CHAPTER – I

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-
I deals with the history of trade and commerce in ancient India. Section II deals
with the concept, nature and purpose of business

SECTION- I

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
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).

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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: Specimens

Fig: Hundi

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Hundi as practised by Indian Merchaant Communities

Name of Hundi Broader Functions of Hundi

Classification

Dhani-jog Darshani Payable to any person—no

Liability over who received payment.

Sah-jog Darshani Payable to a specific person,

someone ‘respectable’. Liability over who

received payment.

Firman-jog Darshani Hundi made payable to order.

Dekhan-har Darshani Payable to the presenter or bearer.

Dhani-jog Muddati Payable to any person—no liability over who

received payment, but payment over a fixed
term.

Firman-jog Muddati Hundi made payable to order following a

fixed term.

Jokhmi Muddati 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)

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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

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

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Merchant Corporations

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.
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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.

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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 one-
fourth 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 T

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rade Policy (FTP 2015-20) is expected to help the economy in terms of exports
and imports and trade balance.

The History of India is Divided into 7 Periods

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

1. Economic Activities-Economic activities are those activities which are undertaken by people to
earn money. Eg : A manager works in an office

2. 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

Economic Activities Non-economic Activities
Undertaken by people to earn money Undertaken by people to get mental
satisfaction
Its benefit can be measured in terms of Its benefit can’t be measured in terms of
money money
Money is the reward Mental satisfaction is the reward

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 Human Activities

Economic Activities Non Economic Activities

Business Profession Employment

Religious and Social Welfare Leisure Time

Cultural activities Activities Activities

Examples:
Economic activities Non Economic Activities
A worker works in a factory House wife cooks food for her family.
A doctor runs his clinic Boy helps an old man to cross the road.
A teacher works in a School Gardening as a hobby.
A manager works in an office A mother looks after her children
A business man runs a shop 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
1. An Economic Activity- it is undertaken by people with the objective of earning profit.

2. Regularity in dealing-Business involves dealing in goods and services on a regular basis. One
single transaction never constitutes a business.

3. Profit Motive- Profit Motive is an important distinguishing feature of business.

It must earn profit for its survival, growth and expansion.

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4. 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.

II Profession
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

III. Employment
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 Business Profession Employment

Nature of work Production or Rendering of Performing the works
purchase and sale of personalized expert assigned by the
goods and services service employer
Qualification No. minimum In profession In employment
qualification is specialized qualification is
required in business knowledge and decided by the
training is required employer.

Reward Profit Fees Wage or salary

Risk High Very Low Risk No Risk
Transfer of ownership Possible Impossible Impossible
Code of Conduct In business there is no In profession Norms of behavior
code of conduct to be professional code of laid down by the
followed conduct to be employer are to be
followed. followed.
Classification of Business Activities
On the basis of function we can classify business activities into two:-I.Industry II. Commerce

I. Industry
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

2. Secondary Industries

3. Tertiary Industries

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 INDUSTRY

PRIMARY SECONDARY TERTIARY

INDUSTRY INDUSTRY INDUSTRY

EXTRACTIVE GENETIC
INDUSTRY INDUSTRY

MANUFACTURING CONSTRUCTION
INDUSTRY INDUSTRY

ANALYTICAL SYNTHETICAL PROCESSING ASSEMBLING

INDUSTRY INDUSTRY INDUSTRY INDUSTRY

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.

1 (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.

1 (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:-

2 (a) Manufacturing Industry and 2 (b) Construction Industry

2 (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

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(1) 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

(2) Synthetical Industry – Business engaged in this sector combines various ingredients to produce
a new product

Eg. Cement industry, fertilizer industry etc.

(3) Processing Industry – Process of these industries involves successive stages for manufacturing
finished products

Eg.Sugar industry, paper Industry.

(4) Assembling Industry-Assembling industry is engaged in the process of assembling different

components to make a new product

Eg. Computer industry, Car industry etc.

2 (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.

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II. Commerce
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.

Definition

‘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
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.

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(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

1. Transportation

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,

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discounting bills of exchange etc.Thus hindrance of finance can be removed with the help of
banking.

3. Insurance

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.

4. Warehousing

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.

5. Advertising

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.

6. Communication

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.

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2. Innovation

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.

4. Productivity

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.

5. 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.

6. Social responsibility:

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.

1. Profit is a source of Income: Profit is a source of income and it provides the means for livelihood
for the businessman.

2. 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.

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3. 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

4. Profit is the reward for risk taking: Profit is the reward for the entrepreneur who takes business
risk.

5. 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.

6. 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.

Business risks
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.

1. 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.

2. 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:-

1. 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.

2. 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.

3. 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.

3. 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

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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.

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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.

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Prepared by, BINOY GEORGE, HSST, MKNM HSS, Kumaramangalam, Thodupuzha, Idukki Dt.

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