What is Business?



Humans engage themselves alternatively between work and life. We work to earn an income. We spend (and also save) the income for the sustenance of self and family. In this process, we regularly engage in numerous transactions, and exchange our income for buying various goods and services. Being social and socially aware, we also live a family life and engage in various social activities. In this  we shall understand human activities whilst focusing on what business means, as a crucial part of our daily life, and the multiple domains of business and commercial knowledge.
In today’s world, both earning of income as well as its spending has increasingly become dependent on business and commerce. To begin with, let us understand business and commerce as comprising of an array of activities for production, distribution and exchange (buying and selling) of goods and services. Now, whether we work as employees or free lancers or as entrepreneurs, our world of work is made of business organisations. And even if we do not work for a business organisation, much of our spending takes place buying various goods and services that have been produced or provided by business organisations. In all probability, most of the goods that we buy, we do not buy these straight from the producer, but indirectly from second, third or even later intermediary or reseller.


Our waking lives are all about activities. Many activities we engage in are purposeful. Usually we dichotomies these activities as work and play. These days it is more common for adults to talk about work and life (the latter implying family time, time for one’s hobbies, causes etc.) and, strive towards balancing the two, work-life balance. We all work to earn a living. All that we do to earn a living comprises Economic Activities. Rest all activities are referred to as non-economic activities. Interestingly, while the economic activities are distinguishable merely by the presence of the livelihood motive, a variety of motives are attributed to non-economic activities, viz., concern for fellow beings, affection & love for family, passion about some hobby or cause such as animal rights, forest/ nature conservation, underprivileged youth, etc. Usually economic
activities are said to be driven by rationality – what do I get in return or what is in it for me - or self-interest.
Non-economic activities are driven by emotional or sentimental reasons or altruism i.e. selfless concern for the welfare of others. Thus, human engagements in all social, religious, cultural, personal, recreational, charity and patriotic activities are bundled together as non-economic activities. But, it is interesting to note that even non-economic activities have an economic dimension, as time, money and material resources are needed to make these happen - both in terms of large initial expenditure as well as their day-to-day operations and management. However, neither the investors nor those who volunteer to work in these activities seek any material gain or regular income from these activities. In fact, the motive or the intent behind any
activities is such a singularly strong determinant of the economic and non-economic dichotomy that, say, if I engage in home making (cooking, housekeeping, etc.) for my family it would be deemed as a non-economic activity.
If I do so for others for an income, the same activity would be deemed as an economic activity. However, the world needs to understand that if we wish the best minds, hearts and souls to work for the solution of the problems facing the humanity, we must find ways of offering them the best rewards and compensations.

Distinguishing Characteristics of Economic Activities:-

Economic activities have several distinguishing characteristics other than the motive of earning a livelihood. Let us be more aware of these. In the process, we shall also be able to situate and understand business, as an economic activity.

♦ Economic activities are income generating: 

One may earn a livelihood in several ways. Manufacturing, reselling, employment, providing any professional service, etc. Income earned by rendering personal time, physical and psychic energy, in other words through one’s sweat and intellect is called earned income. And, the income earned by letting out one’s property is called property income. In economics, individuals comprise as possessors of one or more of “factors of production,’ labor, land, capital and entrepreneurship. The corresponding income characterizations in exchange of or compensation for their factor services are wages (& salaries), rent, interest and profit. It is not
necessary that all these incomes may be earned in the form of money only. These may be earned in kind too. For example, a landowner may compensate the tiller of the land in the form of food grains. The nomadic pastors who brought their herds to graze the stubs left after the harvest were
often paid in the form of food grains. How much can we earn from each factor? The factors earn
according to their contribution to the production. In other words, income is generated in the
process of production.

♦ Economic activities are productive: 

We can transform various raw materials into useful products and sell them for an income. Further, we can even teach skills we are good at, to other people in exchange of money. Production essentially is the process of creation of need satisfying goods and services. As a corollary, earning a livelihood implies participation in the process of production. Production here refers to both goods and services. When the early man set out to hunting the animals and gathering the fruit and firewood, he engaged in productive activities. Farming is productive too.
Practice of the crafts – pottery, textiles- is an instance of productive activities. Generation of
electricity, manufacture of automobiles and writing of software programs are all instances of productive activities. Teaching, medicine, law, accountancy are all productive activities. Production may be done either for subsistence i.e. self-consumption or for market. Production represents the supply side of economics, more so if it is for selling. Here its scope is broadened not only to include the place where it takes place but also the entire range of activities and occupations devoted to delivering the products/services produced to the markets - transport, warehousing, intermediaries (e.g. wholesalers/ dealers, retailers etc.) and so on.

♦ Even consumption is an economic activity: 

Consumption represents the demand side of
economics, i.e. the goods & services on which the people will spend their income. Production is organized in response to the demand. Different products compete for buyer’s attention and spending. In fact every unit of demand is like a vote in favour of a product and a signal to its producer. An economic activity might produce a product or service, but it is not complete until it can earn an income. Thus, feeling or exchanging it for money/or in kind i.e. consumption of the produce is equally important. Therefore, economic activity includes consumption as well.

♦ Savings, Investment and Wealth: 

We just understood that production of goods and services, as an economic activity, generates income. This income is actually the amount that people spend to buy those goods and services. The unspent income of people comprises their savings. The financial sector- banks, non-banking financial companies, mutual funds, dealers in stock markets, real estate, gold, etc. are the channels through which the savings are converted into investments and the wealth. The corporate sector and the government borrow these savings via shares, debentures, bonds, etc. and invest these into creating and operating civil, military and business infrastructure and other productive
pursuits for the country. Thus, all in all economics activities add to savings, investments and wealth in the economy.

Business as an Economic Activity:-

We have seen that market oriented production (other than the production for self-consumption) represents supply side of economics. It is common to refer to shift from subsistence driven production towards market driven production as commercialization of production or production on a commercial scale. We have also seen that for the production to occur at a commercial scale a wide array of interconnected activities need to be put in place. Linking production (supply side) with consumption (demand side) can then be achieved. With this background, we can now attempt a three-tier definition of business.
From the broader perspective, business may be defined as an economic activity comprising the entire spectrum of activities pertaining to production, distribution and trading (exchange) of goods and services. As such it refers to the aggregate of all the businesses and functions related to businesses of all sizes - industry (construction and manufacturing), trading or service enterprises; state-owned / Public Sector or private enterprises; proprietary or corporate sector enterprises; micro, small, medium, or large enterprises; domestic or multinational enterprises (we will take up a brief discussion of these terms later in the chapter). It is usual to classify business into industry, trade and commerce; wherein commerce includes all the industry/ trade related services or auxiliaries / aids to trade such as banking, general insurance, transport, warehousing, etc. Here a question arises: Is agriculture an industry and hence a business? Its answer is “it depends.” In India, much of the agriculture is subsistence agriculture. Moreover, agriculture income, under the Income Tax Act, is characterized separately (from income from Business & Profession) and is exempt from tax. Thus, for our purpose agriculture does not comprise industry and hence business. However, the industries where agriculture produce is processed (like pulses, spices, wheat to flour, processed oils, etc) and whose key material ingredient is agricultural produce do comprise an industry. For example, the extraction of edible oil from rice bran, mustard, coconut, soybean etc., represents agro-based industries. From the medium perspective, business refers to a particular type of activity or industry such as Retail Business, Real Estate Business, and IT Business, Iron & Steel Industry, Transport Business, etc. Thus, a firm may introduce itself as follows: “we are a food processing” unit. From a narrow perspective business may be defined as one’s usual occupation of creating, owning and actively operating an economic organisation i.e., a firm. The phrase ‘usual occupation’ is important for infrequent, isolated transactions even if these might result in profit or loss, cannot be called business. Thus, one time profit earning transactions cannot be termed as business, they have to executed on a regular basis.

More characteristics:

Distinguishing Characteristics of Business vis-à-vis Other Economic

Whilst business as an economic occupation is vastly diverse, yet only a small portion of population, more so urban educated population engages in it. For example, of all of you pursuing Chartered Accountancy, only a small percentage is going to start a business. Since CA is a professional qualification, most likely you are going to practice as an independent professional or would take up a paid employment somewhere. We have thus introduced two other distinct occupations, viz., employment and profession. Let us understand these two forms of occupations, and then we shall discuss the characteristics that distinguish business from these two.

♦ Employment: 

Employment is a contract of service between the employee and the employer. The contract elaborates job description and the periodic compensation known as wages & salaries (the term wages usually denotes factory workers; salary denotes office staff, managers, etc.). One has to
undergo a detailed process of Recruitment & Selection for one’s engagement in employment. Usually minimum qualifications - educational/ technical/ professional and prior work experience are prescribed to take up an employment. Freshers may be initially recruited as interns and required to undergo training. And one is expected to perform as per the terms of employment and the performance targets assigned to them from time to time. There is a minimum assured income,
tenure certainty and reasonable opportunities for career progression via promotions.

♦ Profession: 

Profession is rendering of services of a specialised nature, necessitating prescribed qualifications, for a fee under a Certificate of Practice from an established certification / accreditation examination & assessment body that also imposes a code of conduct. Professions can be pursued as independent practice or under a contract of employment too. Accountancy, Architecture, Designing, Engineering, Law, Medicine and increasingly even Management are assuming the attributes of a profession.
The word profession or professional in common parlance is used to distinguish from one’s amateurish/substandard performance or practice as a part-time/hobby. Professionalism is often associated with perfectionism. Historically however, professions have emerged in pursuit of nobility; demonstrated highest level ofintegrity and ethics; and hence have been held in very high esteem and social status /respect. Chartered Accountants for example, represent a noble profession for ensuring truthfulness and fairness in the conduct of business and thus, have been instrumental in ensuring its trustworthiness of the entire economic system.

♦ Job creator, not job seeker:

Business as an institution is a source of sustenance directly to the business owners and employees and indirectly to all those who derive opportunities from it. This is a unique characteristic of business that separates it from other occupations.

♦ Provides momentum to economic growth and development: 

What is economic growth? It is persistent increase in a country’s Gross Domestic Product (GDP). What is GDP? It is the value of all the final goods & services produced in a country during a particular period. Business output
comprehensively contributes towards the GDP and thus, the economic growth. How is economic
growth distinguishable from economic development? Whereas growth merely implies increase in GDP
numbers, economic development implies diversification of an economy’s capabilities and improvement
in the quality of lives of its people. Business, through research & development, education, and training
& development of employees and by sheer guts and courage of experimenting and innovation, brings
about economic development. In fact, it is pertinent now to introduce the term entrepreneur here. In
common parlance, the terms ‘business person’ and ‘entrepreneur’ are synonymous. Even we
shall be using these two terms interchangeably. However, entrepreneurs are better characterized
more by their problem solving, new opportunity seeking behavior that draws on their creativity
and innovation. Thus, business catapults economic growth as well as development.

♦ Investment intensive: 

Starting a business requires a sizeable investment of funds. Accommodation, plant & machinery, inventories, etc. In accounting, investment requirements are estimated as the sum of fixed assets and net current assets. Indeed, investments are necessary for technological upgradation, modernization and expansion. However, size of investment usually varies with the scale of business. That is why in India Micro, Small, Medium and Large Enterprises are defined with respect to the size of investment - more specifically investment in Plant & Machinery for manufacturing enterprises and investment in Equipment for service enterprises. It is believed and is practically true that the lack of investible funds or capital is a strong barrier to start a business. Thus, any form of business requires investment and is therefore, investment intensive.

♦ Gestation and uncertainties:

 Investment takes time to fructify or investment takes time to bring in profits. And it is uncertain whether it will yield the returns as expected. For example, it will take time to construct and operate a hotel before it is opened for occupancy. And it is uncertain if all the rooms would be occupied all the time. In fact, it is also uncertain if the occupancy ratio (room nights occupied
/ room nights capacity) would be adequate. In economics and finance, one distinguishes between risk and uncertainty. Risk can be calculated in advance, uncertainty cannot. Moreover, risk is a
characteristic of uncertainty itself. Business takes time to flourish and it is uncertain whether is would actually bring in profits. This characteristic specifically distinguishes it from all other forms of occupation.

♦ Systematic, organized, efficiency oriented activity:

 Business is not a random, stray, unorganized and occasional activity. It is a consciously created system of production (of both goods and services). Thus, firm infrastructure needs to be in place, supply chain of materials needs to be developed, these materials need to be processed or transformed, products need to be marketed and sold, payments need to be collected, etc. All these tasks have to be divided into specialised functions, means of coordination need be devised so that the business is able to deliver the promised products and services on day-to-day basis efficiently - on time, of consistent quality and exceeding performance expectations.

♦ Objective oriented/ purposeful:

Profit is said to the defining motive behind business. In economics, objective of the firm is set as maximization of profits. Profits are the income of business, just as wages & salaries are of labor; rent is the income from the land; and interest, the income from investment. It is the residue occurring to the business owners after all other factors of production have been paid off. What are profits for? These are for organizing production, undertaking risks and bearing
uncertainty. Let’s reflect deeper on the purpose of business. We have seen above, that business as
an institution and more so through its entrepreneurial endeavors brings about a qualitative change called development. We have seen that entrepreneurial businesspersons are efficiency seekers, problem solvers and innovators. These intangible aspects of business’s performance impart deeper meaning to business and its purpose.