The term “Business” encompasses a wide variety of activities performed by individuals, organizations and businesses. Business activities are conducted for profit, for the purpose of earning revenue, for the accumulation of surplus or for the establishment of a profit or loss position. There are a number of other, less well known, uses for the term “business.”
A business is typically defined as any entity organized for profit, commercial, industrial or service activities. Businesses may be individually for-profit or non-profitable entities that perform primarily to meet a social purpose or further some social cause. Examples of socially beneficial businesses include those conducted to supply goods and services to the needy, organizations assisting education and development, public utilities like water and electricity, and the business of land speculation. Examples of unprofitable businesses include those engaged in speculation, gambling, property speculation and wholesale or retail sales of items not essential to the operation of the firm. While most businesses are primarily for profit, some do take part in activities designed to serve the public welfare.
In order to understand how different types of business differ, it is necessary to have a broad understanding of what “business” means and the key terms that relate to it. Business, as listed above, is a term that encompasses many aspects of life. The meaning of some of the business-related key terms may vary depending on the nature of the business and its stakeholders. Below are some commonly used business buzzwords with varying definitions and implications.
Economic Definition: An economic definition is a statement that presents the nature and scope of the costs associated with production of a product or service. Production costs refer to the expenditures required to produce the finished product or to produce a service. A product’s price is determined by its cost of production. A service’s cost is measured by the cost of delivering the service to the ultimate users. The process of market development and analysis is often referred to as economics.
Return on Investment (ROI): A return on investment is the ratio of the cost of producing an item or service to the value of producing the same product or service. For instance, in the manufacturing industry, the cost of materials consumed to make a product and the cost of producing a finished product are considered inputs and are included in the analysis of ROI. A firm can improve the ratio of inputs to output by investing in machines that make the previously mentioned products easier to produce at a lower cost. This increases the firm’s ability to produce at a higher level of quality and at a lower cost. Firm managers are interested in maximizing the level of ROI because they want to maximize the firm’s profits. In addition to boosting profits, increasing ROI also helps to maintain a steady cash flow.
Current and Future Value: A current value is a measurement of what a firm can get from its invested assets over the course of time. It is the value of the present discounted value of all future cash flows that a firm would receive if it were to invest the cash in assets today. The present value of the firm’s invested assets represents all the future returns, it can expect to receive if it were to lend its invested money out. The value of future cash flows represents the sum of all present and future profits of a firm multiplied by the amount invested for each profit element.
Other Factors to Consider: While profitability is important, it is not the only factor to consider when determining the efficiency and the profitability of a firm. Other factors such as the number of customers, a firm has, the size of the firm, the number of sales a firm generates, and the variety of services it provides also affect profit maximization. For instance, if a firm sells mainly small items such as office supplies, it may be able to capitalize on existing demand for these items and increase sales by offering slightly larger items that are in greater demand. Likewise, if a firm sells large items like cars, it could increase its profit margin if it sells goods that are in greater supply.
Maximizing Profits: In order to maximize profits, firms should calculate their current and future profits and then apply these figures to their costs and expenses as well as other factors that will affect their profits. It is important for a firm to include all costs and expenses in its income statement so that it will have an accurate picture of its current and future income or loss. This way, managers will know what kind of actions they should take regarding company expenses and which kind of actions will yield better results. The variation of profits among firms is usually a result of differences in the pricing of goods and services, the quality of products and services, and other factors. This also means that the present value of revenue minus cost equals revenue minus cost after all costs and expenses are included in the equation.