Business
Business organized effort of individuals to produce and sell, for a
profit, the goods and services that satisfy society's needs.
A person who risks
his or her time, effort, and money to start and operate a business is called an
entrepreneur. To
organize a business, an entrepreneur must combine four kinds of resources:
material, human, financial, and informational. Material
resources include the raw materials used in
manufacturing processes, as well as buildings and machinery. Human resources are the people
who furnish their labour to the business in return for wages. The financial resource is the
money required to pay employees, purchase materials, and generally keep the
business operating. And information is the resource that tells the managers of the business how effectively
the other resources are being combined and utilized.
Businesses are generally
of three types. Manufacturing businesses (or manufacturers) are organized to process various materials into tangible
goods. Service businesses produce services. And some firms—called middlemen—are organized
to buy the goods produced by manufacturers and then resell them. Consumers are individuals who
purchase goods or services for their own personal use.
All three types of businesses may sell either to other firms
or to consumers. In both cases, the ultimate objective of every firm must be to
satisfy the needs of its customers. People they buy products to satisfy
particular needs.
when the
businesses that produce and sell goods and services understand their customers'
needs and work to satisfy those needs, they are usually successful.
In the course of normal operations, a business receives money
(sales revenue) from its customers in exchange for goods or services. It must
also pay out money to cover the various expenses involved in doing business. If
the firm's sales revenue is greater than its expenses, it has earned a profit.
So profit is what
remains after all business expenses have been deducted from sales revenue. A
negative profit, which results when a firm's expenses are greater than its
sales revenue, is called a loss.
The profit earned by a
business becomes the property of its owners. So in one sense profit is the
return, or reward, that business owners receive for producing goods and
services that consumers want.
Profit is also the payment
that business owners receive for assuming the considerable risks of ownership.
One of these is the risk of not being paid. Everyone else—employees, suppliers,
and lenders—must be paid before the owners. And if there is nothing left over
(if there is no profit), there can be no payments to owners. A second risk that owners run is the risk
of losing whatever they have put into the business. A business that cannot earn a
profit is very likely to fail, in which case the owners lose whatever money,
effort, and time they have invested. For business owners, the challenge of
business is to earn a profit in spite of these risks.
