Section 1: THE NATURE OF BUSINESS

Objectives

● The development of barter

● Describe the role of money
● identify the instruments of exchange
● Interpret information on various instruments of payment
● Differentiate between private and public sectors
● Describe the various forms of business organisations and arrangements
● Differentiate among the types of economic systems
● Describe the functional areas of a business
● Identify the stakeholders involved in business activities
● Discuss the role and functions of the stakeholders involved in business activities
● Explain the ethical and legal issues in the establishment and operations of a business
● Explain the principles that must be adopted in the establishment and operation of a business
● Explain the consequences of unethical and illegal practices in business
● Describe the careers in the field of business.
 The development of barter

Advantages to Bartering:

● Simplicity.
● No Real Concentration Of Power.
● No Overexploitation Of Natural Resources.
● Double Coincidence of wants.
● Lack Of Common Measure Of Value.
● Difficulty In Deferring Payments.
● Indivisibility of Goods.
● No Storage Of Value.
 The development of barter

Barter - Exchange of (goods or services) for other goods or services without using money.

Disadvantages to Bartering:

1. A double coincidence of wants. Can only exchange if each party desires what the other party has.

2. Rate of exchange could be difficult to be decided upon.

3. Some goods are not divisible.

4. Goods are bulky and difficult to transport.

5. Store of Value – Some goods are perishable and cannot be stored for a long time
 The role of money

Definition of Money- A commonly accepted instrument or medium of exchange eg. Coins, bank notes, paper notes.

History of Money

● The drawbacks of barter led to the development of money.

● Traditionally cowrie shells, cattle, salt and sugar were used as money.
● Then precious metals were used such as silver and gold but it became burdensome and heavy.
● The goldsmiths kept the gold while issuing receipts to precious metal owners to represent the value of gold owned.
● The owner would present the receipt when the gold was required.
● The bearer of the receipt would be paid the gold.
● Goldsmiths started to issue smaller denominations such $10 and $5.
● Now receipts became a representation of money.
● Goldsmiths became bankers and the amount of money exceeded the amount of gold or silver in reserve due to
loans being given out which led to greater economic activity.
● Central banks took over the issuing of money to stabilize the system.
 The role of money

Characteristics of Money:
● Generally acceptable
● Relatively Scarce
● Easily divisible
● Homogeneous in nature
● Fairly durable
● Portable
Functions of Money:
● As a medium of exchange
● As unit of account - pricing
● As a store of value – stored for future use eg. savings
● Means of deferred payment- makes credit possible.
uments of exchange CCCC

This is an intermediary instrument or system used to facilitate the sale, purchase, or trade of goods between
parties

A. Barter- The exc Money order - This is a certificate, usually issued by a government or banking institution, that
allows the stated payee to receive cash on demand. A money order functions much like a check, in that the person
who purchased the money order may stop paymenhange of goods (and services) for goods (and services) without
the use of money.
B. Bills of exchange - A written order used primarily in international trade that binds one party to pay a fixed sum
of money to another party on demand or at a predetermined date.
C. Electronic Money transfer - This is a system used to transfer funds electronically rather than paper-based
payment methods. Funds are transferred over a computer network credit e.g. debit card transactions.
D. Tele-banking and e-commerce - This system allows a bank’s customer to simply use the telephone to get his
banking services done rather than visiting the bank.
E. Cheques - An order to the bank to make payments to the payee stated on it.
 Instruments of exchange

G. Debit cards - A card issued by a bank allowing the holder to transfer money electronically to another bank account
when making a purchase.
H. Credit cards - A thin rectangular piece of plastic or metal issued by a bank or financial services company, that allows
cardholders to borrow funds with which to pay for goods and services with merchants that accept cards for payment
I. Bank draft - A cheque which guarantees payment to the receiver from the issuing bank. Bank drafts can be made out
to a payee in foreign currency and thus used for making overseas payment?
K. Bank transfers - A payment between two bank accounts
I. M-money/mobile money and mobile wallets - A virtual wallet that stores payment card information on a mobile
device. Mobile wallets are a convenient way for a user to make in-store payments/h
 Private and Public sectors
Public Sector - The part of an economy that is controlled by the government.
● Government control of factors of production on behalf of citizens
● Motive to provide services to citizens
● Consists of nationalized industries, executive agencies, local and municipal authorities, government
departments, public corporations
Advantages

● Government provides public goods that the private sector will not provide.
● Government provides welfare services to poorer members of society.
● Government sets the control mechanisms on place for the conduct of business.

Disadvantages

● Government can increase taxes to finance expenditure

● Inefficient use of state resources
● Political interference in private sector
 Private and Public sectors

Private Sector - The part of the economy that is not under direct state control
● Private individuals or businesses own the factors of production
● Motive to maximise profits
● Consists of sole traders, partnerships, public and private companies multinationals, conglomerates, franchises
Advantages
● Brings more competition and product variety to the market
● Increased use of technology
● Provides investment and employment
Disadvantages
● Will only provide products that citizens can pay for
● Engages in the production of demerit goods once there is demande
 Forms of business organisations and arrangements
vanstAn organization is a system that groups people together towards establishing a common goal. Business
organizations are centered on creating goods and services for profit. There are several types of business organizations
that one can start.

1) The Sole Trader

The sole trader is a single business owner. This person may employ several other persons to work in the organization,
but he has to make all decisions, acquire all the capital required and other resources needed for the business on his own.

Characteristics

● He or she manages the business and may have the help of family and friends.
● He or she enjoys all the profit and bears all the risks
● Capital is limited since the savings of the owner fund the business
● Personal contact with clients
● Performs a large variety of tasks related to the operations of the business
● This type of business is not incorporated (not given a separate identity) and therefore easy to set up.

Examples: Electrician, Plumper, small farmers, doctors and lawyers.

 Forms of business organisations and arrangements
Formation

There are no legal formalities in the setting up of a business as a sole trader except for the registration of a trade name
or the acquisition of a license. For example a license is required for the sale of alcohol or for the sale of food items.

Advantages

● Enjoys all profits

● Ease of formation – no legal requirements
● Independence – find personal satisfaction in working for themselves
● Simple organisational structure
● Personal Control – decision making is quick
● Personal Service
● Secrecy – No need to disclose info. Except to tax authorities or to creditors
● Personal Commitment to
 Forms of business organisations and arrangements
Disadvantages

● Limited source of finance

● Lack of specialised staff
● Over reliance upon one’s personal health and vigour
● Unlimited Liability
● Lack of leisure time
● Lack of technology
● He bears all the risks
 Forms of business organisations and arrangements
2) Partnership - A partnership business is formed legally by a minimum of two (2) and a maximum of (20) twenty
persons in a business. There are two types of partnership forms:

○ Limited Liability Partnership – at least one partner must have unlimited liability
○ Unlimited liability Partnership- All partners have unlimited liability.

Formation

A deed of partnership must be drafted which set out the terms and conditions of the partnership. This written agreement
helps to settle disputes and in the absence of the deed the partnership will be governed by the Partnership Act.

● A deed will entail:

● Number of partners
● Amount of capital contributed by each partner
● Type of trade engaged in
● Share profits and losses accruing to each partner
● Name of partnership
● Salary of each partner mechanism for dissolution
 Forms of business organisations and arrangements
Types of Partners

Ordinary/General Partners: take an active part in the running of the business.

● Unlimited liability of partners

● Change of members ends partnership
● Assets and liabilities are owned and shared equally
● Each partner plays a part in the management of the firm
● Partnerships cannot exist without an agreement
Sleeping Partners: invest in the business but do not take an active part in the business.
Limited Liability Partners: assets will not be lost if the business goes bankrupt.
● limited liability of partners but one must have unlimited liability
● Change of members does not end partnership
● Does not play a part in the management of the firm
 Forms of business organisations and arrangements

Advantages
●More capital
●Specialisation – partners use their different skills and knowledge
●Simple Organisation – easy to form
●Continuity – more continuity than sole trader
●Limited Liability
●Workload Shared
●Decision making – shares knowledge and expertise
Disadvantages
●Unlimited liability
●Binding – all partners lose if mistake is made
●Limited Capital
●Disagreement
●Concentrated risk – risk not spread enough
●Decision-making
●Continuity – broken partnership upon death
 Forms of business organisations and arrangements

3) Franchise - A franchise is an agreement between a franchisee (the person requesting permission to set up
business) and the parent company to allow the franchisee to sell its products or services. Some businesses
begin by the owner acquiring a franchise to operate under an already existing business name. Many
multinational companies expand into new regions through franchises. The franchisee bears the name of the
parent company. They must abide by all the rules and guidelines outlined by the parent company to sell its
products. It pays royalties (a fee) to the parent company to operate under its business name.
Advantages
●Access to new markets for the franchisor
●Source of revenue for the franchisor
●The franchisee bears some of the risks
●Franchisee benefits form the support provided by the franchisor eg. Training
●The franchisee’s risk is reduced because it is selling a recognised brand.
Disadvantages
●The Franchisee must pay the royalties regardless of business size
●The franchisee has to operate under supervision of the franchisor
●The franchisee is legally bound to sell only the products of the franchisor
 Forms of business organisations and arrangements

4) Co-operatives - These are business entities owned by their members who purchase shares to join them. They
are usually established because of a need existing among a number of persons who wish to acquire particular
goods and services at a reasonable cost.
Principles of Cooperatives
●Open membership- All persons over the age of 16 may join for a fee
●Democratic Controls- Governed by its own members who attend a general meeting where members elect a
committee to run the cooperative
●Limited interest on capital invested – low interest rates for members
●Distribution of Surpluses- surpluses are distributed amongst members fairly- ploughed back into business to
expand and to sometimes for health care or education.
Types of Cooperatives
●Consumer
●Producer
●Financial
●Services
●Worker
Disadvantages
●Limited capital input depending on the size of the cooperative or the credit union
●May lack managerial expertise in membership
 Forms of business organisations and arrangements

Advantages
● Creates employment for members
● Democratic Management
● Benefit from economies of scale
● Support services such as purchasing and marketing for members
● Profit shared among the members
 Forms of business organisations and arrangements

5) Limited Liability Companies - A company is a business entity that has been incorporated, that is,
the company has a separate legal identity from that of the owner. Limited Liability Companies are
companies in which shareholders/investors are protected as they will not lose their personal assets if
the business goes bankrupt. They are not liable for the debts of the company beyond their level of
investment. Therefore if a shareholder buys shares in a company valuing $5000 then he will only lose
that $5000 invested and his personal assets.
There are two types of limited liability companies.
1. Private Limited Liability Company
2. Public Limited Liability Company
The Private Limited Company only allows friends, relatives and co-workers to purchase shares and to
be a part of the company. Its privacy is also protected by the fact that unlike the public limited liability
company, it does not have to publish its balance sheet in the newspaper. Legally the private limited
company can only have a minimum of two and a maximum of fifty persons to join.
The Public limited company allows members of the public to purchase shares. The shares/stocks of
public limited companies are traded on the stock market. The public limited liability company has a
minimum of (7) seven members and there is no limit to the number of shareholders that can join.
 Forms of business organisations and arrangements

Advantages of Private Limited Companies

●A larger capital base than sole trader or partnership.
●The company has continuity and thus can obtain loans easily.
●The company has a separate legal identity from ownership.
●Shareholders have limited liability
Disadvantages of Private Companies
●Capital is limited since the membership is limited to fifty person.
●Must file reports with the registrar of companies
●Selling of shares is restricted to the private grouping.
Advantages of a Public Limited Company
●It is easier to obtain financing
●Shareholders have limited liability
●Share can be quoted on the stock exchange and sold to the public
●Company able to grow and obtain economies of scale
●It has a separate legal existence. Changes in shareholders and directors do not affect continuity
of the company.
 Forms of business organisations and arrangements

Disadvantages
The legal requirements may be costly and time
consuming
The accounts have to be made public
Because of large size, decision making can be long
Differences in opinion may develop owners and directors.
Loss of control of company if sufficient shares are
obtained.
These companies lack a personal element.
 Economic systems

An economic system refers to the way that a country uses its resources to organize production and the
distribution of goods and services, to maximize the benefits to its society. Governments choose particular
economic programmes that will effectively manage their economies, bring about economic growth and improve
the lifestyles of its citizens. The following economic questions must be answered by managers of economies.
1. What to produce?
2. How much to produce?
3. What methods of production are to be used?
4. How will goods and services be distributed?
 Types of Economic Systems
1) Subsistence or Traditional Economic Systems
The Subsistence economic system as its name suggests are economies in which just enough is produced by its citizens
for their survival. Since there is no surplus wealth is not created. Subsistence economies exist in many villages in
Africa and South America among peoples who live in simple societies.
Advantages:
● Every member of the society knows their role.
● The social network is strong
Disadvantages
● This society is slow to changes
● Does not take advantage of technological change
● Little or no development of intellectual or scientific initiatives
 Types of Economic Systems
2) The Planned or Controlled Economic System

Property and capital resources are owned by the government on behalf of the society. The government
makes all decisions concerning the use of the country’s resources and the distribution of its output. Goods
and services are provided through government-owned and run operations. These include factories,
telephone services, newspapers, television stations, etc.

Advantages

● There is a fair distribution of goods and services as the government determines how goods are
distributed.
● Citizens in these economies enjoy a least a basic standard of living as the government provides all
goods and services.
● There is full employment of all available resources.
● Wasteful competition is avoided.
 Types of Economic Systems
Disadvantages

● Resources are inefficiently allocated as consumers are not free to indicate their demand for goods and
services. Therefore resources are not sent to where they are most needed but into industries based on
the government’s decision.
● The lack of competition reduces innovation and the motivation to produce quality output.
● Too rigid system that is inflexible to changes such as shortages
● Too much bureaucracy, procedures and paperwork.
● No freedom of choice for producers and consumers.
 Types of Economic Systems

3) Free Market Economic System

Private individuals own the greater share of the property and capital resources that are used in the production process. There is little or no
government intervention in the economic activities of the country.  The government may provide essential services e.g. transportation and
water. Therefore the private sector provides the majority of goods and services.

Advantages

● Competition among business will result in increased quality of output and lower prices.
● Competition also leads to innovation i.e. newly invented goods, services and production processes.
● Consumers are free to choose the goods and services that they wish to purchase and therefore production is based on their demands.
● Freedom from government interference
● The invisible hand or price mechanism determines the price
 Types of Economic Systems

Disadvantages

● Consumer exploitation by suppliers may go unchecked by government as there is little or no government intervention.
● There is an unequal distribution of wealth as goods are purchased by only those who can afford it.
● In the case of no government intervention public goods such as postal service, streetlights and roads are not provided
● Large companies such as monopolies or cartels may exert influence on prices and limit competition.
● May lead to overuse of demerit goods
● Wastage of resources in advertising and excessive competition.
 Types of Economic Systems

4) The Mixed Economic System - A system that combines characteristics of free market, command economies .

● The private and public sector are both involved in the production of goods and services.
● The economic resources are owned by government and private individuals.
● Economic decisions are made by the price system and the state.
● Private sector to maximise profits and Public sector to maximise social welfare.
● Public sector produces the goods that the private sector is unwilling to provide.

Decision makers in a mixed economy-

● Consumer- to satisfy wants

● Firm- producer to make profits
● Factor owner- person who owns the factors of production
● Government-Provides regulation and guides overall economic activity.
 Types of Economic Systems

Advantages

● Consumer protection through the regulation of businesses by government.

● Economic benefits of competition coupled with goods and services provided by government for those who cannot afford to access these
through the market system.

Disadvantage

● Public sector companies tend to be inefficient as they are supported by taxpayers money.
● Government regulatory policies may reduce the enthusiasm of the private sector e.g. the setting of prices of goods and services resulting
in the closure of businesses.
● State demand for factors of production may limit the amount available to the private sector.
● Disparities exists in earnings and productivity between the state and private sector.
 Functional areas of a business
Functional Areas in the Operation of Businesses - Departments in a business organization are structured according to
certain functions. The departments of various organizations will differ depending on the type of business.
1)Production
The production department is responsible for transforming raw materials into finished products. They are also
responsible for quality control to ensure that required standards are met.
●Input to output
●Quality control
●Purchase and storage of stock
●Organising production schedules

1)Marketing
This department creates awareness for the firm products and motivates consumers to buy. They also carry out market
research to identify customer’s needs.
●Market research and sales forecasting
●Advertising and sales promotion
●Distribution of products
 Functional areas of a business
3) Finance/Accounts
The accounts department makes and receives all payments on behalf of the business and records all
financial transactions
● Producing end of year financial statements – Annual reports, Balance sheets and Profit and Loss.
● Advising Management
● Payments and receipts
● Managing cash flow
4) The Purchasing Department
This department is responsible for the purchasing of the firms raw material, stationery and goods for re-
sale.
5) Customer Service/ Customer Relations Department
This Department bridges the gap between a business and its customers. It deals with customers’ queries,
advising and assisting customers to place orders and handling customers’ complaints.
 Stakeholders involved in business activities

4) Society
Businesses must be aware of the society as a whole, how its activities affect it and not only those
who are customers.
Role of Society
The production process may cause air pollution and discharge of harmful waste into rivers and
seas. The society keeps businesses in check by making them aware of their impact on society.
They write letters to the company and the media and speak on talk shows.

5) Government
They are the managers of the economy within which the business operates.
Role of Government
Regulate business activities to protect consumers. Government agencies ensure product standards
as well as that various legislations are adhered to ensure the protection of consumers’ rights.
 Functional areas of a business
6) Legal Department

This department is concerned with legal problems that might arise for the company. For example, compensation
for employees and customers, who have brought lawsuits against the company.

7) Research and Development (R&D)

This department is involved with research to explore ways of improving the company’s existing products,
developing new ones and identifying efficient processes to increase production. This department works closely
with the marketing department as products developed must satisfy consumers’ needs.
 Stakeholders involved in business activities

Stakeholders – are the various groups within and outside an organisation that stand to potentially gain or lose as a result of the
organisation’s actions.
1)Owners
A business may be owned by a single individual (a sole trader), partners or by a group of shareholders forming a company.
Role of Owners
They must provide the resources that are required for the business to operate efficiently. These include the employment of
workers, identifying suitable premises and procuring machinery, equipment and raw materials. They must make timely decisions
to ensure that the business remains profitable.  They must motivate employees to perform well.
2)Employees
They are employed to carry out assigned tasks to achieve the company’s objectives.
Role of Employees
Employees must work efficiently to accomplish tasks assigned. Accomplishing tasks may require teamwork and therefore
employees must have good interpersonal skills. Employees must adhere to the rules and regulations of the company.
3)Customers
They are the supporters of businesses in the economy. They purchase goods and services to satisfy their needs and wants.
Role of Customers
They assist businesses in identifying the goods and services to be produced based on their demands. They also help business to
identify changing trends in the market and so prepare business operators for future demands.
 The consequences of unethical and illegal practices in business

Business owners are required to obey all legislation concerning the operations of a business. These include, paying taxes,
business registration, obtaining licenses when required etc. Business owners should also operate their business based on
integrity. This involves:

● Environmental awareness – reducing pollution and harmful effluents in the rivers and seas.
● Avoiding tied selling (marrying of goods)
● Misleading advertising (untruths about goods advertised)
● Untrue sale price – For example, writing the word sale on items for which the price remains the same.
● The use of market dominance to squeeze firms out of the industry- For example large firms may drop the price of
their goods so low that small firms are unable to compete with them.

Consequences of Unethical and Illegal Practices

Illegal business practices will result in legal consequence for business. This may include large fines the loss of the
business. Legislation also protects consumers, competitors and society from unethical practices of a business.
The consequences of unethical and illegal practices in business

Ethical and Legal Issues Ethical and Legal practices Description Consequences

Misleading Advertising
Advertising Honest and realistic Cause citizens to waste a
advertisements purchase

Taxation Withholding tax Mandatory Tax avoidance

Environmental Issue Unethical disposal of waste Law mandates protection Pollution

of environment

Too much money circulating.

Money (gained legally Money laundering- use of Illegal business activity
vs illegally) illegal money in legitimate
Distortion of National Income
business
Careers in the field of business

(a) Advertising and Public Relations

(b) Compliance Officers
(c) Strategic Planners.
(d) Educators (online and face-to-face)
(e) Information Officers
(f) Entrepreneurs
(g) Resource Personnel
(h) Web Designers
(i) Web Planners
(j) Software Developers