Concept of Business Simplified

 Concept of Business

Businesses comprise of all the activities related in providing goods and services to the people in an economic system. We find various types of businesses in our society. Some are related with supplying the goods to fulfill the needs of consumer's demand, whereas some are associated with providing services to ease and cope with the consumer's task in a daily basis.

Businesses related with supplying goods such as toothpaste, vegetables, tools, etc. and related to providing services such as courier, transport company, banks, law firms, hotels and restaurants, digital products are common businesses we are familiar about.

Forms of Business Entities

1) Sole Proprietorship:

It is the form of business with single investor/entrepreneur. Everything is handled, managed, controlled and owned by an individual often called sole trading concern.

Advantages:

* Easy to Establish: It is easy to start and control because of the single ownership. For example, beauty parlour, cyber cafe, grocery store etc.

* Tax Advantage: In a sense, all profits are reported on the owner's personal income which avoids double taxation i.e. common in corporations.

* Profit Sharing: No need to share profit among shareholders as it is handled, managed and controlled by a single person.

* Quick Decision: There exists chances of quick decision making and implementing instantly, as a single person decides what to do and what to not whereas in other forms of businesses requires decisions from all other shareholders before decision making and implementing.

Disadvantages:

* Capital is Limited: Business cannot collect large funds easily as the owner invests money alone.

* Unlimited Liability: If the business has debt, the owner must pay it using personal property (house, land, savings, etc)

* Lack of Effective Management: Hard to make the best decisions in all aspects as managed by single person.

* Narrow Scope: The business usually stays small and cannot expand much because resources and management are limited.

* No idea Sharing: Since there are only one owner, there are no partners to discuss ideas with, so fewer new ideas may come.

* Lack of perpetual Existence: The business may end if the owner dies, becomes sick, or stops the business.

2) Partnership: 

A business owned by two or more persons regarded as partners is called partnership. For smooth operating of a business, number of persons collaborate together for their mutual benefit with joining financial, managerial and technical resources.

Advantages:

* Easy to Establish

* Shared Control

* Wider skills and resources

* Tax advantage

Disadvantages:

* Unlimited Liability

* Chances of Dispute & Misunderstanding Among The Partners

* Lack of Perpetual Existence

3) Corporate Entity/Company:

A Corporate Entity/Company is an artificial legal person created by law, having separate legal existence, limited liability, and perpetual succession. For instance, Apple Inc. or Microsoft are corporate entities where many shareholders invest money and the company runs the business.

Advantages:

* Large Capital: A company can raise a large amount of money by selling shares to many people.

* Transferability of Shares: Shareholders can easily sell or transfer their shares to other people without stopping the business.

* Limited Liability: Shareholders are not personally responsible for company debts.

They only lose are the amount they invested.

* Perpetual Existence: A company continues to exist even if shareholders die or leave. The business does not stop.

* Efficient Management: Companies usually hire professional managers and experts, so management becomes more efficient.

* Public Trust: Companies must follow laws and publish reports, so people trust them more than small businesses.

Disadvantages:

* Difficult in Formation: Creating a company is complex and time-consuming because many legal procedures are required.

* Delay in decision: Decisions take time because approval from directors, meetings, and shareholders may be needed.

* Excessive Legal Provisions: Companies must follow many rules, regulations, and government laws, which can be complicated.

* Lack of Secrecy: Companies must publish financial reports, so business information cannot remain fully secret.

Cyclical Nature of Business

The Cyclical Nature of Business means that business activities move in a continuous cycle. Two important cycles in business are the Financial Cycle and the Operating Cycle.

1. Financial Cycle (Cash Cycle)

The Financial Cycle shows how cash moves in and out of a business.

It is the process where a business:

a) Invests money to start operations.
b) Uses the money to buy goods or pay expenses.
c) Sells goods/services to customers.
d) Receives cash from customers.

Then the cash is reinvested again, and the cycle continues.

Example

A shop owner:

a) Invests $1,000 to buy clothes.
b) Sells those clothes for $1,500.
c) Receives the cash from customers.
d) Uses the cash again to buy new stock.

So the money keeps circulating in the business.

2. Operating Cycle 

The Operating Cycle shows how goods move through the business until they are sold and converted into cash.

It is the time taken for a business to:

a) Buy raw materials or goods
b) Produce or prepare products
c) Sell the products
d) Collect money from customers

Example

A bakery:

a) Buys flour, sugar, and butter.
b) Makes cakes and bread.
c) Sells them to customers.
d) Receives cash from sales.

This whole process is the Operating Cycle.