Business economics – Chapter one
1.1 consumers and manufacturers
manufacturing companies are there to manufacture goods and services, witch are then sold on to the consumer. The consumer in has the requisite purchasing power as he is employed by a manufacturing company. Economics is concerned with mans quest for ‘prosperity’: How can goods and services be offered as efficiently as possible, i.e. using as few resources as possible.
Economics: concerned with consumer-manufacturer and manufacturer-manufacturer relationships. A distinction between Micro-economics(: analyze market forms: ex. world travel market) and Macro-economics(: economic problems that affect society as a whole: inflation, unemployment).
Financial management: economic activities within a production organization. Production is not only physical goods, also trade and provision of services. The economic system assigns an important role to production in businesses.
A business can be defined as: an economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners. / businesses are production organizations that are specifically geared towards generating income in the marketplace, they strive to profit.
A production organization combines production resources and transforms them into end products (production process).
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Operates between two markets: production resources are acquired in the procurement market, and the manufactured goods are sold in the sales market.
Production resources consist of raw materials/ natural resources (current assets) and materials that last longer than raw materials (fixed assets) like buildings and machines.
Assets are economic resources. Everything that is held to have positive economic value.
Procurement market: raw materials(current assets)
Fixed assets
Labour (See figure 1.1 in book)
Businesses strive to create value. The net proceeds from the sale of the manufactured goods or services must outweight the price paid to the procurement market for the production factors. This surplus / profit is awarded to the business owners.
The amount of profit depends on efficiency and effectiveness.
An efficient production process manufactures a given quantity of products with the least possible costs.
An effective production process manufactures an end product that is in high demand with customers.
Business use their profit figures as a yardstick for measuring efficiency and effectiveness. Profit is the healthy balance between sales (yardstick for effectiveness) and costs (yardstick for efficiency).
Generating profit is the number one priority of a business. The following facts must however also be taken into account: – the continuity of the business is equally important, for the company to secure its future it is essential that it generates profit and keeps making profit, so it is essential that profit is viewed in a long term
perspective.
– most businesses have a mission statement, witch outlines their goals.
– at times it appears that striving to generate the highest possible profit comes secondary to striving to achieve the highest possible sales.
1.2 profit and non-profit organization
as businesses strive for profit, they are apart of the profit sector. But there are also a significant number of non-profit organizations. We make a distinction between ‘public’ and ‘private’ non-profit organizations.
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Public non-profit sector: is arranged on three levels: national, regional and local. They provide public-sector goods and services, for the population as a whole ( infrastructure and safety).
These facilities cannot be provided by private enterprises due too complete absence of market mechanism ( impossible for a consumer to construct a motorway section for his own personal use).
To provide public-sector goods and services it is essential to levy taxes to finance their production.
Certain facilities provided by the government could in principle also be provided by businesses.
There has been a growing trend toward privatization: all operations and activities eligible for privatization are being freed from government control. Private non-profit institutions are often classified as fund-raising institutions, as they raise money to achieve certain social objectivities.
Organizations in the non-profit sector differ form businesses in a number of respects:
– The objective of a non-profit organization is to achieve certain (socially important) objectives. Its activities are extremely linked to these goals.
– They cannot exist by only conducting market transactions and – in contrast to businesses – they are not economically independent. They depend heavily on contributions, donations, subsidies and so on. To some they are able to operate in the market.
– Assessing the effectiveness of non-profit institutions is a lot more complex than with businesses. The degree of success achieved cannot possibly be expressed in financial terms.
1.3 business activities
Businesses aim to generate profit by purchasing assets and converting or transforming these assets into goods or services that are sold for more than the original purchase price. We can roughly classify businesses according to the nature of this conversion process’:
Agriculture and mining companies typically use ‘natural’ resources. Using relatively few raw materials, they manage to produce large quantities of finished products. Fixed assets are vitally important to this sector.
Manufacturing businesses create physical, tangible product which did not exist in that form prior to the manufacturing process.
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Distinction between Job production and mass production
Job production: a customized product: made to wishes consumer, made to order, first sold than manufactured.
Mass production: flow production, one type of product is manufactured in large quantities. Are manufactured for stock. (see table 1.1)
Between the two extremes: hybrid / batch production: produce ore process any product in batches, varieties or models of one standard product are manufactured.
The relevance of each of the three inputs (raw materials, fixet assets and human labour) depends on the type of company.
Trading companies do not manufacture new products. The reason of trading companies to exist is the unequal relation between production and consumption. The inequality can relate to:
– the scale of production and consumption
– the composition of production and consumption
– the point in time that production and consumption take place
– the place of production and consumption
The transformation process of a trading company is therefore a transformation according: size range, time and place. Distinction between retail trading and wholesale trading.
Retail trading: is the last link in the chain; he supplies directly to the end user of the goods: the consumer.
Wholesale trading: distribute the purchased products to retail outlets. business to business trading, both suppliers and customer are companies. Requires major investments in logistical systems. Use of fixed assets.
Service companies provide a service to their customers, without manufacturing a new product or transforming a existing product. Can be broken down in variety of business categories:
– financial services
– hospitality and catering
– haulage
– ICT services
– General and technical support services
Make little (or no) use of raw materials, however fixed assets are vitally important to certain service companies. Labour is virtually always an important cost item, the service sector is a ‘people business’.
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1.4 legal forms of business
All businesses have a legal form, the choice of legal form determines the legal relationship within the business and between the outside world. The legal form determines the following:
– who has the ultimate say in the business
– what guarantees are in place to ensure the long-term continuance of the business.
– In what ways the businesses can attract funds and financial recourses
– To what extent the business owners are liable for the debts incurred by the business
– The tax position of the company
– To what extent the business is obliged to disclose its financial results
In some legal forms the business- rather than its owners- is considered the prevailing party in any commercial legal agreement. In these cases the business is an independent legal entity or ‘legal person’. ( business hires staff in its own name, borrows money from the bank..).
the business needs people to conduct these activities. If the business is not the legal person the agreements will be concluded in the name of the owner.
Most commonly legal forms: Non-legal entity status:
Sole proprietorship: there is no desperation between owner and manager. It stands and falls with the entrepreneur. The long-term continuance is uncertain If the entrepreneur is unable to continue operating a successor must be found in his immediate family or elsewhere. The business can be financed using funds that the owner is prepared to invest in his company (Equity) or through loans (liability / debt).
A sole proprietorship will be small because the available equity is modest. When starting the business the owner will need to invest a percentage of his own money (private capital) in it. It has no legal
