PRINCIPLES OF BUSINESS

SECTION 1: THE NATURE OF BUSINESS

BUSINESS CONCEPTS AND DEFINITIONS

1. Enterprise: This refers to the taking of risks in establishing a business.

2. Entrepreneurship: The act of combining all the other factors of production (land, labour and

capital) with the aim of establishing a profitable venture to produce goods and

services.

3. Barter: The exchange of one good/service for another.

4. Profit: The surplus funds which remain after all expenses have been covered.

5. Loss: The situation which exist when total sales are not enough to cover all expenses.

6. Trade: The buying and selling of goods and services.

7. Organisation: A social arrangement which pursues collective goals such as the production of

goods and services.

8. Economy: The system within a country which determines the production, exchange and

consumption of goods and services.

9. Producer: Any individual or organisation which makes goods and services.

10. Consumer: Any individual or organisation which uses goods and services.

11. Exchange: The voluntary trade of goods and services.

12. Goods: Tangible products which have been produced. e.g. car, rice, clothing etc. There

are different types of goods

❖ Free goods- These are available to all without charge. They are gifts of

nature e.g. air, sea, sunshine etc.

❖ Public goods- These are goods which can be consumed by all and are

usually paid for by taxation. Consumption by one person does not

exclude consumption by others. E.g. national defence.

 ❖ Merit goods- These goods can provide benefits to the consumer as well

as to the rest of society e.g. health services and education.

13. Service: Intangible products which have been produced. e.g. banking, transportation,

insurance etc.

14. Market: Any place where buyers and sellers meet to engage in trade. It is also referred

to as the demand for a product.

15. Commodity: Any final good used for some purpose.

16. Capital: Money which is used in the organisation to acquire assets. It also refers to

items (factories, equipment, machinery etc.) used to create final products.

17. Labour: This is the physical and mental contribution of individuals to the creation of

goods and services.

18. Specialisation: This is the division of labour into specific tasks. A whole process is divided

into several tasks. This helps to speed up the process and may result in an

increase in productivity and a decrease in unit cost.

 THE DEVELOPMENT OF INSTRUMENTS OF EXCHANGE

Over the centuries, as commerce has developed, so have the various instruments of
exchange. In early times, people cultivated the land and reared animals to provide for their
needs. The most basic of these needs were food, clothing and shelter. This production was the earliest form
of man as an ‘economic animal’ and is known as direct production or subsistence economy. As
production increased, there was a surplus of goods. However, no individual could produce all their needs,
and the system of barter resulted. This is where an individual exchanged one item for another, starting the
earliest forms of trade. It was simple and helped to create wealth but there were also problems. These
include:
❖ A double coincidence of wants -People could only trade with those who had
something they wanted.
❖ An exchange rate -How much of one good was another worth
e.g. how many chickens was a cow’s worth.
❖ Divisibility of goods -Some goods could not be broken done into
smaller parts. E.g. Live animals could not be
sold in portions.
❖ Storage of wealth -Many goods could not be saved/stored for
the future e.g. fruits/meat spoil easily.
To solve many of these problems, a system of ‘money’ was developed where things such as shells, beads,
arrowheads, fishhooks, gold and animal teeth were used.
Eventually when these also had limitations, money was created. Today, money does not only come in the
form of notes and coins. It also includes other instruments of payments such as:
❖ Credit cards- Credit company pays for goods/services while consumer makes
payments to credit company
❖ Debit cards- Payment for goods through access of consumer’s bank account
❖ Cheques- Payment represented on paper to be taken from consumer’s bank account.
❖ Electronic transfer- Funds are transferred from one bank to another via computer.
❖ Tele-banking- The use of the telephone to manage bank accounts to make payments.
❖ E-commerce- The use of the internet to make purchases. Payment can then be made
via electric transfer, credit card etc.
 REASON TO START A BUSINESS
1. Financial independence
2. Wanting to be your own boss
3. Self-fulfilment
4. There is a need for a product/service, which is not being met
5. Redundancy
6. Poor job prospects

FUNCTIONS OF A BUSINESS
1. The provision of goods and services
2. The provision of jobs
3. Assistance with social activities through sponsorship
4. To make a profit
5. Contribute to economic growth
 FORMS OF BUSINESS ORGANIZATIONS

SOLE TRADER:
A person who owns his or her business.

Characteristics
1. Easy to set up
2. Financed by the owner
3. Bears all risks and keeps all profits
4. Provides a personal service
5. Has no one to account to

Advantages
1. Easily and quickly formed and dissolved
2. Close relationship with customers
3. Decisions can be made quicker
4. Takes all profits
5. Pays lower personal tax not company tax

Disadvantages
1. Limited capital and it is not easy to get loans
3. Long working hours
4. Business usually dissolves if owner dies
5. Lack of specialized staff

Formation
The are usually no legal formalities needed except that in some cases, a special licence (e.g. liquor
licence, health certificate) may be needed. The sole trader is usually required to register their trade
name.
Management
The business is managed personally by the sole trader and the organisational structure is
simple since it is usually only the owner and in some cases a few employees. This makes reporting and
decision making quick. Since the owner is usually providing a personal service, he/she is able to set their
own hours of work. There is no need to disclose the business affairs of the business to the public as is the
case of a company, except for tax purposes ad creditors when seeking loans.

PARTNERSHIP:
An association between 2- 20 people operating a business with the common goal of making a profit.

There are two types of partnership

a) Ordinary Partnership where all profits and losses are shared equally
b) Limited Partnership where the limited partner stand to lose only up to the amount which was invested.

Characteristics
1. Minimum of 2 and maximum of 20 for formation. However, for professional such as lawyers, accountants
a maximum is not give since they are not allowed to form companies.
2. Capital is provided by the partners
3. A limited partner cannot take part in the management of the partnership
4. Profits share equally unless stated in agreement

Advantages
1. Relatively easy to set up
2. More capital can be obtained than sole trader
3. Business will not end if one partner dies (continuity)
4. Specialization can occur thus leading to greater efficiency
5. Shared workload
6. Pays lower personal tax not company tax

Disadvantages
1. Unlimited liability
2. Personalities of partners may cause difficulties in decision making.
3. Some difficulty in raising capital.
4. In the absence of an agreement all profits must be shared equally regardless of individual effort.

Formation
A partnership deed is usually written up to form the arrangement. This agreement usually
indicates the number of partners, amount of capital from each partner, how profits are to be divided, name of
partnership, salary to be paid, how partnership is to be dissolved, role of each partner, etc.

Management
This is carried out by the ordinary partners.

CO-OPERATIVES:
Businesses that are formed, owned and operated by its members.

Characteristics
1. All members have a vote
2. Limited interest on money invested
3. Profits distributed among members
4. The members are the clients
5. Members usually have a common bond

Examples of Types of Co-operatives

1. Financial co-ops: e.g. credit unions which offers methods of savings and loans
2. Consumer co-ops: These are involved in the provision of goods and services
3. Agricultural co-ops: provide agricultural products and equipment to farmers

Advantages
1. There is a market for members
2. Employment is provided
3. Owned and operated by members, therefore there is a greater commitment to making it a success.
4. A medium through which government can channel aid to the society.
5. All profits shared among members
6. Shared decision making

Disadvantages
1. Poor, inexperienced and unqualified management. This can hinder growth.
2. Conflict among members can lead to slow decision making
3. Unable to attract skilled professionals
Formation
Each member purchases shares to form the capital base of the co-operative.

Management
They are governed by the membership through a management board elected by members

COMPANIES:
A company is a business entity which has been incorporated. It is a legal entity, separate from its owner(s)
i.e. it can enter contract, can sue and can be sued. There are two types of companies
a) Private Limited Companies (Ltd is usually written as part of the name)
b) Public Limited Companies (PLC is part of the name)

PRIVATE LIMITED COMPANIES

A company where 2-50 shareholders form a company.

Characteristics
1. Limited liability
2. A separate legal entity
3. Governed by a) Memorandum of Association b) Articles of Association
4. Directors elected at AGM
5. Proper accounts must be kept for tax purposes
6. 2-50 shareholders
7. They tend to be owned by families and close friends.

Advantages
1. The company is separate from owners
2. Shareholders have limited liability up to the amount they have invested
3. Easy access to loans
4. Larger capital base than sole traders or partnerships
5. Privacy
6. Death of an owner will not affect the continuity of the business
Disadvantages
1. Shares are not traded publicly and therefore the capital base will be limited
2. Skills may be limited
3. Shares are not transferable without the director’s consent

Formation
Certain legal requirements are needed such as a) Memorandum of Association
b) Articles of Association
c) Statement of Authorised Registered or
Nominal capital
Management
The owners manage the business or hire specialized personnel. Membership must approve disposal of
shares, and their sale is restricted to the members.

PUBLIC LIMITED COMPANY

An incorporated company which offers shares to the public.

Characteristics
1. Limited liability
2. A separate legal entity
3. Governed by a) memorandum of Association b) Articles of Association c) Prospectus.
4. Directors elected at AGM
5. Proper accounts must be kept for tax purposes
6. Shares are sold to members of the public

Advantages
1. The company is separate from owners
2. Shareholders have limited liability up to the amount they have invested
3. Easy access to loans
4. Death of an owner will not affect the continuity of the business
5. Risk is spread among shareholders
6. Easy transfer of shares
7. Specialists are hired to run the firm
Disadvantages
1. Objectives of managers may be different from owners (shareholders)
2. Workers are not part of decision making
3. Accounts must be submitted for inspection

Formation
Certain legal requirements are needed such as a) Memorandum of Association
b) Articles of Association
c) Statement of Authorised Registered or
Nominal capital
d) Prospectus

CONGLOMERATE
A group of companies, each of which operates in different industries. There is usually no common identity or
purpose except that of making a profit. E.g. BS&T (B’dos), Neal & Massey (T’dad), Grace Kennedy
(J’maica)

Advantages
1. Opportunities for training and transfer of staff between industries
2. Good cash position since all companies
3. Industries can advertise under the group name
4. Risk of group failure is spread over a range of industries.

Disadvantages
1. No common objective other than profit
2. Comparative analysis not possible
3. Outside control from the head office is resented

MULTINATIONALS
A firm of this nature is one which owns, controls and operates business activities in several countries at the
same time. Decisions are made by the parent company. e.g. Cable and Wireless, Neal & Massy

Advantages
1. Provides investment in local economy
2. Provides training, expertise, employment and tend to pay higher wages
3. A source of taxation and foreign exchange
4. Provides markets

Disadvantages
1. Large number of profits leave the country in which it operates to return to parent company
2. May exploit natural resources of small countries
3. The welfare of the country is not the concern of the company
4. May leave country after tax holidays are over
5. May harm the environment
6. They nay leave if political ideas are not the same as theirs

FRANCHISE
A right which is bought by an individual/organisation (franchisee) from the person/firm(franchiser), in order
to sell goods by using the franchiser’s name. e.g. McDonald’s, KFC etc.

Franchisee enjoys most of the profits but incur most losses. Lump sum paid to franchiser (rent and shares of
profits). Franchisee benefits from marketing and promotional network of franchiser.

NATIONALIZED INDUSTRIES

Companies which have been taken over by the government via legislation to achieve certain economic and
political aims

Features
1. Legal entity
2. Managed by board of directors chosen by government minister
3. Annual reports are given to the minister who lay them in Parliament
4. Generally no shareholders
5. Funded by government by loans & grants

Advantages
1. The production of public goods in a manner which is not haphazard
2. Reasonable prices because profit it not the motive and so that the masses would have access to
product/service
3. Safe guard jobs
4. Obtain better borrowing terms than private companies

Disadvantages
1. Consumers must accept the product, especially if there is no competitor
2. Lack of initiative to improve product due to monopoly
3. “Red tape” causes delays
4. Not run efficiently
5. Accountability often lacking
 PUBLIC VS PRIVATE SECTOR
All business can be classified as either being owned by members of the public(private sector) or by the
government (public sector). In some cases however, there are operations, which may be joint ventures
between the governments and private individuals. The differences between private and public are stated
below.

Public Sector
1. Business is run by government
2. Provides most public goods
3. Usually not profit oriented therefore the pricing of goods usually covers the cost of
production
4. Employs are greater portion of the labour force
5. Raises funds through taxation, borrowing(home/abroad), issuing government securities
etc.

Private Sector
1. Driven by the profit motive which may be reflected by the prices
2. Raises funds by borrowing or issuing shares, loans
3. Controlled by families or shareholders

Nationalization
The transfer of ownership from the private sector to the public sectors. This may be done for the following
reasons:

1. To increase efficiency
2. To keep some industries going for the economy’s sake
3. To provide goods which may not be otherwise produced
4. To maintain a stable level of prices
5. To overcome inequalities in wealth distribution
6. To control entrepreneurs and to regulate the economy
7. To secure employment

The drawbacks of nationalization include:

1. Lack of motivation of workers
2. Inefficient production
3. Over employment
4. High cost of production
 ROLES OF STAKEHOLDERS IN BUSINESS ACTIVITIES

Stakeholders
1. Owners
2. Employees
3. Customers
4. Government
5. Others (creditors, trade unions, society, suppliers)

Roles of Owners/Employers
❖ Provide relatively secure jobs and fair wages according to the position of employee
❖ Comply with government legislation e.g. payment of taxes, publishing annual accounts statements
❖ Provide a safe working environment
❖ Protect the surrounding physical environment
❖ Provide good conditions of employment e.g. working hours, holidays, paid overtime, breaks during
the day etc.
❖ To provide safe products and services to customers
❖ To maximise profit

Roles of Employees
❖ Provide honest labour
❖ Use equipment carefully
❖ Minimise wastage during production of goods and services

Roles of Customers
❖ Be well informed of rights and duties
❖ To make public any unethical practices
Roles of Government
❖ Provide adequate legislation to control the business and natural environment
❖ Enforce laws relating/governing business activities
 ROLE OF BUSINESS WITHIN THE COMMUNITY

Economic Role
Businesses have the responsibility to make a contribution to the economy in which
they exist. This can be done through the payment of taxes, provision of jobs and
its contribution to GDP(Gross Domestic Product) through the production of goods and
services. Goods exported all provide valuable foreign exchange for the economy.

Financial Role
Each business not only seeks to maximise sales but also profits where possible. It
also has a responsibility to its shareholders (if any) to provide dividends on shares
issued.

Social Role
Businesses are required to ensure that their production in no way harms consumers
or the environment. Many of them also see social responsibility as becoming
involved in community activities such as sports, charities and the provision of
scholarships. There is also the responsibility to ensure that employees are working in a
safe and comfortable environment.

Political Role
Businesses are required to follow the legislation which may govern their business
environment e.g. recognising trade unions, minimum wages, payment of N.I.S.,
disclosing financial statements etc. Also by providing a successful business
environment, a stable political climate is created within the country. Some companies
even go as far as sponsoring political candidates/parties at elections. This can have both positive and
negative effects

Ethical Role
Any business must ensure that their product is free from defects, they do not
infringe on copyrights and do not engage in false advertising. They should also
be willing to hear genuine complaints from consumers and attempt to remedy
such situations where they are clearly at fault. Ethical issues are not necessarily illegal
but not be good for business. E.g. Is it right to sold products which are considered
unsafe in one country to another country with less strict standards?
 TYPES OF ECONOMIC SYSTEMS

Economic Questions

In any society there are three economic questions which must be answered:
❖ What to produce
❖ For whom to produce
❖ How much to produce

What is an economic system?

The system in which it is determined how goods and services will be produced. There are FOUR main
economic systems:

1. Traditional/Subsistence
2. Free or Capitalist
3. Command or Planned (Socialist)
4. Mixed (Public & Private Sector)

TRADITIONAL/SUBSISTENCE ECONOMY
In this type of economy, people live in groups and tend to grow most of their own food. It is called a
subsistence economy because people only provide for their basic needs. This was a feature of the life of early
man. Within this economy there is little or no trade. However, there was little choice or variety in the types
of goods produced.

FREE ECONOMY
1. Little government interference
2. Resources are owned by private individuals and companies.
3. What, how and for whom to produce is determined by the price system
4. Prices are determined by the interaction of supply and demand
5. Competition among producers
6. Freedom to enter or leave the market or industry
7. Profit motive
Advantages
1. Competition keeps prices low and quality high
2. Freedom to choose and greater variety
3. Creation of jobs
4. Lack of government intervention

Disadvantages
1. Uneven distribution of wealth
2. Little production of public goods
3. Profit is pursued which may result in the total welfare of society being ignored

PLANNED ECONOMY

Characteristics
1. All resources or factors of production owned by the government
2. Prices are set by government
3. Profits spent on all citizens
4. The decision of what, how and for whom to produce is made by the central planning
agency

Advantages
1. Competition is avoided
2. The welfare of citizens is the primary goal
3. Social/Public goods can be adequately produced e.g. police, roads, hospital etc.

Disadvantages
1. Since there is no real way of determining the needs of the consumers, situations of
shortages or glut of certain goods may occur
2. Choice of goods tend to be limited
3. Workers may be inefficient due to lack of motivation since there may be no incentives to
work hard
4. Over employment can lead to inefficiency and high cost

MIXED ECONOMY
1. Combination of public and private sector
2. Factors of production owned by both private and public enterprise
3. An element of competition
4. The government provides public goods not for profit while the private sector focus is on
producing goods and services for profit
5. Even though supply and demand is allowed to set price, the government may sometime
intervene to control the price of certain products which it feels are needed by all (basic
needs)
6. Some freedom to enter or leave the market or particular industry. Government may control
entry to some industries

Advantages
1. The welfare of citizens is considered
2. Social/Public goods can be adequately produced e.g. police, roads, hospital etc.
3. Competition keeps prices low and quality high
4. Freedom to choose and greater variety
3. Creation of jobs
5. Government can set price ceilings on certain products
Disadvantages
1. There is some uneven distribution of wealth
2. Profit is pursued which at times may result in the welfare of society being ignored by
private sector
3. Workers (especially in public sector) may be inefficient due to lack of motivation since
there may be no incentives to work hard.
4. Bureaucracy and ‘red tape’ exist in public sector.
 FUNCTIONAL AREAS OF A BUSINESS
1. Production
This department deals with the actual manufacturing or conversion of raw materials
to a product for sale. It can include such activities as quality control, purchasing raw
materials, organising production, timing etc.
2. Finance
This area is concerned with the overall accounts of the business. E.g. preparing
` income statements, balance sheets, maintaining cash flows, making payments and
issuing receipts, advising on sources of capital, establishing hire purchase and credit
controls, paying wages and salaries etc.
3. Research & Development
This department carried out various types of research such as product research,
consumer research, financial research as well as feasibility studies. In this
department, new products are developed or improvements are made to currents
ones, as feed back is received from other departments such as the marketing
department.
4. Marketing
The department seeks to identify, anticipate and satisfy the wants/needs of
customers in a manner which is profitable to the organisation. Activities include
marketing research, choosing methods of promotion, setting prices, product distribution, developing
new products etc. This department often works closely with the R & D department to design and
develop new products.
5. Personnel
This department is concerned with the human element of the organisation. This
includes training and development, recruitment of labour, improving morale,
industrial relations, disciplining workers, administering leave, pension schemes etc.
 ETHICAL & LEGAL ISSUES FACING BUSINESS/ENTREPRENEUR
1. Advertising
Ensure that products do what they say on the commercial e.g. if a good is suppose to
take out stains, it should actually do the job.
2. Safety
Products should be free from defects and should not cause harm to users in the
natural course of their use.
3. Taxation
Taxes and other deductions legally required by government should be paid e.g.
personal income
tax, corporation tax, VAT, N.I.S etc.
4. Environmental Issues
• Ensure that production does not pollute the environment e.g. if production produces smoke, make
sure that you locate away from residential areas or make sure that there is a filter on the smoke stack.
• Dispose of waste correctly
• Reduce noises to acceptable levels
5. Production
Ensure that the raw materials used to produce items are of good quality and that
ingredients are clearly stated to reduce harm.

CONSEQUENCES OF UNETHICAL & ILLEGAL PRACTICES

1. Withholding taxes is cheating the government of vital revenue which can be used to
improve the economy. It usually attracts penalties/fines.
2. Improper waste disposal leads to pollutions
3. Misleading ads. which are unfair and fraudulent on the population may be brought
before a fair trading commission /consumer protection agency and in some cases the law
courts.
4. In order to “clean” money made through illegal activity, money laundering may occur.
The money passes through a legitimate business so that it cannot be traced.
5. Lawsuits may arise if products cause illness/death.
6. A decrease in sales/profits as word spreads about unethical/illegal practices.