So, obviously, you know what a business is. You use them every day. You’ve probably been grocery shopping at least once in your life and you might have, just maybe, paid for a haircut somewhere. If so, you know what a business is and how it operates from the outside. But what about behind the scenes? What does “business” really entail? You might be considering going to school for business or starting a business yourself, and this introduction to business will fill your head with all the business goodness you need. And if you’d rather engage in some video lectures, we can do that too, in Business 101.
What does business mean?
Business is a commercial entity that sells or buys goods, provides services and/or makes products. You can see that most institutions that we interact with on a daily basis are considered businesses. Now, a business doesn’t have to be a place that you go and buy a product, it can be a manufacturer of a product, or even offer a service, like providing clean water for underdeveloped countries.
Types of business
Generally speaking there are two types of business: for-profit and non-profit. Businesses that sell or make goods for a profit are cleverly called a for-profit business. Then, there are businesses or organizations that offer auxiliary services like Habitat for Humanity or the YMCA. These are considered non-profit businesses, commonly called “non-profit organizations.” In a for-profit business the owners or investors are in it with a profit as the goal. The business will have to pay taxes on this profit. If a for-profit business goes under, all the assets will be liquidated and divided amongst the shareholders or business owners.
Some vocabulary you should know
Revenue is all the money coming into the business before you take any of the operating expenses out.
Operating Expenses are, well, your expenses. Everything that you need to pay out to keep your business operational every day, minus the cost of goods and services. This includes facility rent and utilities, payroll and taxes.
Gross Profit is the amount of money that remains after you pay for your products, goods and/or services. Essentially, you’re paying for the goods or services that make your business a business.
Operating Income, this is the money left over after you pay all your operating expenses. To get this figure you want to subtract your operational expenses from your gross profit. By calculating your operational income you will be able to see if your business is making a profit loss (negative money) or a profit gain (positive money). Obviously, if you’re end up with a profit loss, you’re going to have to make some changes.
Profit Loss, if you’re in the red after figuring out your operating income and subtracting that from your gross profit – then your business is experiencing a profit loss. This is the worst case scenario.
Goods and Services, these are the things that make you money. What do you sell? What service do you provide? How much money did you spend to obtain your inventory?
Here’s an example. You’re the owner of a comic shop and here are your numbers:
Revenue (Net Income): $35,000
Operational Expenses: $10,000
Goods and Services Expenses: $10,000
Gross Profit: $25,000
Operational Income: $15,000
So let’s figure out if you’re making cash-money, or if you’re going bankrupt. Math time.
1. revenue – goods and services = gross profit
$35,000 – $10,000 = $25,000
2. gross profit – operational expenses = operating income
$25,000 – $10,000 = $15,000
gross profit – operating income = profit loss or gain
($25,000 – $15,000 = $10,000)
It appears that you, comicon-lover, are in the positive $10,000 – which is awesome. Rock on, warrior.
It’s important to know and understand the differences of these financial terms as it could be what makes or breaks your business plan.
Four Functions of Management
Alright, let’s move away from the finances for a minute and focus on another very important facet of business: management. You’ve probably held jobs where management is either really disorganized, or super uptight, or both. A crucial part to running a successful business is having excellent management in place to oversee daily operations and keep the company from falling apart. A management role can be pretty much summed up into four core elements: planning, organizing, leading, controlling, or the P-O-L-C network.
For starters, a business will always have a business plan. This is a layout of the business’s missions, goals, objectives, finances, investors, and logistics. Learn how to draft a business plan. Without a plan, a business is doomed to fail. You may have a great idea, but if you don’t hammer out every detail it’s likely you will be faced with unforeseen circumstances that could be totally detrimental to your success. Likewise, management has to take the reins and plan out daily, weekly, monthly, and annual goals and objectives for the greater good of the company. There are a few different types of planning: strategic, tactical, and operational planning.
As a manager, part of your job is keeping everything in its place and functioning correctly. You’ll have to develop ways to allocate human resources to ensure you achieve the businesses goals most effectively. You’ll be responsible for designing jobs, organizing duties and responsibilities, and creating as much organizational structure as possible. You will seek out ways to best departmentalize, effectively use resources available to you and provide job enrichment to your employees.
As if it wasn’t obvious, management’s role is to lead a team of employees as they work towards common company goals. This doesn’t mean bossing your employees around. There is a grave difference between a manager and a leader. As a leader, you will empower and inspire your employees to be the best they can be, for themselves, and for the good of the business. To be an effective leader you are going to have to do more than know your employees’ names. You should learn their personalities, how they work, what stresses them and what encourages them. You can use this information to energize your employees, which results in better performance.
Controlling doesn’t mean micromanaging your people until they pull their (or your) hair out. You just want to make sure that company performance standards aren’t deviated from. You can do that by establishing these standards from the get-go, analyzing actual performance against these standards and then taking action to fix any discrepancies.
All businesses are organized in one of three ways: as a sole proprietorship, partnership, or corporation.
If you’re starting a business all by yourself you’re going to want to register as a sole proprietorship. This basically means that there is no legal distinction between the owner and the business. As a sole proprietor you will receive all profit from the business, and have all the control and flexibility you want.
This is pretty self-explanatory. If you and someone else want to join forces to start a business you will want to register your business as a partnership. As partners, you will be expected to contribute to the business either with money, property, labor or skill. You’ll share the profits and losses, and be legally bound in the interest of the business.
This is probably the most common type of business registration. A corporation is chartered by the state and is considered a completely separate entity from its owners. A business corporation is characterized by the limited liability of its owners and the issuance of shares of transferable stock. There are a two types of corporations available, an S corporation, or a C corporation. An LLC can be either a sole proprietorship, a partnership or a corporation. Want to start your own business? Learn what it takes.
A non-profit, as discussed above, is a business that brings in money to be used for goods or services to benefit a community. This is also sometimes called a 501(c)3 organization. For a non-profit organization, the financial scene is quite different. The overall mission for a non-profit it to provide a service to the greater good of a community, a region or the world. They do not have to pay taxes and the money they receive in the form of grants or donations cannot be used for personal purposes, it must serve the mission.
Supply and Demand
In the world of business there are people who produce goods and services, and people who want them. This is the framework of supply and demand. Those who produce are the suppliers and those who want are the demanders. It’s a very delicate balance that drives our market economy. The laws of demand states that if all other factors remain equal, the higher the price of a good, the less the people will demand it. This is probably pretty common sense: if the iPhone cost sat at $3,000 each, people would most likely not want to buy it, and there would be no demand for the supply.
In the law of supply, the higher the price, the higher quantity of supply is produced. Essentially, if an item costs more money, the supplier wants to sell more of that item to increase their revenue, so they create more of a supply. The relationship between supply and demand is delicate, and these factors influence each other: if the item is widely available and priced cheaply, like in the phrase you might’ve heard, “a dime a dozen,” that may mean the demand is low, which could have driven the supplier to reduce the price in an attempt to increase the demand.
So, within the realm of business we have markets. Markets are what allow business and consumers to interact with one another. A market is a group of individuals or businesses that have a need for a product and the means to purchase that product. There are a number of different markets but arguably the two most important ones are: consumer markets and business markets.
A consumer market is a market dominated by products that are designed and available to the consumer. It can be a tough crowd as consumers are a fickle bunch. One day leg warmers are the most popular thing and the next they’re not. Consumer markets have to be able to adapt quickly and tailor products to the current trends and brand loyalties.
A business market is, as you may have guessed, a market catered to businesses. It’s similar to the consumer market as there are trends to follow and branding techniques that can help your business succeed. However, business markets tend to focus more on customer relationships than a traditional consumer market would.
Marketing is key to having a successful business. Without it, no one knows who you are, what you have to offer, and why they should choose you over someone else. Creating a unique and catchy brand is one way to grab the attention of your target market. There are some marketing strategies that work quite well and are popular amongst top notch companies: stealth marketing, which includes things like product placement in movies; alliance marketing, which basically means creating partnerships to increase profitability for both businesses (Barnes and Noble and Starbucks); cause-related, as in when you purchase a good you contribute to a cause (like TOMS shoes); scarcity, when a product has a low supply and high demand and relationship marketing, or customer-centric marketing. Learn about other marketing strategies in this online course.
In businesses there are typically two methods of accounting: cash basis and accrual. For smaller businesses, cash basis accounting is usually what is used. It acknowledges and records financial transactions when cash physically moves between involved parties. So, if Tiny Tim purchases inventory on a credit card from the North Pole in September but doesn’t pay on the credit card until December, using the cash basis method, Tiny Tim’s would record the transaction in December. The transaction would be recorded in December because that’s when the money actually left the business and is considered a payment. Learn how to budget and forecast your business.
For accrual-based accounting, using the same example of Tiny Tim’s, the business would record the transaction in September even though no money was actually paid until December. The transaction, or intent to pay, still exists. The accrual method tracks all commitments to pay or to be paid when the commitment is made, regardless of if actual funds were transferred. This method is typically used for larger businesses.
The long and short of it is, business is essential to the world we live in today. All of the topics we’ve discussed above have great depth to them and I’ve only touched the surfac!. There are plenty of online courses like Business Happens which will help you dive into more specific and data-intensive information about business.