LESSON 03 BUSINESS ORGANIZATION

LESSON 03

BUSINESS ORGANIZATION

Business organization is an act of grouping activities into effective cooperation to obtain the

objective of the business.

In the words of L. H. Haney

“It is more or less independent complex of land, labour and capital, organized and directed for

productive purposes but entrepreneurial ability.

SCOPE OF BUSINESS ORGANIZATION

The scope of business organization can be defined as under:

Scope of

Business

Organization

Partnership

Combination

Sole

Joint Stock

Cooperative

Proprietorship

Company

Societies

1. Sole Proprietorship

According to D.W.T. Stafford

“It is the simplest form of business organization, which is owned and controlled by one man.”

Sole proprietorship is the oldest form of business organization which is owned and controlled

by one person.  In this business, one man invests his capital himself.  He is all in all in doing

his business.  He enjoys the whole of the profit.  The features of sole proprietorship are:

Easy Formation

Unlimited Liability

Ownership

Profit

Management

Easy Dissolution

2. Partnership

According to Partnership Act 1932:

“Partnership is the relation between persons who have agreed to share the profits of a

business carried on by all or any of them acting for all.”

Partnership means a lawful business owned by two or more persons.  The profit of the

business shared by the partners in agreed ratio.  The liability of each partner is unlimited.

Small and medium size business activities are performed under this organization.  It has the

following features:

Legal Entity

Profit and Loss Distribution

Unlimited Liability

Transfer of Rights

Management

Number of Partners

3. Joint Stock Company

According to S. E. Thomas:

“A company is an incorporated association of persons formed usually for the pursuit of some

commercial purposes”

A joint stock company is a voluntary association of persons created by law.  It has a separate

legal entity apart from its members.  It can sue and be sued in its name.  In the joint stock

company, the work of organization begins before its incorporation by promoters and it

continues after incorporation.  The joint stock company has the following feature:

Creation of Law

Separate Legal Entity

Limited Liability

Transferability of shares

Number of Members

Common Seal

4. Cooperative Societies

According to Herrik:

“Cooperation is an action of persons voluntarily united for utilizing reciprocally their own forces,

resources or both under mutual management for their common profit or loss.”

Cooperative Societies are formed for the help of poor people.  It is formed by economically

weak persons of the society.  In this form of organization, all members enjoy equal rights of

ownership.  The features of cooperative society are as under:-

Easy Formation

Protection of Mutual Interest

Limited Liability

Equal Distribution of Wealth

Equal Rights

5. Combination

According to J. L. Hanson

“Combination is the association, temporary or permanent, of two or more firms.”

Business combinations are formed when several business concern undertaking units are

combined to carry on business together for achieving the economic benefits.  The combination

among the firms may be temporary or permanent.  The salient features of business

combination are:

Economy in Production

Effective Management

Division of Labour

Destructive Competition

IMPORTANCE OF BUSINESS ORGANIZATION

The following points elaborate the role of business organizations:

1. Distribution

Another benefit of business organization is that it solves the problems of marketing and

distribution like buying, selling, transporting, storage and grading, etc.

2. Feedback

An organization makes possible to take decisions about production after getting the feedback

from markets.

3. Finance Management

It also guides the businessman that how he should meet his financial needs which is very

beneficial for making progress in business.

4. Fixing of Responsibilities

It also fixes the responsibilities of each individual.  It introduces the scheme of internal check.

In this way chances of errors and frauds are reduced.

5. Minimum Cost

It helps in attaining the goals and objectives of minimum cost in the business.

6. Minimum Wastage

It reduces the wastage of raw material and other expenditures.  In this way the rate of profit is

increased.

7. Product Growth

Business organization is very useful for the product growth.  It increases the efficiency of

labour.

8. Quick Decision

Business organization makes it easy to take quick decisions.

9. Recognition Problems

Business organization makes it easy to recognize the problems in business and their

solutions.

10. Reduces the Cost

Business organization is useful in reducing the cost of production as it helps in the efficient use

of factors of production.

11. Secretariat Functions

It also guides the businessman about the best way of performing the secretarial functions.

12. Skilled Salesmen

It is also a benefit of the business organization that it provides the skilled salesmen for

satisfying various needs of the customers.

13. Transportation

It is another benefit is that it guides the businessman that what type of transport he should

utilize to increase the sales volume of the product.

What are the factors of consideration before starting a business?

PRE-REQUISITES OF BUSINESS

Following are the main pre-requisites of a successful business:

1. Selection

The first and most important decision before starting a new business is its selection.  If once a

business is established, it becomes difficult to change it.  One should make a detailed

investigation in the selection of business.

2. Feasibility Report

A person should prepare the feasibility report about the business to be started.  This report will

provide the facts and figures whether business is profitable or not.

3. Nature of Business

There are various types of business like manufacturing, trading and services. The

businessman should decide that what type of business he would like to start.

4. Demand of Product

The businessman also keeps in view the demand of the product which he wants to sell.  If the

demand is inelastic, the chances of success are bright.  If the demand of a product is irregular,

seasonal and uncertain, such business should not be started.

5. Size of Business

The Size of business means the scale of business.  The size of business depends upon the

demand of commodity in the market and organizational ability of entrepreneur. The

determination of size of business is an important decision of a person.

6. Availability of Capital

Availability of capital is an important factor in the business. Capital is required for the purchase

of land, machines, wages and raw materials.  A businessman must decide that how much

capital he can arrange.

7. Business Location

A businessman has to select the place where he wants to start his business.  He should select

that place where raw material, cheap labour and transportation facilities are available. He

should also check the location of business competitors.

8. Government Policy

The businessman should also carefully consider the policies of government before starting a

new business.  Some areas are declared as ‘tax free zones’ and for some particular

businesses the loan is provided without any interest.

9. Availability of Raw Material

Availability of Raw material is essential to produce the goods at low cost.  Sometimes the raw

material is to be imported which may create problem for him.  So a businessman must keep

this factor in mind.

10. Availability of Machines

Availability of new machines is also an important factor for a business.  A businessman must

see whether these machines are easily available inside the country or not.  If these are to be

imported then it may create the problems for him.

11. Availability of Labour

Skilled and efficient labour is essential to run the business in profit.  But if efficient and skilled

labour is not available where business is going to be started then it will not be profitable.

12. Means of Transportation

Quick and cheap means of transportation are essential for low cost of production and high

profit rate.  A businessman must keep in view this factor.

13. Power Resources

There must be availability of power resources like water, oil, coal and electricity.  So

businessman must keep in view this factor.

14. Hiring Employees

A businessman must hire the efficient and competent employees in the business.  The proper

training must be given to employees.

15. Product Pricing

A businessman must decide the price of his product.  In the beginning the price must be low.

He must keep in view that whether he will cover cost of his product and other expenses with

such price.

FUNCTIONS OF BUSINESS

Following are the main functions of a business:

1. Production

Production of goods and services is the first main function of the business.  The production

must be regular.  The goods and services must be produced in such a way which can satisfy

human needs.

2. Sales

The sale is another important function of the business.  Sales are of two types:

Cash sales

Credit sales

The sale must be regular and at reasonable price.  It is very difficult job because there is hard

competition in each market.

3. Finance

It is also an important function of the business to secure finance.  Finance is required for

establishment and expansion of business.  There are two sources of raising funds:

(a) Owner’s Capital

(b) Borrowed Funds

4. Management Function

“To do things efficiently and effectively” is known as management.  The functions of

management are:

Planning

Organizing

Leading

Controlling

Staffing

The management also provides direction for all subordinates.

5. Innovation

In this era of competition, for the survival of business, innovation is essential.  The

businessman must try to find new techniques of production because the business may not sell

present output in future.

6. Accounting

Another function of the business is to maintain its records properly.  To record the business

activities is called accounting.  With proper accounts, the owner can know the actual

performance of business and chances of fraud are reduced.

7. Marketing  -  According to Harry Henser

“Marketing involves the design of the products acceptable by the consumers and the conduct

of those activities which facilitate the transfer of ownership between seller and buyer.”

Through marketing, goods are moved from producers to consumers.  It is an important

function of the business.  This function includes buying, selling, transportation, product

designing and storage, etc.  The concept of marketing mix is very important in marketing.  It

includes four Ps:

Product

Price

Place

Promotion

8. Quality Improvement

Quality of product must be improved to increase the sale.  If quality of product is poor then

business may suffer a loss.

9. Motivation

Motivation is very essential for increasing the efficiency of employees.  Motivation encourages

the employees to give their best performance.

10. Research

Research is also an important function of any business.  Research is a search for new

knowledge.  By research, business becomes able to produce improved and new goods.  The

research is of two types:

Basic Research

Applied Research

11. Public Relations

It is very important function to make friendly relations with public, In this way sales volume is

increased.