Businesses play a fundamental role in the economy by providing goods and services, creating employment, and driving innovation to meet societal needs.
What is a Business?
A business is an organisation that provides goods and/or services to customers in exchange for money. The main aim of a business is typically to generate revenue and, in many cases, to make a profit. However, not all businesses exist purely for profit; some are motivated by social or ethical goals.
The Fundamental Role of Business in the Economy
Businesses are the backbone of modern economies, and they serve several vital functions:
Producing goods and services: Businesses produce physical goods (e.g. furniture, smartphones, clothing) and deliver intangible services (e.g. education, healthcare, legal advice). These offerings are sold to individuals, other businesses, or the government.
Satisfying wants and needs: Businesses exist to satisfy both needs (essential items such as food, water, shelter) and wants (non-essential items like designer clothes or luxury holidays). By offering products and services that customers demand, businesses improve living standards and overall well-being.
Adding value: Businesses take raw materials or inputs and transform them into finished goods or services that are more valuable. For instance, turning flour, sugar, and eggs into a cake creates more value than selling the ingredients separately. Added value is the difference between the cost of inputs and the price customers are willing to pay.
Creating employment: Businesses employ people to carry out various tasks, from production to customer service to management. This provides income, supports families, and contributes to government tax revenue.
Driving innovation: Through competition and the need to remain profitable or efficient, businesses innovate by developing new products, improving processes, or adopting technology.
Why Do Businesses Exist?
The existence of businesses is driven by a range of motives, which can be broadly grouped into three categories: economic, social, and personal.
Economic Motives
Economic motives are the most commonly associated reasons for starting and running a business.
Profit maximisation: One of the most common motives, especially in the private sector. Businesses aim to make more money than they spend, allowing them to reward shareholders, reinvest, and grow.
Efficiency and cost control: A business may aim to streamline operations to reduce waste and maximise output with fewer inputs, boosting profitability.
Market dominance: Some firms aim to become leaders in their industry or segment by offering better value, investing in marketing, or acquiring rivals.
Sustainability: Increasingly, businesses recognise the importance of long-term economic sustainability—balancing profit with responsible resource use.
Social Motives
Some businesses are founded not to maximise profit, but to achieve social benefits.
Social enterprises: Operate to solve social problems or benefit communities. Profits are typically reinvested in the business or cause.
Charities: While not technically businesses, many operate using business principles (e.g. fundraising, budgeting) and exist to deliver social good.
Public services: Government-run organisations (e.g. schools, hospitals) exist to serve society rather than to generate profit.
Examples of social motives include:
Providing employment opportunities for disadvantaged groups.
Reducing environmental impact.
Offering affordable housing or food to low-income families.
Personal Motives
Many individuals start businesses for personal reasons that go beyond economics:
Independence and control: Running your own business gives you freedom to make decisions, set your schedule, and choose your direction.
Personal fulfilment: Turning a passion, hobby, or skill into a business can be deeply satisfying.
Legacy: Some entrepreneurs aim to build a business that lasts or passes to future generations.
Lifestyle goals: A business can be a vehicle for achieving a desired lifestyle—more travel, working from home, or flexible hours.
Business Objectives
Objectives are specific, measurable steps a business takes to achieve its overall purpose or mission. They help provide focus, motivation, and direction for individuals and teams within the business. Objectives can vary depending on the nature, size, and stage of the business.
Profit
Profit is the financial gain a business makes after subtracting its total costs from its total revenue.
Formula:
Profit = Revenue - Total Costs
Where:
Revenue (also called sales or turnover) = Price x Quantity Sold
Total Costs = Fixed Costs + Variable Costs
Fixed costs do not change with output (e.g. rent, insurance).
Variable costs vary with output (e.g. raw materials, wages per hour).
Why profit matters:
Rewards owners and shareholders through dividends or retained earnings.
Attracts investment, as it signals financial health.
Enables reinvestment into equipment, staff, or marketing.
Ensures survival in competitive markets.
Boosts motivation, especially for owner-managed businesses.
However, profit is not the only objective. Focusing solely on profit may lead to poor ethical decisions, customer dissatisfaction, or long-term brand damage.
Growth
Growth is about increasing the scale and capacity of the business.
Types of growth:
Organic growth: Achieved internally through increased output or customer base.
External growth: Achieved through mergers, acquisitions, or partnerships.
Measures of growth:
Sales revenue
Market share
Number of employees
Number of outlets or locations
Why businesses pursue growth:
Economies of scale: Larger businesses can reduce unit costs.
Market power: Bigger firms can influence prices or control supply.
Attract investment: Growing firms may appeal more to investors and lenders.
Brand recognition: Expanding increases visibility and customer loyalty.
However, rapid growth can also lead to cash flow problems, management difficulties, or quality control issues, so growth must be managed carefully.
Survival
Survival means continuing to operate without going bankrupt or closing down.
Typical in:
The early stages of a start-up.
Economic downturns or periods of uncertainty.
Industries undergoing rapid change or disruption.
Why survival is crucial:
Businesses need to cover basic costs and obligations (e.g. rent, salaries).
Once established, other objectives (e.g. profit, growth) become viable.
Avoiding insolvency builds trust with suppliers, customers, and employees.
Many start-ups fail within the first few years. For these businesses, survival may be their only realistic objective for a period of time.
Cash Flow
Cash flow refers to the movement of money into and out of a business over a given period. A business with positive cash flow has more money coming in than going out.
Why cash flow matters:
Enables payment of bills, wages, and suppliers.
Prevents insolvency—even profitable businesses can collapse if they run out of cash.
Allows for quick response to opportunities or emergencies.
Improves credit rating and access to finance.
A business may focus on improving cash flow by:
Encouraging prompt payment from customers.
Delaying payments to suppliers (within agreed terms).
Cutting unnecessary expenses.
Offering discounts for early payments.
Cash flow is often prioritised by seasonal businesses, new ventures, or businesses facing unexpected financial stress.
Social and Ethical Objectives
Social and ethical objectives are growing in importance, especially as consumers become more aware of corporate behaviour.
Social objectives: Goals that benefit society, such as:
Reducing unemployment.
Supporting local suppliers.
Promoting education or health in the community.
Ethical objectives: Goals that relate to doing what is morally right, such as:
Paying fair wages and avoiding child labour.
Sourcing materials responsibly.
Reducing pollution and carbon emissions.
Examples of socially/ethically driven businesses:
Patagonia: Emphasises environmental protection.
Divine Chocolate: Co-owned by cocoa farmers, promoting fair trade.
The Big Issue: Offers employment to the homeless.
Meeting these objectives may sometimes mean accepting lower profits or slower growth. However, it can also improve brand image, customer loyalty, and long-term sustainability.
Influences on Business Objectives
Business objectives are influenced by several internal and external factors. Businesses must adapt their goals in response to changing circumstances.
Stage of the Business
Start-ups: Usually focus on survival, cash flow, and building a customer base.
Growth phase: Objectives may shift towards increasing sales and market share.
Maturity: May focus on efficiency, innovation, or corporate responsibility.
Decline: May aim to cut costs, divest, or reposition in the market.
Size and Structure
Small businesses: Tend to have simpler objectives—often focused on income and survival.
Large businesses: Can pursue a variety of objectives across different departments and may balance financial, social, and environmental goals.
Ownership Type
Sole traders: Often set personal or lifestyle goals alongside financial ones.
Private limited companies (Ltd): May be focused on long-term growth and stability.
Public limited companies (PLC): Face pressure from shareholders for short-term profits and dividend payments.
Not-for-profit organisations: Prioritise service delivery, ethical practice, and mission alignment.
External Environment
Economic climate: Recessions may force firms to focus on survival or cost control, while booms encourage expansion.
Competitors: The level of competition may push businesses to improve quality, lower prices, or innovate.
Technology: Can create new objectives related to digital transformation or automation.
Consumer expectations: Growing demand for ethical and sustainable practices can influence objectives.
Government policies and regulation: Taxation, labour laws, and environmental rules shape strategic priorities.
These factors mean that business objectives must be flexible and regularly reviewed to ensure they remain relevant and achievable in a constantly evolving business environment.
FAQ
Ethical objectives strengthen a business’s relationship with stakeholders by demonstrating integrity and accountability. For customers, ethical conduct—such as using sustainable materials or avoiding exploitation—builds trust and loyalty. Employees are more likely to be motivated and committed if the business treats them fairly and ethically. Investors may be more inclined to support a business that minimises risk through ethical governance. Even suppliers and communities benefit, fostering long-term partnerships and support. However, ethical objectives may increase costs or conflict with profit-driven goals.
Yes, businesses often face conflicting objectives. For example, pursuing cost-cutting to maximise profit might undermine quality or customer satisfaction. Similarly, investing in environmentally friendly practices may reduce short-term profitability. These conflicts are managed through prioritisation, compromise, and strategic planning. Objectives are reviewed in context—such as timeframes, stakeholder expectations, or current market conditions. Functional departments may adopt complementary goals to support a balance, and management often uses SMART objectives to coordinate and align competing priorities across the organisation.
Public sector organisations typically focus on service delivery, accessibility, and social value rather than profit. Their objectives may include providing affordable healthcare, maintaining infrastructure, or ensuring equal education access. In contrast, private sector businesses aim to generate profit, grow market share, and deliver shareholder returns. While both may share secondary objectives like efficiency or sustainability, the fundamental difference lies in motivation: public bodies serve the public interest, while private enterprises serve owners or investors. This difference affects performance measures and operational decisions.
Social enterprises balance profit and purpose by reinvesting earnings into their mission while maintaining commercial discipline. They sell products or services like traditional businesses but aim to address societal issues such as poverty, education, or environmental sustainability. Their governance often includes social impact goals alongside financial ones, ensuring accountability to both commercial and ethical performance. They may adopt hybrid structures or social business models to monitor impact and revenue. This dual focus allows them to operate competitively while staying committed to their cause.
During a crisis—such as a recession, pandemic, or supply chain disruption—a business may change its objectives to ensure survival and manage risk. Long-term aims like growth or profit maximisation may be deprioritised in favour of short-term goals such as maintaining liquidity, retaining staff, or securing supply lines. Flexibility becomes essential, and objectives may shift towards cost reduction, operational resilience, or stakeholder communication. Rapid response planning and scenario analysis help management adapt to evolving threats while preserving the core viability of the business.
Practice Questions
Explain two reasons why a business might prioritise cash flow over profit in its early stages.
In the early stages, a business may prioritise cash flow over profit because maintaining positive cash flow ensures it can meet day-to-day obligations, such as paying suppliers and wages. Without sufficient cash, even a potentially profitable business may face insolvency. Secondly, start-ups often face unpredictable sales and high initial costs, so a steady inflow of cash is vital to survive fluctuating income. Managing cash flow effectively builds trust with creditors and improves the likelihood of securing short-term finance, which can be essential in navigating the uncertain conditions of a newly launched business.
Analyse how different business objectives might change as a business grows.
As a business grows, its objectives often shift from survival to expansion and profitability. Initially, small businesses may focus on generating enough revenue to cover costs and establish market presence. Once stability is achieved, objectives typically evolve towards increasing market share, improving efficiency, and maximising profit. Larger firms might later adopt broader goals such as corporate social responsibility or innovation. The availability of more resources enables diversified objectives, including environmental sustainability or international expansion. These changes reflect the organisation's evolving capacity, stakeholder expectations, and the influence of competitive and regulatory environments.
