Class 11 business studies Chapter 1 BUSINESS TRADE AND COMMERCE
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NCERT Notes for Class 11 business studies Chapter 1 BUSINESS TRADE AND COMMERCE
Class 11 business studies Chapter 1 BUSINESS TRADE AND COMMERCE
BUSINESS, TRADE AND COMMERCE
- Business is not merely an activity to earn income or profit.
- Value of business is more than just a profit making activity.
- Business activities led to growth and development of any country.
- Is it possible to think a week without business firms? It is closely connected with our life.
- They satisfy our needs and wants by providing various types of goods and services.
- The purpose of business is to earn profit through customer satisfaction.
- This chapter is divided into two sections.
- Section deals with the history of trade and commerce in ancient India.
- Section II deals with the concept, nature and purpose of business
History of Trade and Commerce
- Trade and commerce have played a vital role in making India to evolve as a major player in the economic world in ancient times.
- Archaeological evidences have shown that trade and commerce was the basis of the economy of ancient India.
- Commercial cities like Harappa and Mohenjodaro were founded in 3300 B.C.
- The civilisation had established commercial connections with Mesopotamia and traded in gold, silver, copper, coloured gemstones, pearls, sea shells, terracotta pots, etc.
- There were diverse types of coins and weighing practices.
1.1 Indigenous Banking System
- As economic life progressed, money served as a medium of exchange, the introduction of metallic money and its use accelerated economic activities.
- Documents such as Hundi and Chitti were in use for carrying out transactions in which money passed from hand to hand.
- Hundi as an instrument of exchange, which was famous in the subcontinent.
It involved a contract which —
(i) warrant the payment of money, the promise or order which is unconditional
(ii) capable of change through transfer by valid negotiation.
Hundi refer to financial instruments (as bill of exchange) evolved on the Indian sub-continent used in trade and credit transactions. They were used:-
-As remittance instruments (to transfer funds from one place to another),
-As credit instruments (to borrow money),
-For trade transactions (as bills of exchange).
Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Hundis, being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881. Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers.
Hundi as practised by Indian Merchant Communities
Name of Hundi
Functions of Hundi
Payable to any person—no
Liability over who received payment.
Payable to a specific person,
someone ‘respectable’. Liability over who received payment.
Hundi made payable to order.
Payable to the presenter or bearer.
Payable to any person—no liability over who received payment, but payment over a fixed term.
Hundi made payable to order following a fixed term.
Drawn against dispatched goods. If goods lost in transit, the drawer or holder bears the coasts, and the
Drawee carries no liability.
Indigenous banking system
- Indigenous banking system played a prominent role in lending money and financing domestic and foreign trade with currency and letter of credit.
- With the development of banking, people began to deposit precious metals with lending individuals functioning as bankers or Seths, and collect money from them. Money served as a medium of exchange.
Economic Life of People
- Agriculture and the domestication of animals were important components of the economic life of ancient people.
- In addition to this, by resorting to weaving cotton, dyeing fabrics, making clay pots, utensils, and handicrafts, cottage industries, manufacturing, transports (i.e., carts, boats and ships), etc., they were able to generate surpluses and savings for further investment.
- Workshops (Karkhana) were prominent where skilled artisans worked and converted raw materials into finished goods which were high in demand.
- Family-based apprenticeship system was in practice and duly followed in acquiring trade-specific skills.
- The artisans, craftsmen and skilled labourers of different kinds learnt and developed skills and knowledge, which were passed on from one generation to another.
Rise of Intermediaries
- Intermediaries played a prominent role in the promotion of trade.
- They helped manufacturers especially in foreign trade.
- Intermediaries consist of commission agents, brokers and distributors both for wholesale and retail goods.
- Bankers began to act as trustees and executors of endowments.
- Foreign trade was financed by loans.
- The emergence of credit transactions and availability of loans and advances enhanced commercial operations.
- The Indian subcontinent enjoyed the fruits of favorable balance of trade, where exports exceeded imports with large margins and the indigenous banking system benefitted the manufacturers, traders and merchants with additional capital funds for expansion and development.
- Commercial and Industrial banks later evolved to finance trade and commerce and agricultural banks to provide both short-and long-term loans to finance agriculturists.
- Transport by land and Sea (maritime) was popular in the ancient times.
- Roads as a means of communication had assumed key importance in the entire process of growth.
- The northern roadway route is believed to have lengthened originally from Bengal to Taxila.
- There were also trade routes in the south spreading east and west.
- Pepper was particularly valued in the Roman Empire and was known as ‘Black Gold’.
- Various empires conflict each others to dominate the route for this trade.
- It was in the search for an alternate route to India for spices that led to the discovery of America by Columbus in the closing years of 15th century and also brought Vasco da Gama to the shores of Malabar in 1498.
- Calicut was such a busy market, it was even visited by Chinese ships to acquire items, like essential oils and myrrh (used in perfumes, medicines) from the Middle East, as well as, pepper, diamonds, pearls and cotton from India.
- On the Coromandel Coast, Pulicat was a major port in the 17th century.
- Textiles were the principal export from Pulicat to Southeast Asia
- The merchant community also derived power and prestige and they formed autonomous corporations to protect their interests.
- Trade and industry taxes were also a major source of revenue of the kingdom.
- Traders had to pay octroi duties that were levied on most of the imported articles at varying rates.
- Tariffs varied from province to province.
- The ferry tax was another source of income generation.
- It had to be paid for passengers, goods, cattle and carts.
- The right to receive the labour tax was usually transferred to the local bodies.
- The federation chief dealt directly with the king or tax collectors and settled the market toll on behalf of its fellow merchants at a fixed sum of money.
- The guild merchants also acted as custodians of religious interests.
- They undertook the task of building temples and made donations by levying a corporate tax on their members.
- The commercial activity, thus, enabled big merchants to gain power in the society.
Major Trade Centres
There were all kinds of towns—port towns, manufacturing towns, mercantile towns, the holy centres , and pilgrim mage towns. Their existence is an index of prosperity of merchant communities and professional classes.
The following were the leading trade centres in ancient India:
Pataliputra: Known as Patna today. It was not only a commercial town, but also a major centre for export of stones.
Peshawar: It was an important exporting centre for wool and for the import of horses. It had a huge share in commercial transactions between India, China and Rome in the first century A.D.
Taxila: It served as a major centre on the important land route between India and Central Asia. It was also a city of financial and commercial banks. The city occupied an important place as a Buddhist centre of learning. The famous Taxila University flourished here.
Indraprastha: It was the commercial junction on the royal road where most routes leading to the east, west, south and north come together.
Mathura: It was a centre of trade and people here live depends on commerce. Many routes from South India touched Mathura and Broach.
Varanasi: It grew as a major centre of textile industry and became famous for beautiful gold silk cloth and sandalwood workmanship. It had links with Taxila and Bharuch.
Mithila: The traders of Mithila crossed the seas by boats, through the Bay of Bengal to the South China Sea, and traded at ports on the islands of Java, Sumatra and Borneo.
Ujjain: Cloths were exported from Ujjain to different centres. It also had trade relations through the land route with Taxila and Peshawar.
Surat: It was the centre of western trade during the Mughal period. Textiles of Surat were famous for their gold borders (zari). It is noteworthy that Surat hundi was honoured in far off markets of Egypt and Iran.
Kanchi: Today known as Kanchipuram, it was here that the Chinese used to come in foreign ships to purchase pearls, glass and rare stones and in return they sold gold and silk.
Madura: It was the capital of the Pandayas who controlled the pearl fisheries of the Gulf of Mannar. It attracted foreign merchants, particularly Romans, for carrying out overseas trade.
Broach: It was the greatest seat of commerce in Western India. It was situated on the banks of river Narmada and was linked with all important marts by roadways.
Kaveripatta: Also known as Kaveripatnam, it was scientific in its construction as a city and provided loading, unloading and storage facilities of merchandise.
- Foreign traders had their headquarters in this city.
- It was a convenient place for trade with Malaysia, Indonesia, China and the Far East.
- It was the centre of trade for perfumes, cosmetics, scents, silk, wool, cotton, corals, pearls, gold and precious stones; and also for ship building.
Tamralipti: It was one of the greatest ports connected both by sea and land with the West and the Far East. It was linked by road to Banaras and Taxila.
Major Exports and Imports
Exports consisted of spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products—hides, skin, furs, horns, tortoise shells, pearls, sapphires, quartz, crystal, lapis, lazuli, granites, turquoise and copper etc.
Imports included horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin, copper, lead, rubies, coral, glass, amber, etc.
POSITION OF INDIAN SUBCONTINENT IN WORLD ECONOMY ( 1 AD UP TO 1991)
- Between the 1st and the 7th centuries CE, India is estimated to have the largest economy of the ancient and medieval world, controlling about one- third and onefourth of the world’s wealth (timeline).
- The country was often referred to as ‘Swaranbhumi’ and ‘Swarndweep’ in the writings of many travelers, such as Megasthenes, Faxian (Fa Hien), Xuanzang (Huen Tsang) and others.
- They repeatedly refer to the prosperity of the country.
- The pre-colonial period in Indian history was an age of prosperity for Indian economy and made the Europeans embark great voyage of discovery.
- Initially, they came to plunder but soon realised the rewards of trade in exchange of gold and silver.
- Despite the growing commercial sector, it is evident that the 18th century India was far behind Western Europe in technology, innovation and ideas.
- With the increasing control of the East India Company causing lack of freedom and no occurrence of agricultural and scientific revolution, limited reach of education to the masses, population growth and preference to machines over manual skills made India a country which was prosperous but with people who were poor.
- The British empire began to take roots in India in the mid – 18th century.
- Condition of Indian Economy slowly changed.
- This changed the condition of the Indian economy from being an exporter of processed goods to the exporter of raw materials and buyer of manufactured goods.
India begins to Reindustrialise
- After Independence, the process of rebuilding the economy started and India went for centralised planning.
- The First Five Year Plan was implemented in 1952.
- Due importance was given to the establishment of modern industries, modern technological and scientific institutes, space and nuclear programmes.
- Despite these efforts, the Indian economy could not develop at a rapid pace.
- Lack of capital formation, rise in population, huge expenditure on defence and inadequate infrastructure were the major reasons.
- As a result, India relied heavily on borrowings from foreign sources and finally, agreed to economic liberalisation in 1991.
- The Indian economy is one of the fastest growing economies in the world today and a preferred FDI destination.
- Rising incomes, savings, investment opportunities, increased domestic consumption and younger population ensures growth for decades to come.
- The high growth sectors have been identified, which are likely to grow at a rapid pace world over and the recent initiatives of the Government of India such as ‘Make in India’, Skill India’, ‘Digital India’ and roll out of the Foreign Trade Policy (FTP 2015-20) is expected to help the economy in terms of exports and imports and trade balance.
SECTION-II NATURE AND CONCEPT OF BUSINESS
Human wants are unlimited. In every society people undertake various activities to satisfy their needs. Human activities can be classified into two:-
(1) Economic Activities
(2) Non Economic Activities
Economic Activities-Economic activities are those activities which are undertaken by people to earn money. Eg : A manager works in an office
Non Economic Activities– Non economic activities are those activities which are undertaken by people to get psychological satisfaction or as a hobby. Eg : House wife cooks food for her family, Gardening as a hobby, Playing football etc.
Differences Between Economic Activities and Non-economic Activities
Undertaken by people to earn money
Undertaken by people to get mental satisfaction
Its benefit can be measured in terms of money
Its benefit can’t be measured in terms of money
Money is the reward
Mental satisfaction is the reward
Non Economic Activities
A worker works in a factory
A doctor runs his clinic
A teacher works in a School
A manager works in an office
A business man runs a shop
House wife cooks food for her family.
Boy helps an old man to cross the road.
Gardening as a hobby.
A mother looks after her children Playing football.
A patriot sacrifices his life for his motherland.
Economic activities can be classified into three:-
I. BUSINESS II. PROFESSION III. EMPLOYMENT I Business
Business is an economic activity which involves production or purchase of good for sale, or exchange of goods or providing services, at profit.
Characteristics of Business
An Economic Activity- it is undertaken by people with the objective of earning profit.
Regularity in dealing-Business involves dealing in goods and services on a regular basis. One single transaction never constitutes a business.
Profit Motive- Profit Motive is an important distinguishing feature of business.
It must earn profit for its survival, growth and expansion.
Element of risk-Risk cannot be eliminated from business. Risk may be in the form of natural calamities, changes in consumer tastes, competition, fire etc.
- Profession is an occupation, in which application of special knowledge and skill of a person is necessary.
- It involves rendering of personal services of a special and expert nature.
- Eg Doctors are engaged in the medical profession, Chartered Accountants are engaged in the accounting Profession, Lawyers are engaged in the legal profession
Employment refers to an occupation in which people work for others regularly and get salary or wage in return.
Difference between Business, Profession and Employment
Basis of Difference
Nature of work
Production or purchase and sale of goods and services
Rendering of personalized expert service
Performing the works assigned by the employer
No. minimum qualification is required in business
In profession specialized knowledge and training is required
In employment qualification is decided by the employer.
Wage or salary
Very Low Risk
Transfer of ownership
Code of Conduct
In business there is no code of conduct to be followed
In profession professional code of conduct to be followed.
Norms of behavior laid down by the employer are to be followed.
Classification of Business Activities
On the basis of function we can classify business activities into two:-I. Industry II. Commerce
- Industry refers to that part of business activities which is concerned with the production of goods and materials.
- It includes business activities like raising, producing, processing or manufacturing of products.
- Industries can be divided into three broad categories namely:
1. Primary Industries
It includes all those business activities, which are concerned with extraction of natural resources, reproduction and development of living organisms, plants etc. Primary industries can be classified into two namely extractive industries and genetic industries.
(a) Extractive Industries: Extractive industries are those industries which extract something from natural sources like earth, water, air etc. It extract timber from forest, fish from sea, coal and iron are from soil etc. Primary industries supply basic raw materials to manufacturing industries and manufacturing industries convert these raw materials into finished goods.
Eg. Mining, hunting, fishing from natural sources, fruit gathering, agriculture etc.
(b) Genetic Industries: Genetic Industries are those industries which are undertakes activities like reproduction or multiplication of animals and plants with an objective of earning profit.
Eg : Agriculture nursery, poultry farming, cattle breeding, pisciculture (fish farming).
2. Secondary Industries
Secondary Industries are manufacturing products or constructing building, roads etc. by using raw materials provided by primary industries. Secondary industries can be divided into two:-
(a) Manufacturing Industry and
(b) Construction Industry
(a) Manufacturing Industry: Manufacturing Industries are engaged in the process of converting raw materials into finished good and create form utilities. They convert cotton into textile, iron ore into steel, timber into furniture and so on.
On the basis of methods of operation used for production, we can classify manufacturing industries into four categories.
a. Analytical Industries b. Synthetical Industries c. Processing Industries d. Assembling Industries
Analytical industries – Analytical industry is engaged in the process of analysing and separating various components from the same material.
Eg .Oil refinery – they separate diesel, petrol etc from crude oil
Synthetical Industry – Business engaged in this sector combines various ingredients to produce a new product
Eg. Cement industry, fertilizer industry etc.
Processing Industry – Process of these industries involves successive stages for manufacturing finished products
Eg. Sugar industry, paper Industry.
Assembling Industry-Assembling industry is engaged in the process of assembling different components to make a new product
Eg. Computer industry, Car industry etc.
(b) Construction Industry
These industries are involved in the construction of buildings, dams, bridges, roads, canals etc. The raw materials required for these industries are supplied by the manufacturing industries and extractive industries. Their outputs are always immovable.
C. Tertiary Industries
- Tertiary industries are providing support service to primary and secondary industries.
- Tertiary Industries consists of banking, Insurance, advertising, communication etc.
- For example, if a transporting company helps to move iron ore from mining place to manufacturing plant, it come under industry and on the other hand if the same transporting company helps to move finished product (here steel) to different parts of the country, it is not an industry and it is a part of commerce.
Make in India
- ‘Make in India’ is an initiative launched by the Government of India on 25 September 2014,to encourage national as well as international companies to manufacture their products in India.
- The major objective behind this project is to create employment opportunities and enhance skill development in 25 sectors of the economy.
Commerce = Trade + Aids to trade
- Commerce includes trade and auxiliaries to trade (aids to trade).
- Buying and selling of goods is termed as trade.
- But there are a lot of activities that facilitates the process of trade.
- These are called auxiliaries to trade or aids to trade.
- Aids to trade include services like banking, insurance, communication, advertisement and warehousing.
- Industry looks after the production aspect of business whereas commerce looks after the distribution aspect of the business. Whatever is produced, it must be consumed.
- To facilitate this consumption there must be a proper distribution channel.
- Commerce facilitates the transfer of goods from producers to consumers.
- Commerce is the connecting link between producers and consumers.
- Commerce includes all those activity which are necessary for maintaining a free flow of goods from producers to consumers.
- ‘Commerce means the sum total of those processes which are engaged in the removal of the hindrances of person, place and time in the exchange of commodities’.
- In the process of trade there exist various hindrances like hindrances of place, hindrances of time, hindrances of knowledge, hindrances of finance, hindrances of risk etc.
- Aids to trade or auxiliaries to trade remove these hindrances.
- Hindrance of place can be removed with the help of transportation, hindrance of time can be removed with the help of warehousing, hindrance of knowledge can be removed with the help of advertising, hindrance of finance can be removed with the help of banking and hindrance of risk can be removed with the help of insurance and proper packaging.
- Trade is the central activity (nucleus) of commerce.
- It refers to purchase and sale of goods.
- It helps the movement of goods from the producer to the ultimate consumers.
- They purchase goods from the producer in bulk quantities and sell them to consumers according to their requirements.
- It is the connecting link between producer and consumer.
- In the absence of trade, it would not be possible to undertake production activities on a large scale.
- Trade may be internal trade or external trade.
I. Internal trade
- Internal trade means purchase and sale of goods with in the country.
- Internal trade may be whole sale trade or retail trade.
(a) Whole sale trader
- Wholesaler is the connecting link between producer and retailer.
- He purchases huge quantity of goods from producer, stores it in big godowns and sells in small quantities to retailers.
(b) Retail trade
- Retail trade is the Connecting link between wholesaler and ultimate consumer.
- Retailer purchases goods from wholesaler and sells them to ultimate consumer.
- A retailer is the last link in the chain of distribution.
II. External trade
External trade or foreign trade means buying and selling of goods and services between two countries. External trade may be import trade, export trade or Entrecote trade.
Import trade – 1f goods are purchased from another country, it is called import trade.
Export trade – If goods are sold to another country, it is called export trade.
Entrepot trade– When goods are imported from foreign countries with the object of re exporting them to some other countries, it is called entrepot trade.
Eg. Indian firms importing goods from Germany and Japan and exporting it to Nepal is entrepot trade.
Auxiliaries to trade (Aids to Trade)
- The term commerce includes trade and aids to trade.
- These are services which help in removing various hindrances which arise in the process of buying and selling of goods.
- Transportation, banking, insurance, warehousing, communication and advertising are regarded as aids to trade.
- Aids to trade are briefly discussed below
- Production of goods generally takes place in particular locations.
- But these goods are required for consumption in different parts of the country.
- For instance tea is mainly produced in Assam but it is consumed all over India.
- The hindrance of place is removed with the help of various transportation facilities like road transport, rail transport, air transport etc.
2. Banking and Finance
- Business activities can’t be undertaken unless funds are available for acquiring assets and meeting day to day expenses.
- Banks help business firms to overcome the problem of finance by giving necessary funds.
- Banks also undertake collection of cheque, remittance of funds to different places, discounting bills of exchange etc.
- Thus hindrance of finance can be removed with the help of banking.
- Business involves various types of risks.
- Factory building, machinery, goods in stock or transit are subject to the risk of loss or damages.
- Risk may arise due to fire natural calamities, accidents etc.
- Employees are to be protected from risks of accidents.
- Insurance provides protection in all such cases.
- Hindrance of risk can be minimized with the help of insurance.
- There is always a time gap between the production and consumption of goods.
- They are to be kept in good condition and make them available as and when required.
- Warehousing helps business firms to overcome the problem of storage and facilitates the availability of goods when needed.
- Warehousing stabilities prices by equalizing the supply of goods to the market.
- Thus hindrance of time can be removed with the help of warehousing.
- Advertisement plays on important role in the process marketing.
- Through advertisement consumers get information about a particular product and its use.
- It is one of the most important devices designed to capture the attention of prospective customers and to create interest in the products which would ultimately turn into sales.
- Thus advertisement removes hindrance of knowledge in the process of trade. Various means of advertisement are news paper, TV, magazine, radio, internet etc.
- Communication means exchange of ideas, facts, opinions, emotions, information etc. between two or more persons.
- The successful operation of the business requires that there must be proper communication between buyer and seller.
- Communication between them is required for placing order, making complaints, making payments, deciding the terms of transactions etc.
- The various means of communication are telephone, email, mobile phone, fax etc.
Multiple Objectives of Business
- Objectives of Business mean the purpose for which a business is established and carried on.
- Objective setting is the starting point of any business.
- Objective serves as the guidelines for future direction and management of business.
- Since a business has to balance a number of needs and goals, it requires multiple objectives.
Main objectives of business are the following:
1. Earring profits
- Main aim of any business is to earn profit.
- No business can survive for long without adequate profit.
- Business needs profit not only for its existence but also for growth and expansion.
- Profit is the ultimate test of business performance.
- Innovation means introduction of something new to the market.
- It includes discovery of a new product, introduction of new and improved methods of production, adoption of better distribution system etc.
- Introduce colour television in the place of black and white television is an example of product innovation.
- Using the power looms in place of handlooms in weaving is an example of process innovation.
- Today business world is highly competitive.
- No business enterprise can flourish in a competitive world without innovation.
- So innovation became an important objective.
3. Market standing (creation of customers)
- Creation of customers or increase market share is an important objective of a business.
- It refers to the position of an enterprise in relation to its competitors.
- To ascertain the market standing, the business must analyze the market and find out where it stands.
- The business must state in quantifiable terms the present and prospective customers and the share of market it can capture.
- Also business must look upon things in the light of competition.
- Productivity means the efficiency of a business firm to produce its output.
- It is ascertained by comparing the value of output with the value of inputs.
- Every business must aim at greater productivity by making the best possible use of scarce resources like men, money, machinery, materials etc.
- It can be achieved by employing competent personnel, making fuller utilization of machine capacities, reducing wastage of materials etc.
Physical and financial resources:
- Any business requires physical resources, like plants, machines, offices, etc., and financial resources, i.e., funds to be able to produce and supply goods and services to its customers.
- The business enterprise must aim at acquiring these resources according to their requirements and use them efficiently.
Social responsibility refers to the obligation of business firms to contribute resources for solving social problems and work in a socially desirable manner.
Role of profit in business
- Securing profit is the basic requirement of a business.
- The profit is the driving force which initiates, activates, and sustains the efforts of the business man.
- It is the reward for risk bearing.
- Profit is necessary for the survival, growth, prosperity and prestige of the business.
- Profit is the sun, which enlighten every corner of the business.
Profit making is essential in business due to the following reasons.
- Profit is a source of Income: Profit is a source of income and it provides the means for livelihood for the businessman.
- Profit is essential for growth and expansion: Profit provide necessary fund for growth and expansion of business activities. Retention of profit as an internal source of funds is more dependable than external sources like banks and financial institutions.
- Profit is the index of business performance: Profit earning ability is considered to be the index of business success. It measures the performance of the business
- Profit is the reward for risk taking: Profit is the reward for the entrepreneur who takes business risk.
- Profit enhances prestige: Profit provides economic power and prestige to a business. It improves the credit worthiness as well as the bargaining strength of the business. A profit making firm can raise funds on easy terms.
- Profit Increases the efficiency of business: Good profit earning concerns are in a better position to pay good salaries and perk to employees. This will motivate the workers and they work hard for the business. This will improve overall efficiency of the business.
- The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. In a business, risk is unavoidable.
- It can be defined as the chances of loss due to certain uncertain events like natural calamities, competition, government decision etc.
- Business enterprises usually face two types of risks –
(1) Speculative risk and
(2) Pure risk.
Speculative risk: Speculative risk involves both the possibility of gain as well as loss. It may arise due to change in demand. In this case, demand may increase or decrease. Another example, change in the price of raw material, it may increase or decrease. Favorable market conditions are likely to result in gains whereas unfavorable ones may result in losses.
Pure risks: In case of pure risk, there is only the possibility of loss or no loss. The chances of fire, theft, etc. are examples for pure risk. Their occurrence may result in loss whereas non- occurrence may explain absence of loss, instead of gain.
Nature of Business risk
Nature or characteristics of business risks are as follows:-
- Business risks arise due to uncertainties: Uncertainty refers to the lack of knowledge about what is going to happen in the future. Natural calamities, change in demand and prices, changes in technologies, government decisions etc. are examples of uncertainty. The outcome of this future event is not known in advance.
- Risk is an essential part of every business: In business risk is unavoidable. Risk may vary from business to business. Risk can be minimized or shared with the help of insurance but can’t be eliminated.
- Profit is the reward for risk taking: Actually profit is the reward for risk bearing. No risk, no gain is an age old principle and is applicable to all kinds of business. Greater the risk more is the reward. A businessman shoulders risks in anticipation of better returns.
- Risk depends mainly upon the nature and size of business: Nature and size of business very much determine the degree of risk involved in a business. A large scale business involves more risks than small scale unit. Similarly, a firm dealing in fashionable items does have high degree of risk than a firm dealing in essential commodities.
Causes of business Risk
Business risks arise due to variety of causes, which are discussed as follows:-
1. Natural causes
Natural calamities are unpredictable and are beyond the control of a businessman. Flood, earthquake, heavy rains, lightning, famine, storm etc. are examples of natural risk.
2. Economic Causes
These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems, like rise in interest rate for borrowing, levy of higher taxes, etc., also come under these type of causes as they result in higher unexpected cost of operation or business.
3. Human Causes
Human causes: Human causes include such unexpected events, like dishonesty, carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.
4. Government policy
Government policy regulations, changes in import export policy, licensing policy, tax structure etc. may cause heavy losses to a business man.
5. Physical Cusses
Physical Cusses include loss due to mechanical defects, accidents from defective machinery etc.
Procedure for Starting up new business
The procedure for starting up of new business enterprises is very lengthy and time consuming. It includes many steps and formalities.
1. Selection of line business:
The first thing to be decided by an entrepreneur is the nature and type of business to be undertaken. The promoter can start a manufacturing concern or a trading concern.
2. Size of business
After finding a business opportunity, the promoter must decide on its size. The size of the business depends on various factors like capital, future demand, economies of scale etc.
3. Choice of form of ownership:
With respect to ownership, the business organisation may take the form of a sale proprietorship, partnership, or a joint stock company. Each form has its own merits and demerits.
4. Location of business
The promoter must also make a decision about the location of the business. He must consider factors like cost of land, availability of land, transportation facilities, electricity, water, nearness to market, scope for expansion and so on. Unscientific location affects the efficiency of business.
5. Financing (Capital acquisition)
Financing is concerned with providing the necessary capital for starting as well as for acquiring the proposed business. Capital is required for acquiring fixed assets as well as for meeting day to day expenses. Proper financial planning is necessary to determine (1) the requirement of capital (2) source from which capital will be raised and (3) the best ways of utilizing the capital in the firm.
6. Plant Layout
Once the requirement of physical facilities has been determined, the entrepreneur should draw a lay out plan showing the arrangement of these facilities. Plant layout is a scientific and systematic arrangement of machines and equipment within the factory. A good layout ensure minimum wastage, better use of available space, safety and security of workers etc. It also increases the profit of the business.
7. Organizational Structure
A business is divided into various departments according to their functions they performed. After making departments; the employees are assigned their duties to fix responsibility on employees.
8. Starting the business
After the decisions relating to the above mentioned factors have been taken, the entrepreneur can go ahead with actual launching of the enterprise. Launching means brings together various factors of production fulfilling necessary legal formalities, starting the production process and initiating the sales promotion campaign.