CHAPTER 1

Foundations of Business

Chapter Learning Objectives:

• Define the term Business and explain the features of a Business.

• Understand the main objectives of a Business.• Explain the functions of Business.• Explain the importance and benefits of Business.• Understand what businesses need to produce goods and

services.• Understand the accounting profit and economic profit of

a Business.• Discuss the problems and prospects of doing Business in

Bangladesh

Definitions of Business

• Stephenson defines business as, "The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants."

• According to Skinner and Ivancevich, "Business is the exchange of goods, services or money for mutual benefit or profit.”

FEATURES OF BUSINESS

• 1. Exchange of goods and services

• 2. Profit is the main Objective

• 3. Business skills for economic success

• 4. Risks and Uncertainties

• 5. Buyer and Seller

• 6. Marketing and Distribution of goods

• 7. Deals in goods and services

Types of goods and services

• Consumer goods: Goods which are used by final consumer for consumption are called consumer goods e.g. T.V., Shampoos, etc.

•  • Producer goods: Goods used by producer for further

production are called producers goods e.g. Machinery, equipments, etc.

•  • Services are intangible which means you can’t touch it

but can be exchanged for value like providing transport, education and insurance services, etc.

Objectives of Business

• Economic objectives

• Human Objectives

• Social Objectives

• National Objectives

Functions of Business

• 1. Internal functions• 2. External functions• 3. Support functions

The Importance of Business

1. Supply of Goods and Services2. Harnessing Capital and other Resources in

Production3. Employment Generation4. Preservation of Natural Resources5. Research, Development and Innovation6. Income Generation7. Quality of Life8. Contribution to Social Development9. Contribution in the Development of Education,

science and Technology

What do businesses need to produce goods and services?

• Land• Labor• Capital• Entrepreneurship

Key Business decisions

• Management decisions: • Marketing decisions:• Financing decisions:

Accounting profit

Accounting profit is calculated by subtracting total costs from total revenue and revenue is calculated by multiplying quantity with price and costs are included all fixed costs like rent, managers’ salary etc and variable costs like raw materials, hourly wages of labor etc. When total revenue exceeds costs, the firm earns accounting profit but not necessarily it is making economic profit.

Economic profit• Economic profit is defined as total revenues minus total

operating costs minus opportunity cost. Opportunity cost is defined as the cost of the profits you have given up by not doing another activity. For example, you have invested 1 lac taka in the share market last year and you now have 1.1 lac taka in your portfolio which means you have made ten thousand taka profit which is accounting profit. But if we calculate economic profit then you may have lost a minimum two thousand taka given that you could just buy the risk-free government savings bonds which pay a minimum 12% annual interest. So you would have received one lac twelve thousand taka out of your one lac taka investment.

Problems Facing by Businesses in Bangladesh

• Need for capital• Poor infrastructure• Rampant corruption• Lack of skilled labor• Political instability• Labor unrest• Lack of financing• High rates of taxation

Business prospects in Bangladesh

• Cheap labor• Young labor force• Cheap cost of conducting business• Huge consumer base• Strong banking sector• GSP facilities• Strategically important location• Nice weather

Case Study

• Making profit or maximizing profit - what should be the ultimate objective of a Business?

»The end