MGTA05 – Foundations of Business Management

What is a Business?
Read: Chapter 1 of textbook

Last updated: August 30, 2021

3:30 p.m.

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 MGTA05 – Week 1

Main points of Chapter 1:

Business: a kind of organization
Not all organizations are businesses
Business characteristics:
Revenues and expenses
Profit and loss
The Profit Motive
Risk and Reward

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 “Business” Defined
Business:
a kind of organized effort,
which creates or provide things,
that people want,
and will pay for,
in order to make a profit. 
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This is a business

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 So is this…
..

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Business: “an organized effort”
A business is
an “organization”
i.e.
one or more people
put time, thought and effort
into trying to accomplish a goal

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Not all “organizations” are businesses
Many kinds of “organization”
Most are not businesses
A family is an organized effort
A church is an organized effort
An army is an organized effort
A school reunion is an organized effort

None of these is “a business”

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 A family is an organization
Family: An organization of one or more adults

That work together;

To provide material support; and
To provide emotional support;
To one another; and
To children in its care.

A family is not a business

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A church is an organization

Church: A body of Christians who worship

together as a congregation

A church satisfies peoples’ needs

A church provides a service

A church is not a business

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Business: Characteristics
This is a business…

It tries to sell pizza

Because people might be hungry
It tries to make a profit
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Business: Characteristics
This is a business…

It tries to sell lemonade

Because people might be thirsty
It tries to make a profit
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 Business: Characteristics
Businesses are formed because
People (customers) need and want things

and they will pay for them

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Characteristics: Revenue
The $$$ that comes in:

“Revenue”

A business tries to generate revenue

by selling things that people want

(also, frequently, called “sales”)

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The World’s Largest Businesses
Which business has the most revenue?

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 Characteristics: Expenses
In return, the business must provide a product

“Expenses”
(also called “costs”)

Cost to the business of providing the product

Dough = 50 ¢
Cheese = 50 ¢
Mushrooms = 40 ¢ Green Pepper
= 40 ¢ Paper Plate = 5 ¢
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 Characteristics: Profit

“Profit”
The difference between

$$$ in (revenues or sales)

- $$$ out (expenses or costs)

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 Profit: Simple Example
Business sells small, plain pizza

Revenue (sales) = $6.00

less Expenses (costs) = - $5.00

Profit = $1.00

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 Profit versus Loss
Profit 
Revenue more than expenses

Business owners become wealthier

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 Profit versus Loss
Loss 
Revenue less than expenses

Business owners become poorer

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 Now, watch this short video...
.

This 70 second video is called:

What’s a business? Definition and meaning

https://www.youtube.com/watch?v=Ogrl1lFmHHg

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 Profit
Key reason for a business to exist
Not all organizations are businesses
Hospitals, universities, churches: provide
services but not intended for profit

These are “not for profit” organizations

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Not for Profit Organizations
This is not a business

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Not for Profit Organizations
Nor is this

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Businesses vs. Not for Profits

A business tries to make a profit

Churches and universities do not

(the difference is intent)

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The U of T is Not a Business
U of T provides a service 
U of T generates revenue 

Source: University of Toronto Annual Report 2019, page 3

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U of T Sources of Revenue - 2018
But – it doesn’t try to make profit
Student fees (tuition) less than ½ of revenue

gov-
ern-
ment
funds
+
tuition do-
fees na-
47% tions
37%

all other
16%
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 The Profit Motive

People give up their time, energy and

money if there is incentive to do so

Profit
(the chance for owners to create wealth)
is the incentive

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The Profit Motive
He liked the idea

Adam Smith
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 The Profit Motive
Adam Smith
Professor of Moral Philosophy
Edinburgh University, Scotland

Author: “The Wealth of Nations”, 1776

Articulated philosophy of “liberalism”
People will be most motivated to work hard and to
succeed without undue government interference

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The Profit Motive
He didn’t

Karl Marx
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 The Profit Motive
Karl Marx
German writer and philosopher
Author: “Das Kapital” (“Capital”), 1867
Articulated philosophy of “Marxism”
Profit is result of one class of people (“capitalists”)
exploiting the hard work of others (“labour”)
“Communism” is a way of organising society
“Marxism” is its most famous and influential strand
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 Who’s Right – Smith or Marx?
Answer: Who knows?

The competing arguments for and against:

“liberalism” (Smith’s ideas) and
“Marxism” (Marx’s ideas)
the most important debate of last 100+ years
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 Risk and Reward

Why “liberalism”
supports the profit motive:

Profit is
fair compensation for the risk

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 Risk and Reward
“liberal” thinkers believe:
Let people take a chance...
Let people keep the profit...

Without the chance of reward

people won’t take the risk of failure

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Businesses Can and Do Make Losses
Amazon 1995-2010
1200 1150

1000 902
800
645
600 568
476
400 359
190
200
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0
-0.3 -5 -28
-200 -125 -149
-400
-600
Amazon lost $3 billion
-567
-800 -719 over 8 years
-1000 before
-1200
it made its first profit
-1400
-1411
-1600
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
 Blackberry Revenue & Profit
. Revenue

Profit
 Risk and Reward
Some businesses fail and must close
Summer 2020:

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 Blockbuster - Revenue
.

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 Businesses Can and Do Fail
entries exits net change
. 150,000

120,000
. 90,000

60,000

30,000

-30,000

-60,000

-90,000

-120,000

-150,000
2010 2011 2012 2013 2014
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Businesses Can and Do Fail
In Canada during 2010-2014

~135,000 businesses started/year

(~370 per day)
~120,000 business closed/year
(~330 per day)

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Businesses Can and Do Fail
Running a business is difficult

Running a business is complicated

Businesses must anticipate

what people need and want

Customers are unpredictable

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Businesses Can and Do Fail

Another characteristic of business:

“risk”

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 Main points - Review
Characteristics of a “business”
Revenues and expenses
Profit and loss
The Profit Motive
Smith vs. Marx
Risk

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