What business is
Businesses provide the goods and services people use every day. Understanding how they work is useful whether you start one, work for one, or simply buy from one.
Defining business
A business is an organisation that provides goods or services to customers, usually aiming to earn a profit. Profit is what remains after subtracting expenses from revenue. Businesses range from a single freelancer to multinational corporations employing hundreds of thousands of people.
Profit and risk
Profit rewards business owners for taking risk: investing money and time without a guarantee of success. Many new businesses fail; US Bureau of Labor Statistics data show that roughly one in five new businesses closes within the first year and about half within five years. Higher potential rewards usually come with higher risk.
Not-for-profit organisations
Not-for-profit organisations, such as charities, hospitals, universities, and museums, provide goods or services without distributing profits to owners. They still must manage money carefully, often relying on donations, grants, and fees, and any surplus is reinvested in their mission.
Stakeholders
Stakeholders are all the groups affected by a business: owners and shareholders, employees, customers, suppliers, lenders, communities, governments, and the environment. Managers must balance their often conflicting interests, such as shareholders wanting higher profits and employees wanting higher wages.
Factors of production
Businesses combine four factors of production: land (natural resources), labour (human effort), capital (machinery, buildings, and tools), and entrepreneurship (the initiative and risk-taking that organises the other factors). Many economists add knowledge or information as a fifth factor in modern economies.
The business environment
Businesses operate within an environment they cannot fully control: the economic environment (growth, inflation, interest rates), the legal and regulatory environment, technology, competition, social and demographic trends, and the global environment. Successful businesses monitor and adapt to these forces.
Forms of ownership
The main forms of business ownership are sole proprietorships (one owner, unlimited liability), partnerships (two or more owners sharing profits and, usually, liability), and corporations (separate legal entities owned by shareholders with limited liability). Limited liability companies (LLCs) combine limited liability with simpler taxation.
Worked example
A bakery earns 200,000 dollars in revenue in a year. Its costs for ingredients, rent, wages, and utilities total 170,000 dollars. Its profit is 30,000 dollars. If costs rose by 10% and prices stayed the same, profit would fall to 13,000 dollars, showing how sensitive small businesses are to costs.
Key takeaways
Businesses provide goods and services, usually for profit, which is revenue minus expenses and rewards risk. Many new businesses fail. Not-for-profits reinvest surpluses in their missions. Stakeholders include owners, employees, customers, suppliers, communities, and more. Businesses combine land, labour, capital, and entrepreneurship. They operate in economic, legal, technological, competitive, social, and global environments. Ownership forms include sole proprietorships, partnerships, corporations, and LLCs.
Flashcard
Organisation providing goods or services
Check your understanding
A shop earns 80,000 dollars in sales and has expenses of 65,000 dollars. What is its profit?