The diverse nature of business (Part I)

In a wealthy society business is not just concerned with the satisfaction of basic needs. From the definition we can see that the existence of a business community in a society means that surpluses have been generated. The wealthier the society, the more advanced the technology and the wider range of goods and services available.

There are six main elements that are common to all business activity:

• objectives;

• the resources used by the business;

• the functions undertaken by the business;

• the constraints on achieving the objectives;

• the functions of management;

• integrating themes.

The objectives of business

A company is required by law to state the type of business activity it intends to undertake before it can begin trading. In addition to these stated aims the managers of a business will have a number of long-term objectives that they will attempt to achieve. These will include profitability, survival, prestige, growth and social objectives.

Profitability

The word ‘profit’ should be approached with caution. It has a number of meanings which will vary according to the context in which it is used.

1 To an economist profit is the reward for risk-taking. The person who takes the risk of organizing resources to produce a new product or to provide a new service is sometimes referred to as an entrepreneur. A person mortgages a house to raise money to start a business. She/He is risking a major personal capital investment in this enterprise and is putting more into it than just labour. Profit is seen as the reward for this extra commitment.

2 An accountant would define profit as the difference between revenue and expenditure; that is the difference between the money received as a result of the activities of the business (the revenue), and the costs associated with those activities (the expenditure). If it costs £100000 to produce a certain number of goods which bring in a revenue of £125000 when sold, a profit of £25000 has been made.

3 In political terms a profit can be elevated to the most important drive in the economy of a country, encouraging people to work productively and to take risks, which will lead to greater wealth for all. Other people see profit as the result of employers using their power to take an unfair advantage of the people they employ and of the people they sell to. Profit, in this case, is believed to exist because wages and salaries have been unfairly depressed and/or prices have been unfairly high (exploitation).

Again, in stating the objectives of a business, economists assume that each business will attempt to maximize its profit, that is to continue to expand production until it has made the greatest amount of profit it is capable of. In practice it is more likely that a business will satisfice. This unpleasant word means simply that the business will decide on a profit level it considers to be satisfactory taking into account the amount of capital employed, the general profit level of the industry it is operating in, the profits it has achieved in previous years, the personal ambitions of its owners and managers and the overall objectives of the business.

The idea that business aim for a satisfactory level of profit rather than the maximum possible profit suggests complacency on the part of management and the owners.

In setting profit targets businesses are limited by:

• the funds the business has at its disposal. Achieving maximum profit may require further investment which the business cannot afford.

• the complexity of the decisions to be made. If there are a large number of decisions it becomes increasingly difficult to judge the effect each separate decision will have on the final outcome – particularly as the outcomes of one decision may have unforeseen effects on the outcomes of other decisions.

• the quantity and quality of the information available to management when making the decisions.

Research suggests that management places a very high level of importance on achieving profit objectives, especially long-term objectives. This implies that the profit targets set as satisfactory are in fact the best possible targets the management believes the business is capable of. You should remember that long-term rather than short-term profit objectives tend to be regarded as the more important when considering the importance of profit in relation to the other objectives of a business.

The following examples will give you some insight into the way in which the importance of profitability can vary according to the circumstances in which a business finds itself.

1 The owner of a small business deliberately decides against acquiring more assets because she/he wishes the business to stay small. Expansion might bring higher profits, but the additional responsibility would interfere with the private life of the owner.

2 A very large business with factories in number of countries deliberately selects a very low price for a new product in a particular national market. In the short term it sacrifices profits. In the long term it drives its competitors out of business and is therefore in a position to make higher profits.

3 A business is running at a loss. It can remain in operation for two years. There is reason to believe that within the next twelve months more people will buy the goods it sells and within eighteen months it will make a profit once more. A decision is made that it should accept the present losses and stay in operation, rather than sell the business and re-invest the proceeds of the sale in a more profitable venture.

The examples given above were designed to show that the profit motive, although essential for the survival of a business, can appear to be superseded in the short term if other objectives are seen to be more desirable. The small business owner in the first example was satisficing. There was enough profit to finance a satisfactory lifestyle and no desire to sacrifice personal objectives to make more money. The sacrifice to be made in terms of leisure was greater than the satisfaction to be gained from additional income and greater personal prestige. In other words the opportunity cost of expanding the business was too great.

Profit, as a surplus of revenue over expenditure, is the most important objective of any business.

1 It provides money to buy raw materials, employ labour and pay for the services needed to keep the business in operation.

2 It provides a reserve for future investment. The small business owner who refuses to expand to achieve greater profit might find a valued lifestyle threatened if a change in technology lowers the price of competitors’ goods but the business has insufficient reserves, generated by profits, to buy the new machines.

3 It can make it easier for a business to raise capital from outside sources. People are more willing to buy a share of a business that is making a good profit than one that is making a low profit compared with the rest of the business community.

4 Profit can act as a measure of the success of a business.

5 Profit can act as an incentive to greater effort.

Because profit allows a business to continue in existence and is essential for future investment, it is usually regarded as the prime objective of all businesses owned by private individuals, as opposed to those owned by the state.

1. Which of these statements expresses the main idea of the text?

1. The existence of a business community in a society means that surpluses have been generated.

2. The long-term objectives of the business will include profitability, survival, prestige, growth and social objectives.

3. Profit is a measure of the success of a business.

4. Business can remain in operation for two years.

2. Find in the text English equivalents of these words and phrases.

різний, відмінний	40. видатки	79. відповідно до обставин
багатий	41. результат діяльності	80. обдумано; навмисно
стосуватися, відноситися	42. витрати	81. набувати, одержувати
існування, наявність	43. пов'язаний з чимось	82. активи
ділові круги	44. приносити доход	83.поширення, розширення
надлишок, решта	45.найважливіший напрямок	84. відповідальність
породжувати	46. заохочувати	85. втручатися; заважати, перешкоджати
передовий, прогресивний	47.працювати продуктивно	86. вибирати, відбирати
наявний	48. керувати, управляти	87. витіснити з бізнесу
ділова активність	49. наймач, роботодавець	88. збиток, втрата
мета (3)	50. сила, енергія, міць	89. залишатися в дії
ресурси	51. несправедливий	90. реінвестувати
обмеження	52. перевага, вигода, користь	91. виручка від продажу товару
вимагати	53. існувати, жити	92. більш прибуткове підприємство
заявляти, формулювати	54.заробітна плата робітників	93. розроблений
мати намір	55.заробітна плата, оклад	94. мотив прибутку
до того ж, крім того	56.несправедливо високий	95.обов’язковий, необхідний
довгостроковий	57. експлуатація	96. заміняти, звільняти (працівника)
прибутковість	58. припускати, вважати	97. бути більше бажаним
виживання	59.пробувати, намагатися	98. заробляти більше грошей
престиж	60. доводити до максимуму	99. жертва
збільшення, приріст	61. розширяти виробництво	100. дозвілля
підходити, наближатися	62. здатний, здібний	101.здобувати, одержувати
обережно	63. задовольняти	102.додатковий дохід
відповідно до	64. у попередні роки	103.витрати в результаті прийнятого альтернативного курсу
винагорода	65. загальний, повний	104.розширення бізнесу
ризик	66. пропонувати	105.забезпечувати грошима
брати ризик	67. самовдоволення; благодушність	106.сировина
виробляти, створювати	68. кошти, фонди	107.наймати робочу силу
стосуватися	69. бути в розпорядженні у когось	108.зберегти бізнес
підприємець	70. мати змогу зробити щось, дозволити собі	109. забезпечити резерви
заставляти, ручатися	71. складність	110.відмовляти(ся)
діставати гроші	72. судити	111.конкурент, суперник
розпочати бізнес	73. кінцевий результат	112.недостатні резерви
інвестиції, капіталовкладення	74. передбачати	113.зовнішні джерела
підприємство	75. кількість	114.купити долю у бізнесі
праця, робоча сила	76. якість	115. міра успіху
зобов’язання	77. мати на увазі, означати	116.стимул
доход	78. вважати за	117.протиставляти

3. Are these statements true or false? Correct the false ones.

1. In a rich society business is only oriented on satisfaction of basic necessities.

2. The advancement of technology and the range of goods and services available depend on the financial status of society.

3. The law requires a company or firm to state the type of its business activity.

4. The managers of a business usually attempt to achieve long-term objectives.

5. The word “profit” should be approached with prudence.

6. Profit is money that you make by selling something or from your business, after your costs have been paid.

7. If the encouraging people work productively and take risk it will be worse to the country’s economy.

8. According to economists each business attempts to maximize its profit.

9. When making the decision the management of the company relies on the number of the available information.

10. Management is very important in achieving short-term profit objectives.

11. Profit gives money to buy raw materials, hire new workers and pay for the services needed to keep the business in operation.

12. People refuse to buy a share of business that is making a low profit compared with the rest of the business community.

13. Everyone thinks money is relatively unimportant.

14. Profit is usually regarded as the prime objective of all businesses owned by private individual because it allows a business to continue in existence and is essential for future investment.

4. Answer the questions.

1. What elements are common to all business activities?

2. What does the word ‘profit’ mean?

3. Who is an entrepreneur?

4. What is the difference between an accountant’s and an economist’s definition of profit?

5. What are the circumstances in which other objectives might be more important than profit?

6. What are the arguments to support the view that profit is the most important long-term objective of a business enterprise?

5. Write key words and phrases to each paragraph of the text.

Text 3