Nature OF Business
You are familiar with many large companies, such as General Motors, Barnes & Noble, and AT&T. You are also familiar with many local businesses, such as gas stations, grocery stores, and restaurants. You may work for one of these businesses. But what do they have in common that identifies them as businesses?
In general, a business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.1 Businesses come in all sizes, from a local coffee house to General Motors, which sells several billion dollars worth of cars and trucks each year. The customers of a business are individuals or other businesses who purchase goods or services in exchange for money or other items of value. In contrast, a church is not a business because those who receive its services are not obligated to pay for them.
The objective of most businesses is to maximize profits by providing goods or services that meet customer needs. Profit is the difference between the amount received from customers for goods or services provided and the amount paid for the inputs used to provide the goods or services. Some businesses operate with an objective other than to maximize profits. The objective of such not-for-profit businesses is to provide some benefit to society, such as medical research or conservation of natural resources. In other cases, governmental units such as cities operate water works or sewage treatment plants on a not-for-profit basis. Our focus in this text will be on businesses operated to earn a profit. However, many of the concepts and principles also apply to not-for-profit businesses
Forms of Business
Forms of Business
A business is normally organized as one of three different forms: proprietorship, partnership, corporation, or limited liability company. A proprietorship is owned by one individual. More than 70% of the businesses in the United States are organized as proprietorships. The popularity of this form is due to the ease and low cost of organizing. The primary disadvantage of proprietorships is that the financial resources available to the business are limited to the individual owner’s resources. Small local businesses such as hardware stores, repair shops, laundries, restaurants, and maid services are often organized as proprietorships
As a business grows and requires more financial and managerial resources, it may become a partnership. A partnership is owned by two or more individuals. Like proprietorships, small local businesses such as automotive repair shops, music stores, beauty shops, and men’s and women’s clothing stores may be organized as partnerships. Currently, about 10% of the businesses in the United States are organized as partnerships.
Like proprietorships, a partnership may outgrow its ability to finance its operations. As a result, it may become a corporation. A corporation is organized under state or federal statutes as a separate legal entity. The ownership of a corporation is divided into shares of stock. A corporation issues the stock to individuals or other businesses, who then become owners or stockholders of the corporation
A primary advantage of the corporate form is the ability to obtain large amounts of resources by issuing shares of stock, which are ownership rights in the corporation. For this reason, most companies that require large investments in equipment and facilities are organized as corporations. For example, Toys“R”Us has raised over $800 million by issuing shares of common stock to finance its operations. Other examples of corporations include Yahoo!, Ford, Apple Computer, Coca-Cola, and Starbucks.
About 20% of the businesses in the United States are organized as corporations. However, since most large companies are organized as corporations, over 90% of the total dollars of business receipts are received by corporations. Thus, corporations have a major influence on the economy.
A limited liability company (LLC) combines attributes of a partnership and a corporation in that it is organized as a corporation, but it can elect to be taxed as a partnership. In addition, its owners’ (or members’) liability is limited to their investment in the business.
In addition to the ease of formation and ability to raise large amounts of capital, the legal liability, taxes, and limitation on life are important considerations in choosing a form of business organization. For sole proprietorships and partnerships, the owners have unlimited liability to creditors and for other debts of the company. For corporations and limited liability companies, the owner’s liability is limited to the amount invested in the company. Corporations are taxed as separate legal entities, while the income of sole proprietorships, partnerships, and limited liability companies is passed through to the owners and taxed on the owners’ tax returns. As separate legal entities, corporations also continue on, regardless of the lives of the individual owners. In contrast, sole proprietorships, partnerships, and limited liability companies may terminate their existence with the death of an individual owner.
How Do Businesses Make Money?
How Do Businesses Make Money?
The goal of a business is to make money by providing goods or services to customers. How does it decide which products or services to offer its customers? For example, should Best Buy offer warranty and repair services to its customers? Many factors influence this decision. Ultimately, however, the decision is based on how the business plans to gain an advantage over its competitors, and in doing so, make money and maximize its profits. Profits are the excess of revenues from selling services or products over the cost of providing those services or products as illustrated below.
Businesses try to maximize their profits by generating high revenues, low costs, and thus high profits. However, a business’s competitors are also trying to do the same and, thus, a business can only maximize its profits by gaining an advantage over its competitors. So, how can a business accomplish this?
Generally, businesses gain an advantage over their competitors by using either a low-cost or a premium-price emphasis. Under a low-cost emphasis, a business designs and produces products or services at a lower cost than its competitors. Wal-Mart and Southwest Airlines are examples of businesses with a low-cost emphasis. Such businesses sell no-frills, standardized products and services.
For the most part, organizations gain preference over their rivals by utilizing either a
minimal effort or an excellent value accentuation. Under a minimal effort accentuation, a business structures
what’s more, produces items or administrations at a lower cost than its rivals. Wal-Mart and
Southwest Airlines are instances of organizations with a minimal effort accentuation. Such organizations move straightforward, institutionalized items and administrations.
Under an exceptional value accentuation, a business endeavors to plan and create items or
administrations that serve one of a kind market needs, enabling it to charge premium costs. For instance, clients may see an item or administration as exceptional dependent on quality, dependability, picture, or plan. John Deere, Tommy Hilfiger, and BMW are instances of
organizations that charge premium costs for their items. To represent, John Deere
underscores the unwavering quality of its garden gear, Tommy Hilfiger stresses the
one of a kind picture of its apparel, and BMW accentuates the special driving style and distinction of its cars.
Since organizations are exceedingly aggressive, it is troublesome for them to continue an upper hand after some time. For instance, an essential worry of a business utilizing a minimal effort
accentuation is that a contender may duplicate its minimal effort strategies or create mechanical
propels that empower it to accomplish even lower costs. An essential worry of a business utilizing an excellent value accentuation is that a contender may create items with attributes apparent as increasingly alluring by clients.
Instances of how organizations utilize the ease and premium-value accentuations to attempt
to pick up points of interest more than each other incorporate the accompanying:
• Local drug stores endeavor to create customized associations with their clients. By
doing as such, they can charge premium (higher) costs. Interestingly, Wal-Mart’s
drug stores utilize the minimal effort accentuation and contend on expense.
• Grocery stores, for example, Kroger and Safeway additionally endeavor to create customized associations with their clients. One way they do this is by issuing attractive cards
to favored clients to build up brand faithfulness. The cards likewise enable the stores to
track purchaser inclinations and purchasing propensities for use in obtaining and promoting efforts. In doing as such, Kroger and Safeway want to contend on a premiumprice premise against Wal-Mart Supercenters which utilize a minimal effort accentuation.
• Honda publicizes the unwavering quality and quality appraisals of its cars and is in this way
ready to charge premium costs. So also, Volvo’s superior value accentuation employments
security as the one of a kind normal for its cars. Interestingly, Hyundai and Kia
utilize a minimal effort accentuation.
• Harley-Davidson underscores that its bikes are “Made in America” and advances its “rebel” picture in executing an exceptional value accentuation. This permits
Harley-Davidson to charge more expensive rates for its cruisers than does Honda,
Yamaha, or Suzuki.
Proprietors and investors need to augment the monetary estimation of their speculations.
Capital market partners hope to get an arrival on their speculations proportionate to the level of hazard they are taking. Since banks and long haul leasers have
first inclination to the benefits on the off chance that the business falls flat, their hazard is not as much as that of the
proprietors, therefore, their general return is lower.
Item or administration advertise partners incorporate clients who buy the business’ items or administrations just as the sellers who supply contributions to the business.
Clients have a monetary enthusiasm for the proceeded with accomplishment of the business. For
precedent, in the mid 2000s, clients of the Internet supplier @home.com were at first helpless to recover their email or associate with the Internet when @home.com
defaulted on some loans. Clients who buy advance tickets on Delta Air Lines have
a monetary enthusiasm for whether Delta will proceed in business. So also, providers
are partners in the proceeded with accomplishment of their clients. Providers may put resources into
innovation or other capital hardware to meet a client’s purchasing and assembling
particulars. On the off chance that a client comes up short or curtails buys amid downturns, providers may see their business decrease too. This has been the situation for Delphi, a noteworthy
provider to General Motors, amid GM’s downturn in 2005.
Different governments have an enthusiasm for the financial execution of organizations.
Accordingly, city and state governments frequently give impetuses to organizations to find
inside their locales. City, region, state, and central governments gather charges
from organizations inside their locales. The better a business does, the more duties
the legislature can gather. Moreover, specialists are burdened on their wages. Interestingly,
laborers who are laid off and jobless can record claims for joblessness remuneration, which results in a money related weight for the legislature.
Inner partners incorporate people utilized by the business. The supervisors
are those people who the proprietors have approved to work the business.
Supervisors are fundamentally assessed on the financial execution of the business. The
supervisors of organizations that perform inadequately are frequently terminated by the proprietors. In this manner, administrators have a motivating force to amplify the financial estimation of the business. Proprietors may
offer supervisors pay gets that are attached specifically to how well the business performs. For instance, a chief may get a percent of the benefits or a percent of
the expansion in benefits.
Representatives give administrations to the organization they work for in return for pay.
Therefore, representatives have an enthusiasm for the monetary execution of the business in light of the fact that
their occupations rely on it. Amid business downturns, it isn’t surprising for a business
to lay off specialists for broadened timeframes. In the outrageous, a business may fall flat and
the workers may lose their positions for all time. Representative worker’s guilds frequently utilize the
great financial execution of a business to contend for compensation increments. Interestingly,
organizations regularly utilize poor monetary execution to contend for representative concessions
for example, wage diminishes.
Notwithstanding whether the organization is Microsoft or General Electric, all organizations are
occupied with the exercises of financing, contributing, and working, as appeared at the highest point of
page 11. Initial, a business must acquire the essential assets to fund the expenses to compose,
pay lawful charges, and pay other startup costs. Next, a business must put assets in the
important resources, for example, structures and gear to start activities. For instance,
Milton Hershey put resources into the German chocolate-production apparatus he saw at the
Chicago International Exposition. At long last, a business must use its benefits and assets
to actualize its business accentuation. Milton Hershey’s business accentuation was to massproduce chocolate confections at a reasonable expense.
As we will talk about later in this part, a noteworthy job of bookkeeping is to give
partners with data on the financing, contributing, and working exercises of
organizations. Budget reports are one wellspring of such data.
The cases of loan bosses and investors on the company’s assets are unique. The assets claimed by a business (enterprise) are called its advantages. In the event of a
organization’s liquidation or chapter 11, leasers have first case on its benefits. As it were
after the loan bosses’ cases are fulfilled can the investors get corporate resources. In
expansion, while loan bosses hope to get convenient installments of their cases, which may incorporate intrigue, investors are not qualified for normal installments. In any case, numerous companies disperse income to investors all the time as long as the cases of loan bosses are being fulfilled. These dispersions of income to investors are called dividends
Once financing has been gotten, a business utilizes contributing exercises to acquire the
fundamental advantages for begin and work the business. Contingent on the idea of the
business, a wide range of advantages must be obtained. For instance, Milton Hershey
obtained the German chocolate-production hardware and later developed a working to house the Hershey tasks. Notwithstanding
hardware and structures, different resources could incorporate PCs, office
goods, trucks, and vehicles. Albeit most resources have physical qualities, for example, hardware, a few resources are immaterial in
nature. For instance, a business may buy patent rights for use in a
fabricating procedure or item.
A business may gain resources through financing exercises when the
business obtains money through acquiring or issuing offers of stock.
Money is utilized to buy resources through contributing exercises, for example, in
the first section. At long last, resources might be procured through working exercises, as we will depict in the following area.
Resources may take a wide range of structures. For instance, unmistakable
resources incorporate money, land, property, plant, and hardware. Resources may
likewise incorporate immaterial things, for example, rights to licenses and rights to installments from clients. Rights to installments from clients are called records of sales. Other immaterial resources, for example, generosity, copyrights, or licenses, are frequently gathered together and detailed as elusive
resources. A business may likewise prepay for things, for example, protection or lease.
Such things, which are resources until they are devoured, are ordinarily announced as prepaid costs