what businesses do - part (1)
Richard Bowett provides a succinct two-part introduction to what it is that businesses actually do!
A business uses inputs of resources to make goods and services which it sells.
That’s it.
....Oh, one more thing.
A business pays out money (costs) to use the resources and takes in money (revenue) for its sales. The difference between the two (revenue less costs)is profit/loss.
Profit ?= R-C
That really is it. Now you understand what businesses do. Everything else is detail.
Figure 1: What Businesses Do
The diagram shows that the full picture is quite complicated. All of the
different boxes represent something that affects what businesses do.
Each box contains important detail that leads to a full understanding
of how
businesses work.
But the basic truth that underlies all the detail is still the same simple message given at the top of the page. When you feel yourself beginning to drown in all the details, go back to the simple underlying truths and then all the detail will fall into its proper place.
Business Resources
The use of resources represents a cost to business. Businesses try to make a profit. This means they try to reduce costs. This means they try to use fewer resources.
1. Land. This means what is grown from land, what is dug up from under it, what is built on it, and what comes from the sea. It means raw materials and is also called the ‘primary sector ’. Usually it is used to mean a piece of land for building a business on and rent is paid for the use of this land. ‘Renewable resources’ are those that can be replaced, like trees can be re-grown in the same place once thy have been cut down. ‘Non-renewable’ resources can only be used once, such as oil and iron ore. There is a lot of concern about non-renewable resources and not over-using them.
2. Labour. This means the workers a business employs. They are paid a wage or salary. The level of skills and motivations is very important. This helps to boost productivity. This is a very important word which means ‘how much output one worker produces in one unit of time’. In modern businesses labour is often referred to as ‘Human Resources’ to draw attention to the importance of using the resource to its maximum.
3. Capital. This means the equipment workers use to make goods and services (output). Interest is paid for the use of it. We have to be careful with this word. In finance ‘capital’ means more exactly the stock of money a business has available to finance its operations. This use of ‘capital’ is one part of the wider use of the word ‘capital’ because money is needed to pay for machinery, and money is worth the rate of interest.
4. Enterprise. This means the skills and ideas of the managers and/or owners in putting the other three resources together into a successful business. One of the key roles is to be able to change ideas when the world changes (which is most of the time). Another key role is to organise and motivate the workers to be productive. The owners of the business put their money up to create the business. In doing this they take a risk, because the business may not do well, or may even close. Profit is paid in return for this risk.
Business Functions
Businesses are divided up into specialist units (or departments) which do each of the different jobs needed to run a successful business. In a small business these jobs may be done simultaneously by one or two managers.
1. Marketing. This means trying to bring your product to the attention of buyers and make more people buy it. This makes Revenue and (hopefully) profit.
2. Production. This means making the product you are selling.
3. Purchasing. This means buying all the different inputs the business needs in order to do its work.
4. Human Resources. This means looking after your workers and their needs. The point of this is to improve motivation which improves productivity so more product is made. When this extra product is sold this means Revenue and profit.
5. Finance. This means looking after all the money needed to run the business.
6. Research & Development. This means trying to make existing products better and also trying to come up with new products.
7. Logistics/Transport. This means moving around inputs and outputs from where they are made to where they are needed.
8. Management. This means planning for the future, making decisions about the present, and organising the business in the most efficient manner.
9. Administration. This means looking after the day-to-day needs of the business and making sure everything runs smoothly.
All businesses organise themselves slightly differently from one another, but the list above includes all the departments (functions) that are usual in the typical business. It is important that all these separate functions are properly integrated and co-ordinated so all the separate bits of the business are working together towards the same objectives.
Types of Output
Not all businesses produce consumer goods that we buy in the shops. There is a lot of buying and selling between businesses that we don’t see.
1. Consumer Goods. This is the normal output of things we buy in the shops.
2. Consumer Services. These are things like insurance, holidays and hair-cuts.
3. Durable Goods. These are consumer goods which aren’t consumed straightaway (like food aka non-durable goods) but last quite a long time, such as washing machines and TVs.
4. Capital Goods. This means productive equipment used by other businesses, such as machinery and vehicles.
5. Raw Materials. This means the basic starting ingredients of the productive process, such as wheat which ends up as bread or cake.
6. Semi-Finished Goods. This means components which one business buys from another and turns into something else eg components that go to make up a finished car.
7. Finished Goods. Businesses buy lots of finished goods eg cars for managers or PCs for employees.
8. Business Services. Businesses also buy services such as insurance and banking services.
In part two to Richard's guide to "What Businesses Do", we look at the external factors that affect a business and then conclude by thinking about the role of "money"
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