Business Basics
Business affects nearly every part of everyday life. We buy goods, use services, work for organizations, and depend on businesses and nonprofit organizations to meet many of our needs. Understanding a few basic terms makes it easier to understand how organizations operate and why some succeed while others do not.
What Is a Business?
A business is an entity that provides goods or services while attempting to make a profit. A business may not earn a profit immediately, and it may occasionally experience a loss. Over time, however, a for-profit business must bring in enough money to pay its bills and provide a return to its owners if it is to survive.
Revenue, Expenses, Profit, and Loss
- Revenue is the total amount of money a business receives during a specific period through sales of its goods or services.
- Expenses are the goods and services a business must pay for to operate and/or produce its goods and services.
- Profit is the amount left from revenue after expenses are paid.
- Loss occurs when revenue is not sufficient to cover expenses.
Basic relationship: Profit = Revenue − Expenses
New businesses do not always earn a profit immediately. Some operate at a loss while they build a customer base, develop their products, and establish their operations. The long-term goal is to generate enough revenue to cover expenses and become financially sustainable.
Goods and Services
Businesses generate revenue by providing goods, services, or a combination of the two.
- Goods are tangible products—items you can physically touch—such as a car, smartphone, hamburger, coffee, computer, food, or clothing.
- Services are activities performed for customers, such as transportation, education, house cleaning, accounting, healthcare, recreation, or travel.
Entrepreneurship: Risk and Reward
An entrepreneur is an individual who starts and manages a business while risking personal time, effort, and money. Entrepreneurship involves uncertainty. The entrepreneur hopes the venture will succeed, but there is always a chance that the business will not become profitable.
Risk is the chance of losing money and/or time on a non-profitable business venture. This is the idea behind the familiar expression, “Nothing ventured, nothing gained.” Greater risk can create the possibility of greater reward, but reward is never guaranteed.
Finding a Need or Niche
A successful business needs customers who want what it offers. An entrepreneur therefore looks for a need or niche in the marketplace. The opportunity might involve a new product or service, an improvement to something that already exists, or a different way of serving a particular group of customers.
Nonprofit Organizations
A nonprofit organization does not have the goal of earning a profit for owners. It may solicit charitable donations and often has a mandate to provide a particular service. Although earning a profit for owners is not its purpose, a nonprofit still needs sufficient resources to pay its bills and continue operating.
Factors of Production
The factors of production are the resources needed to create wealth. Chapter 1 identifies five:
- Land — natural resources.
- Labor — human effort.
- Capital — tools, equipment, buildings, and other productive resources.
- Entrepreneurship — initiative and willingness to organize resources and accept business risk.
- Knowledge — information, skills, and expertise.
The Business Environment
The business environment consists of external factors that affect the development and operation of businesses. Chapter 1 identifies five major areas:
- Economic and legal environment
- Technological environment
- Competitive environment
- Social environment
- Global business environment
Putting It Together
Businesses combine resources to provide goods and services that customers want. They earn revenue, pay operating expenses, and attempt to produce a profit. Entrepreneurs make this possible by identifying opportunities and accepting risk. Every organization also operates within a larger business environment that can influence its success.
Common Mistakes to Avoid
- Confusing revenue with profit.
- Assuming a business that has revenue is automatically profitable.
- Thinking that services are less important than tangible goods.
- Assuming entrepreneurship guarantees a large reward.
- Thinking nonprofit means an organization does not need revenue.
- Ignoring outside forces in the business environment.