CHAPTER 1 -UNDERSTANDING BUSINESS FUNDAMENTALS

MGT 153 (INTRODUCTION TO BUSINESS)

PREPARED BY: NOORAIN MOHD NORDIN

CHAPTER 1UNDERSTANDING BUSINESS FUNDAMENTALS

• What is business?• Business goals• Functions of business • Different form of business• Business Support System

LEARNING OBJECTIVES

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What is BUSINESS?

People – need work for living

Salary: to buy goods for everyday used

Various types of SELLER - aim to make profit

Activity of providing goods and services to fulfill customers needs and wants can be termed as “BUSINESS”

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DEFINITION OF BUSINESS

Euthans F and Hodget (1984)Business as the organized, profit-seeking approach to provide people with goods and services they want

Jackson, H. John and Musselman, Vernon (1987)Business as an activity that meets people’s economic needs and wants; a firm organized to engage in such activity

Steade & Lowry (1987) A Business firm is a commercial or industrial enterprise owned and organized to buy, sell, manufacture, or provide products or services for a profit

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BUSINESS GOALS

- To make profit encourage business to open and expand their business

Amount of money that a business earns

after all expenses have been deducted from sales

revenue

- To make profit: need administer and manage the business effectively and efficiently

- Therefore, the starting point in any business management is setting goals

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EFFECTIVENESS & EFFICIENCY

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DEFINITIONS OF GOAL• Goal is an objectives that a business hopes and plans

to achieve • Can also be interpreted as an end-state that the

business is expected to achieve

• Simple term: “THE THING THAT ONE EXPECTS TO ACHIEVE”

• To ensure organization to function systematically • Ensures all resources will be utilized effectively and

efficiently

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GOAL SETTING: PURPOSE

• Provides direction and guidance for all businesses

• Helps the firm to allocate resources

• Helps businesses to define corporate culture

• Helps business managers to assess the business performance

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TYPES OF GOALS

Three (3) types of goals:

1. Purpose 2. Mission 3. Objective

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TYPES OF GOALS

1. Purposes • Is the reason for the business organization’s existence• As the reason for various organization’s existence • Eg: profit & non-profit organizations’ purpose are

different from each other

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TYPES OF GOALS

2. Mission • Is the “means” by which a business can fulfill its

purpose • Indicates “how” a business will achieve its purposes • eg:

AirAsia: Everyone can Fly UTM: to be World Class University Touch n’ Go: To provide secure, swift and convenient cashless payment mode to all

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TYPES OF GOALS

3. Objective

• Specific statements detailing what a business organization intends to accomplish as it goes about its mission

• Eg: Air Asia: offering affordable air fareMcDonald: serve all customers within 2 minutes of their order

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LEVELS OF GOALS

Three levels of goals

1. Long-term goals 2. Intermediate goals 3. Short-term goals

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LEVELS OF GOALS

1. Long-term goals

• Formulated by the higher level management group in a business organization

• Set for a long period of time – 5yrs and above • Eg:

Touch n’ Go: To be No. 1 in the electronic payment system for micro payment towards realising a cashless society

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LEVELS OF GOALS

2. Intermediate goals

• Set for period one year to 5yrs • Set by middle managers of a business • Eg:

Marketing manager – targeted sales for the following yearR&D manager – targeted new types of technologyHR manager – forecast manpower for the following year

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LEVELS OF GOALS

3. Short-term goals

• For one year and less • Eg:

Marketing manager – monthly performance HR manager – quarterly staff performance

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FUNCTIONS OF BUSINESS

1. PROVIDE GOODS AND SERVICESa. Making raw materials useful to customers

b. Creating new products i. Expand to new products – diversify the business

ii. Improve the product quality

c. Creating an organized markets i. Responsible to transfer the service & product to the customer at the right

time & right place

ii. Product availability & convenient to customer, eg. Shopping mall

Input Process Output

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2. PROVIDE EMPLOYEMENT

- corporate social responsibility

- business: opening more jobs opportunity to society

- reduce poverty

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3. HELPING THE COUNTRY TO INCREASE THE GROWTH RATE

- international trade – promote exchange rate between two countries (economic)

- helps country to maintain high standard of living

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4. HELPING TO PROTECT THE ENVIRONMENT

- to preserve the environment, reduce contamination and pollution

- together with consumer; promote the

environmentally safe product & services

- eg: biodegradable fertilizer, merchandise

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FORMS OF BUSINESS OWNERSHIP Major forms of business ownerships are:

• Sole Proprietorship

• Partnership

• Corporation

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FORMS OF BUSINESS OWNERSHIP 1. Sole Proprietorship

o is a business owned and operated by one person with profit motive

o Simplest form of business ownership

o Easiest to start

o Single owner assumes all risks, receive all profits and sustains all losses

o Owner will the operator and manager of the business

o Usually in small size

o Found in every type of business

o Eg: restaurants, travel agencies, bakery shop, laundry shop

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FORMS OF BUSINESS OWNERSHIP – SOLE PROPRIETORSHIP

• Advantages 1. Easy to set up

o No need to make a contract with other owners

o No charter to obtain from the state government

o Owner is free to choose name of the new business

2. Low cost of organization o No charter fee to be paid (since it is not chartered by the state)

o Small local license fee

o Profits of the business are not taxed (the owner pays income taxes as an individual) and all profits

o Owner gets all the profits

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• Advantages 3. Freedom to manage and promptness of action

o Owner has the maximum freedom in dec-making and takes appropriate action without delay

o Easier to manage since its operation is usually much smaller than other forms of business

o Fewer government restrictions on either starting or terminating a business

4. Financial advantages o After expenses are paid, all the profits belong to the owner

o High credit limit as assets can be used as guarantee

o Therefore, the credit standing of the business may be strong

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• Advantages 5. Personal incentive and satisfaction

o Owner can get personal satisfaction because he or she can run the operation his way and takes pride in his effort

o He can work as many hours as he wants

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• Disadvantages 1. Limited Size

o Usually they there is only one owner

o There is a limit to the amount of capital he can raise for the operations further growth of the business will depend entirely upon reinvested profits

o Therefore the growth is limit

o Every major decision has to be made by the owner

2. Unlimited Liability o A sole proprietorship is personally responsible for all debts the business

incurs

o Credits or lenders have the rights over personal property of the owner, therefore sole proprietors risk everything they own

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• Disadvantages 3. Limited Life

o A sole proprietorship has no legal life beyond that of its founder. The firm’s existence depends on the proprietor

o For example, if he dies, the business dies with him

4. Limited management ability o The sole proprietorship is responsible for many basic functions such as

buying, selling, advertising, accounting, personnel management

o Therefore, too much depends on the ability of one person, because few people are experts in all these areas

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FORMS OF BUSINESS OWNERSHIP – PARTNERSHIP

o Is an association of 2 or more persons to act as co-owners of a business for a profit

o Most partnership have only 2 partners but it may also be in form of estates, trusts

o Usually represents a pooling of special talents especially law, accounting, advertising and retailing

o A sole proprietor may also take on another partner for the purpose of obtaining more capital

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3 types of partnership

1. General partnership

2. Limited partnership

3. Other types of partnership

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1. General partnership o An association of 2 or more persons with each general

partner as co-owner having unlimited legal liability • General partners are responsible for operating the business

• They also assume unlimited liability for its debts, including debts that have been incurred by any other general partner without their knowledge or consent

• Each partner can enter into contracts on behalf of all the others

• Each partner is taxed on his or her share of the profit

• If one general partner withdraws from the partnership, he or she must give notice to creditors, customers and suppliers in order to avoid future liability

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2. Limited partnership o An association in which one or more (but not all) partners

have limited legal liability for the debts of the firm • These limited partners are not legally liable for debts beyond the

amounts of money they invested in the company

• They may or may not participate in managing the business

• In return for their investment, they share the profits of the firm

• At least one partner must be a general partner

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3. Other types of partnership a. Silent partners – known as owners in the business, but who take no

active role in managing the operations

b. Secret partners – owners who take an active role but do not want to reveal their identity to the public

c. Dormant (sleeping) partner – take no active role in running the business and at the same time remain unknown to the public

d. Senior partners – general partners who have been with the partnership for a long time and who own a large share of the general partnership

e. Junior partners – made up of those who have been owners for a short time and are not assuming substantial responsibilities

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1. Advantages a. Increased sources of capital and credit

• Funds or direct contribution of financial resources from partners

• Loans can be extended by friends, investors and lending institutions – offers attractive investment to creditors due to many partners therefore less risk

b. Improved – decision making potential • More than one owner each contribute to a particular specialized

area/field

• Improved management skills

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1. Advantages

c. Personal interest in business • Partners are vitally interested in the success of the business

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2. Disadvantages c. Lack of continuity

• Death or withdrawal of partner can lead to termination of business

• It is probably hard to accept a new partner after the death or withdrawal of a partner

d. Difficulty in resolving conflict • If one partner wants to expand business and the others disagree,

the conflict is difficult to resolve especially if both partners have equal powers

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FORMS OF BUSINESS OWNERSHIP – CORPORATIONS

o An association of individuals united for some common purpose and permitted by law to use a common name and to change its members without dissolution (termination) of the association

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o Separate legal entity from its owners, is liable for its own debts

o Employ many people

o Control vast sums of economic wealth and physical resources

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o Types of corporations 1. Private or business corporation

2. Public or government corporation

3. Open or close corporation

4. Domestic, alien corporation

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1. Private or business corporation Business privately operated for profit for the benefit of stockholders:

individuals who purchased shares of stock in the corporation and which represent ownership

Eg: Ford Motor

2. Public or Government Corporation Corporation chartered by the federal government a state, or a city for a

public purpose, eg: FAMA, MARA, FELDA

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3. Open or close corporation Open corporation – profit-making corporation whose stock is sold on the open

market, eg: McDonald, MAXIS, UEM

Close corporation – whose stock is closely held by members of a family, eg: GENTING BERHAD

4. Domestic / Alien Corporation Business chartered under the corporate laws of one states is a Domestic

corporation

An Alien corporation is a company doing business in the country but charted by a foreign government. Eg: CITIBANK

“Any company that is incorporated outside the Malaysia, but operates facilities within the Malaysia”

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1. Advantages Limited liability of stockholders

Stockholders have their liability restricted to the amount of money they have invested in the corporation

Since the corporation is a legal entity, it is responsible for its own debt

Then if the stockholders receive dividends they have to pay income taxes

Continuity of life

Corporation stays in business even though an owner or its officer dies or retires

It may continue to exist for more than 100 yrs

Eg: PRUDENTIAL INSURANCE

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1. Advantages Ease of ownership transfer

The stock has an open corporation maybe publicly traded and listed on a stock exchange market

Stockholders can sell their shares, shares deceased stockholders can be transferred to their heirs

Specialised management

Corporations often managed by paid officers

Gives the business managerial efficiencies and expertise in areas such as production, finance, marketing and purchasing

Stockholders elect a board of directors who hire officers, employs people to manage particular areas of the business

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1. Advantages Large financial capability of growth potential

Can easily expand business by selling more stocks. This increases the number of investors and the amount of available funds

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2. Disadvantages Legal restrictions on activities

Firm is regulated by both federal and state government laws in its sale of stock

It is required to maintain records or reports, which governmental agencies have the right to examine

Cost and difficulty of organization Company goals and operation plan must be agreeable to the

investors involved

Cost of organizing and being chartered is big

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2. Disadvantages Double taxations of earnings

Corporations are required to pay federal and state income tax

Their shareholders must pay income tax on their corporate dividends

A corporation operating in another state may need to pay annual taxes or fees to the other state

Lack of personal interest People who work for corporations are its employees

They may not have the intense interest in the success of the business

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2. Disadvantages Lack of secrecy

Annual reports must be submitted by corporations to their stockholders

Financial details become available to competitors as well as to the general public

Charter restrictions A corporations purpose of business is stated in its charter and they

may not be able to diversify its activities later untill the charter is amended

Business support system refers to the assistance and services given by the government or private agencies to help entrepreneurs to start a new business or to develop an existing one.

There are a lot of business support system provided to the entrepreneur in term of monetary and non monetary facilities.

BUSINESS SUPPORT SYSTEM

BUSINESS SUPPORT SYSTEM

Documents

CHAPTER 1 -UNDERSTANDING BUSINESS FUNDAMENTALS