MGTA05 – Foundations of Business Management

What is a Business?
Chapter 1 of textbook
continued from page 9

Last updated: September 10, 2021

5:30 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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 Profit and Loss

Revenue more than expenses

“ Profit ”
Business owners become wealthier

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 Profit and Loss

Revenue less than expenses

“ Loss ”
Business owners become poorer

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Some Well-Known Businesses
Which of these has the most profit?

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 Profit
Key reason for a business to exist
Not all organizations are businesses

The founders / owners are

trying to make a profit
so they can become rich

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Organization (Not for Profit)
This is an organized effort

But… it’s not a business

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Organization (Not for Profit )
This is an organized effort
It provides a service

But….it’s not a business

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Organization (Not for Profit)
This is an organized effort
It provides many services

But….it’s not a business 9

Businesses vs. Not for Profits

A business tries to make a profit

Churches and hospitals do not

(the difference is intent)

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 U of T - Not a Business
U of T is an organized effort 
U of T provides a service 
U of T generates revenue 

Source: University of Toronto Annual Report 2019, page 3

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 Poll Question 3
What is the average cost to educate
a student at U of T?
a) Less than $10,000
b) $10,000 - $15,000
c) $15,000 - $20,000
d) $20,000 - $30,000
e) $30,000 - $40,000
f) More than $40,000
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U of T Sources of Revenue - 2019
Student 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

is the incentive behind a business

(churches, hospitals, universities have other motives)

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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
35
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
 Businesses Can and Do Fail
.

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

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