Business is a combination of industry and commerce based on functions. Industry includes activities involved in the conversion of raw materials into useful products. It processes raw materials or semi-finished goods into finished goods.
For example, cotton is converted into cloth in textile industries, sugar is extracted from sugarcane in sugar industries, and automobiles are produced in automobile industries, and so on.
These activities are called industrial activities, and the units that undertake these activities are called industrial enterprises.
On the other hand, commerce includes all those activities which are necessary for the exchange of goods and services. It refers to various activities that make goods available to consumers for consumption.
Trade, transportation, storage, packaging, etc. are all included in commerce. These activities are called commercial activities, and the units that undertake these activities are called commercial enterprises.
Types of business are;
- Industry, and
The industry refers to all business activities, which are connected with raising, producing, and processing of goods and services.
They convert raw materials into useful products by the business application or use of human or mechanical power. These products are then sold.
Sometimes the term industry is used to represent a group of business enterprises engaged in producing similar products or providing similar service.
For example, all units engaged in producing automobiles, whether two-wheelers, three-wheelers, or four-wheelers, together constitute the automobile industry.
Similarly, we find the film industry, the banking industry, the telecom industry, and many more.
Types of Industry
Industries may be divided into three broad categories
- Primary Industries;
- Secondary Industries; and
- Tertiary Industries.
Let us learn further about these Industries.
Industries engaged in extracting, producing and processing natural resources like minerals, oil, agricultural products, plants, and animals, are called primary industries.
These industries use natural resources as their raw material and provide finished goods to consumers.
We may further classify these industries into;
These industries are engaged in the extraction of minerals, oil, and natural gas from the earth, fish from the sea, timber from the forest, etc. Mining, forestry, fishing are examples of extractive industries.
The distinctive feature of these industries is that they use natural resources, and the materials once extracted or used cannot be replaced.
These industries are engaged in rearing and breeding birds and animals and growing plants for sale.
Agriculture, dairy farming, poultry farming, pisciculture (breeding fish), horticulture, orchard farming, floriculture (growing flowers) are examples of genetic industries.
Secondary industries are those industries that engage in the production or processing of items produced by primary industries.
They use the products of primary industries as their raw materials and produce a variety of goods for our use.
For example- iron ore is extracted from the earth by primary industries. This is used as raw material by the secondary industries to produce iron and steel for our use.
Thus, mining of iron ore is a primary industry, but the manufacturing of iron and steel is a secondary industry.
We may further classify secondary industries as;
Industries engaged in the conversion of raw materials or semi-finished products into finished products are called manufacturing industries. For example, cotton is converted into textile, timber into furniture, iron-ore into steel, bauxite into aluminum, etc.
Industries engaged in the erection of buildings, dams, bridges, roadways, railways are called construction industries.
They use the products of other industries as their raw materials and construct different types of structures as per the requirements of the consumers.
Industries providing services to consumers are called tertiary industries. These activities may include personal services like medical treatment, nursing, teaching, etc., or commercial services like transport, banking, insurance, etc.
Based on functions, we have classified a business as industry and commerce, and till now, we have discussed the industry and its types. Let us find out more about commerce.
You have learned about various types of industries that deal with the production of goods and services. The question arises, why are these goods and services produced?
Industries produce goods and services for consumption or use by the consumers.
But, how do the consumers get these goods?
You know that goods and services are of no use unless these are made available to the persons who can use them. Here comes the role of commerce.
Commerce includes all those activities which facilitate the transfer of goods and services from one place to another or from one person to another.
It deals with the movement of goods from the person who produces them to the person who consumes them.
Commerce is defined as “the total of activities involving the removal of hindrances in the process of exchange of goods and services and facilitates the availability for consumption or use.”
Types of Commerce
Types of commerce are;
- Auxiliaries to trade/aid to trade.
Trade means buying and selling of goods and services on a continuous or regular basis. It refers to the exchange of goods and services for cash or on credit.
A person who buys goods for selling is known as a trader. The shopkeepers of your locality who buy goods from the producers and other shops for selling are traders.
There are many persons engaged in trading activities in different ways.
Some traders buy goods in bulk and also sell in bulk. Some sell goods in the local market while others sell in the international market.
So, according to the nature of the activities of all these traders, we may classify trade as Home trade and foreign trade.
Types of Trade
- Home trade.
- Foreign trade.
Home Trade refers to buying and selling of goods and services within the boundaries of a country. It is also known as internal trade or domestic trade.
Payment for goods and services in home trade is made in the currency of the home country. Thus, goods sold by a trader in Brooklyn to a buyer in New York or the same locality, village, or town are called home trade.
Home trade may also be of two types: Wholesale trade and retail trade. Wholesale trade involves the purchase of goods in large quantities from producers for sale to other traders or buyers in smaller quantities.
Generally, the wholesale trader deals in a limited variety of goods. The person who does wholesale trading is known as a wholesaler.
Retail trade refers to the purchase of goods from the wholesalers or producers for sale to the ultimate consumers in smaller quantities.
The retail trader generally has a variety of goods needed by consumers. The person who does retail trading is known as a retailer.
Foreign trade refers to buying and selling of goods or services between people living in different countries. It is also known as External trade or International trade.
Payment for goods or services is required to be made in the currency of the seller’s country or the currency acceptable to the seller.
Foreign trade may be subdivided into three categories, viz.
- Import Trade.
- Export Trade.
- Entrepot Trade
When goods or services are purchased from a foreign country for selling in our own country, it is known as import trade. Similarly, when goods and services are sold to a foreign country, it is called export trade.
When goods or services are imported into one country to export the same to some other country with or without making any change, it is known as entrepot trade or reexport trade.
Such types of trade may be necessary due to the reason that;
- the exporting country does not have any accessible trade routes connecting the importing country, or
- the goods imported require processing or finishing before export for which facilities are lacking in the exporting or importing countries).
Aids to Trade
You know that commerce includes not only buying and selling of goods and services but also several activities that facilitate the distribution of goods and services.
For example, a trader who buys goods from a producer must carry the goods to his shop located in a market. He must hire a cart or truck or some other means of transport.
Having carried the goods to his place of business, he must arrange proper storage of the goods to prevent damage or loss.
Also, he may have to insure the goods as a means of protection against the risk of loss by theft or fire. He will also require money to buy or store the goods before selling the same.
He may have to borrow money from the bank. In the process of buying and selling, he may have to contact many other persons by using the telephone or any other means of communication.
Thus, transport, warehousing, insurance, banking, communication, etc., are activities that facilitate the business of a trader. Taken together, these activities are known as auxiliaries or aids to trade.
Thus, we can say that activities that support trade are the auxiliaries or aids to trade. The activities or services may farther be enumerated as follows:
- Transportation (Hindrance of Place),
- Banking (Hindrance of Finance).
- Warehousing(Hindrance of Time.
- Insurance(Hindrance of Risk).
- Promotion(Hindrance of Knowledge).
- Communication(Hindrance of Information).
To sum up, commerce stands on seven pillars of business-trade, transport, banking, warehouse, insurance, promotion, and communication. And these are supplementary as well as complementary to each other.
Factors Determining Types of Business
Seven main things will influence the price you get for your business.
- Profit level
- Current profit multiples in your sector
- State of the market
- Premium for branding
- Premium for desirability
- Negotiating skills
- Size of the enterprise.
The valuation of a small business can be a complex subject. The market, however, like most things in business, likes to keep it simple. Thus the initial valuation of your business is a multiple of profits.
So if your business is making $150,000 profit per year after drawing a market management salary cost and the current multiple is 5 then your business will go up for sale probably around $750,000.
Any specific asset, like property, being added to that.
A buyer will want to see a lot more detail, track record over the last few years, market potential, etc. If the profit was higher in the last two years, it suggests a declining market.
So as an owner from three years before a sale, you want to start manipulating the figures to increase the profitability.
This means that major investment, which reduces profit in the short and medium-term, will reduce the market value of the business. A new buyer will also be looking for ways that he or she can grow the business.
So anything that suggests the business can be expanded will fetch a premium.
Current profit multiples in your sector
Multiples are set by the market. They vary probably between about 4 and 12 depending on the sector, size of the business, and current market conditions.
Then they are adjusted for a specific business, depending on the negotiation of other factors to be taken into consideration.
State of the market
Like every other market, that for buying and selling a business goes up and down. It all depends on how many buyers and sellers there are at any particular time, the state of the general economy, and confidence levels.
One can pick an ideal time when one is ready to sell.
Premium for branding
A good brand can gain not only a premium but a substantial premium because a brand is expandable easily.
Much effort should be spent on establishing a clear brand for your business and one that has more than limited market potential.
Premium for desirability
Various other factors can make your business more desirable to a buyer.
For example, if a national network of employment agencies does not have an operation in your town, it will probably be cheaper to buy your business than to set up their operation.
A buyer, whether an individual or a company, can have special skills that, as soon as they buy your business, instantly improve its value. They have management skills. A marketing expert may see they can use their talents to grow the business.
A computer expert may see an opportunity to make it more efficient and reduce operating costs. They both have a client list or a business that is synergized with yours.
Your negotiating skills
Like anything traded, negotiating skills will determine the final price. If you are not a good negotiator, employ one.
I suggest a well-chosen professional firm would probably increase the final selling price by more than their fee. Not to mention finding someone who you were not aware of.
Size of the enterprise
As firms grow, the multiple they attract, mainly due to bigger buyers having bigger pockets and a more competitive market. There is a real incentive, therefore, to merge or acquire as you grow to raise the multiple.
In practice, merging two businesses might not now be that easy if they have different cultures.
On the other hand, rationalizations in operating processes might allow some cuts and make them more profitable before increasing sales.
For most entrepreneurs, their life wealth is their business and thus their pension scheme. Selling means that at least half of it can be put in the portfolio of investments meaning that your risk is greatly reduced.