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Chapter 2

Business Fundamentals

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The Nature of Business The purpose of a business is to

provide – products and/or services – to its customers.

Money, or value, received from customers for its products and/or services is revenue.

To provide its products and/or, the business incurs expenses.

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The Nature of Business (cont’d.) Profit or Loss is the difference

between the firm’s revenues and it’s expenditures.

Profit/Loss = Revenues-Expenses

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Business Environment The business environment includes

Economic Socio/Cultural Political/Legal Technological and Industry factors.

Competition, Suppliers, Customers, & others

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Business Environment

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EconomicGDP trendsInterest ratesMoney supplyInflation ratesUnemployment levelsWage/price controlsDevaluation/ revaluationEnergy availability and costDisposable and discretionary income

TechnologicalTotal government spending for R&DTotal industry spending for R&DFocus of technological effortsPatent protectionNew productsNew developments in technology transfer from lab to marketplaceProductivity improvements through automation

Political-LegalAntitrust regulationsEnvironmental protection lawsTax lawsSpecial incentivesForeign trade regulationsAttitudes toward foreign companiesLaws on hiring and promotionStability of government

SocioculturalLifestyle changesCareer expectationsConsumer activismRate of family formationGrowth rate of population Age distribution of populationRegional shifts in populationLife expectanciesBirth rates

Societal Environment

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Industry Analysis

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Types of Businesses Most business are “for profit”. Some businesses are “not-for-

profit”.

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Types of Businesses (cont’d.) Some businesses sell to other

Consumers or end-users (B-to C) Some businesses sell to other

businesses (B-to-B)

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Types of Businesses (cont’d.) Some businesses manufacture

Product(s) for their customers. Tire manufacturers Automobile manufacturers

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Types of Businesses (cont’d.) Some businesses provide Service(s) to

their customers. Wholesalers (or Distributor) Retailers Brokers Banks Insurance companies Travel Agents Air lines

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Types of Businesses (cont’d.) Others Provide both Product(s) and

provide Service(s) to their customers. Direct Marketers

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Business Trends Globalization of businesses Consolidation of businesses Shift away from manufacturing

towards service businesses

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Business Functions Accounting Finance Marketing Production Human Resource Management Other functions

Research and Development Information Services

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The Organization of a Business Employees often (but not always)

grouped by general functions. Departments Workgroups

Organization Chart diagrams the arrangement of employees. Functional Divisional

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Basic Organizational Structures: Simple and Functional

I. Simple Structure

II. Functional Structure

Owner-Manager

Workers

Top Management

Manufacturing Sales Finance Personnel

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Basic Structures of Corporations: Divisional

III. Divisional Structure*

Manufacturing Finance Manufacturing Finance

Top Management

Product Division A Product Division B

*Conglomerate structure is a variant of the division structure.

Sales Personnel Sales Personnel

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The Organization of a Business Information flow within a business

may be within or between workgroups, departments, or within or outside the business.

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Information and Business Management Management of a business refers to all the

activities related to deciding how a business functions.

Planning Organizing Stafing Control

A decision is a selection among different courses of action.

Management decisions are of three types: Strategic decisions

Usually made at the highest level Generally long-term decisions

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Information and Business Management (cont’d.)

Tactical decisions Usually made at the department or

workgroup level Generally short to medium term in nature

Operational decisions Usually made by individuals at the “front

line” Generally short term in nature

Information systems support managerial decision making.

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Information and Business Operations Business operations are those

activities that provide products/services and ensure the business makes a profit.

Information systems also support business operations.

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Basic Business Information Processing Nine tipical (basic) information

processing activities1. Accepting & Entering customer orders2. Shipping products3. Billing (invoicing) customers4. Collecting customer payments5. Keeping track of inventory6. Purchasing stock and materials7. Paying bills8. Paying employees9. Reporting financial information

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Entering Customer Orders Customer order acceptance and

preparation of a sales order in a form the business can use.

Usually part of the marketing function and performed in the Sales Department. Sales Department determines if there is

sufficient inventory on hand and the creditworthiness of the customer.

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Entering Customer Orders (cont’d.) Inputs

Customer orders May be received by mail, phone, fax,

email, and other methods

Outputs Sales order

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Shipping Shipping Department uses the

sales order to determine what items should be shipped to the customer and produces the shipping notice.

Shipping may be a part of productions and operations department of the company.

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Shipping Inputs

Sales order

Outputs Shipping notice

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Billing Customers Billing Department uses the sales

order and the shipping notice to prepares the customer’s bill (invoice) for those goods shipped by the Shipping Department.

Billing department may be part of the accounting or marketing function.

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Billing Customers (cont’d.) Inputs

Sales order Shipping notice

Outputs Invoice (bill)

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Collecting Customer Payments The Accounts Receivable

Department uses a copy of the invoice produced by the Billing Department to keep track of the amount a customer owes the business.

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Collecting Customer Payments (cont’d.) Inputs

Invoice Customer payments

Outputs Customer statements Overdue notices Accounts receivable reports

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Keeping Track of Inventory A business must keep track of its

inventory and report when inventory is low so it can reorder more stock.

Can be a part of the production or operations function.

Can be a part of the marketing or accounting function.

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Keeping Track of Inventory (cont’d.) Types of inventory

Raw Materials Work-in-Process Finished goods

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Keeping Track of Inventory (cont’d.) Inputs

Receiving notices Shipping notices

Outputs Inventory reorder report Inventory value report

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Purchasing Stock and Materials (Purchasing) Determine the best suppliers and

prepare purchase orders which indicate to the suppliers what items the business wants to purchase.

Can be a part of the production or operations function.

Can be a part of the accounting function.

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Purchasing Stock and Materials (cont’d.) Inputs

Inventory reorder report Outputs

Purchase order

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Paying Bills (Accounts payable)

Accounts Payable Department uses the purchase order, receiving notices, and supplier invoices to keep track of money owed by the business for purchases, called accounts payable.

Part of the accounting function.

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Paying Bills (cont’d.) Inputs

Purchase order Receiving notice Invoice from supplier

Outputs Checks payable to suppliers Accounts payable report

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Paying Employees (Payroll) Involves paying employees wages

or salaries and providing reports to other business functions.

Usually part of the accounting function, but may be part of the human resources management function.

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Paying Employees (cont’d.) Inputs

Employee work report (time sheet) Outputs

Paychecks to employees Payroll report

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Reporting Financial Information

Provides reports of financial information for the management and owners of the business.

Usually a part of the accounting department.

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Reporting Financial Information (cont’d.) Categories of “accounts”

Assets – what the business “owns” Liabilities – what the business “owes” Stockholder’s Equity – what the

business is “worth” Revenues – the income of the business Expenses – the costs incurred to

produce the revenues of the business

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Reporting Financial Information (cont’d.) Inputs

The transactions of the business Outputs

Balance Sheet Income Statement