity of
its resources. Profit is also necessary for the growth and
survival.
it also serves as a barometer of stability ,efficiency and
progress of a business enterprise.
• Creating Customers: Profit arises from the businessman’s efforts to
satisfy the needs and wants of customers.
A businessman can earn profits only when there are enough
customers to buy and pay for his goods and services.
No business can succeed without providing customers value for their
money. Business exists to satisfy the want, taste and preferences of its
customers.
In order to earn profit business must supply better quality goods and
services at reasonable prices. Therefore creation and satisfaction of
customer is an important economic objective of business.
• Innovations: A business can be successful only when it creates new
designs, better machines, improved techniques, new varieties, etc.
Innovation comprises all efforts made in perfecting the product,
minimising the costs and maximising benefits to customers.
Business firms invest money, time and efforts in Research and
development to introduce innovations. They develop new technology,
introduce new designs and new tools and processes to minimise costs
and to satisfy everi ncreasing wants of customers.
Social objectives
• Supplying desirable good at reasonable prices: Business is
expected to supply the desired goods and services of good
quality at reasonable prices.
• Fair remuneration to employees: Employees must be given
fair compensation for their work. In addition to salary a
reasonable part of profits should be distributed among
employees in recognition of their contributions.
Also, To provide healthy and safe work environment for
employees to motivate them and hence improve productivity.
• Employment generation: Business should, along with government
provide opportunities for gainful employment to members of the
society.
• Fair return to investors: Business is expected to pay fair return to its
shareholders and creditors in the form of dividend and interest.
Investors expect safety and appreciation of their investment.
• Social welfare: Business should provide support to social, cultural and
religious institutions. It can build schools, colleges, libraries, hospitals,
sport bodies and research institution. They can also help NGO’s which
render services to weaker sections of society.
• Payment of government dues: every business enterprise should pay
tax dues to the government honestly and at the right time. These taxes
provide revenue to the government for spending on public welfare.
Business should also abide faithfully by the laws of the country.
Human Objectives
• Labour welfare: business must recognise the dignity of labour and human
factor should be given due recognition.
Proper opportunities for utilising individual talents and satisfying aspirations
of workers. Adequate provisions should be made for their health, safety and
security.
Job satisfaction and sense of belonging is must.
• Development of human resources: Business should provide opportunities for
developing new skills and attitudes. It can facilitate self development by
encouraging creativity and innovations among them.
• Participative management: employees should be allowed to take part in the
decision making process to get the valuable suggestion .
• Labour management cooperation: there should be a cordial employee
employer relation to ensure peace and progress in industry.
National objectives
• Optimum utilisation of resources: business should produce goods in accordance
with national priorities and interests. It should minimise the wastage of scarce
natural resources.
• National self reliance: it is the duty of business to help the government in increasing
exports and in reducing dependence on imports. This requires development of new
technology and its application in industry.
• Development of small scale industries : Big business firms are expected to
encourage growth of small scale industries which re necessary for generating
employment.
• Development of backward areas: business should give preference to
industrialisation of backward regions of the country to have a balanced development.
• Control over pollution: Business is responsible for reducing the adverse effect of
business on the quality of life. It must make proper arrangements for the disposal of
smoke, wastes, etc. to protect the health and life of people, animals and birds.
Role of profit in business
Profit earning is essential in business due to following reasons:
• Incentive: Profit is the driving force behind every business. It inspires
people to start an enterprise and to work hard for making it
successful. Profit is the reward for undertaking the risk of business.
• Survival: Profit is essential for the survival of business and it ensures
the continuity of an enterprise. In the absence of profits, an
enterprise will eat up its own capital and ultimately close down. With
the help of profits business can replace obsolete machinery and
equipment and thereby maintain its capacity to create wealth.
• Growth: Profit is the biggest source of capital for expansion and
growth of business. It serves as a means of self financing. In
addition ,profits enable business to attract capital from outside.
• Measure of efficiency: Profit is considered to be the index of success
in business. People judge the performance of an enterprise on the
basis of profit earned by it.
• Prestige: A loss making business enjoys no goodwill. Profits provide
economic power and status to the businessmen. Higher profit
increases the bargaining power and credit worthiness of the business.
moreover only a profit making firm can provide service to the society.
Objections against profit maximisation/ Why
profit can’t be the sole objective of business?
Profit cannot be the sole objective of business due to the following reasons:
• Disregard of stake holders: Profit helps to serve the interest of the shareholders
alone. But business also has obligations towards other stakeholders such as
employees, customer, Government, society etc.
• Misguide management: in their craze for maximum profits managers may
undermine the firm’s future. They may fail to invest in executive development ,
Research and development etc.
• Overstress the ends: profit maximisation overstresses the end result and overlooks
the means employed to achieve the profits. Any means which are against social
interest are injurious to business even if they generate huge profits.
• Outdated: Profit maximisation is inconsistent with the modern trends in business.
It may endanger the long term growth hence is unrealistic and inappropriate.
The guiding principle should be ‘profit through service’.