How Businesses Operate

There are only two ways to make money: Increase Sales and Decrease Costs. Businesses exist to provide the Goods and Services they need and want but that is only half the story. Businesses have to be carefully managed to make a profit.

Balancing the books

Businesses of all sorts, from individual traders, or small private companies to huge international corporations, make money for their owners or shareholders by selling their products. They may produce commodities, manufactured goods, or services, but all aim to be profitable. This means they are run so that there is more money coming into the business than is being spent. It is the task of the management, either the owners of a small firm or the managers in a large company, to balance the costs of production with the revenue—the money that comes from sales of the product. When income is greater than expenditure, the business makes a profit, but when expenditure is greater than income it makes a loss.

Money out and money in

Whoever is running a business has to consider the costs of production—the money that needs to be spent to make their product. If it is a manufacturing industry, for example, this will include the cost of raw materials that the product is made from—the paper and ink of a book, for example—the buildings and machinery needed to make it, and the wages of the workers. There may also be other costs, such as delivery of the goods to the customer, and payment for services including heating and lighting, repairs and maintenance of equipment, and insurance. If the business makes a profit, it will also have to pay some tax to the government. On the other side of the equation is the income a business gets from selling the product. Once a business is running successfully, this income can be used to pay for the costs of production. But starting a new business involves costs, such as buying machinery and paying for premises, before any goods can be produced and sold. Even established businesses need to spend money, from time to time, to increase production before they see a return on that money. So, in addition to revenue from sales, a business can raise money by taking a loan from the bank, or by selling shares in the company. In return, it will pay the bank interest on the loan, or the shareholders a share of the profit.

Making a profit

To ensure the best income from sales, the business should identify its market, those people most likely to want its products. Some businesses, especially in the service sector, sell their products directly to the consumer, but there are often many different businesses involved in getting a finished product to the customer. For example, raw materials are supplied to manufacturers, who in turn supply stores with their products, which they offer for sale to their customers—each selling to the other for a profit. Many small businesses are run by the people who own them, but large companies employ qualified people as directors to manage the business. They ensure that the business is profitable, and decide what products to make and how they are sold. Due to pressure from shareholders to make a quick profit, they sometimes focus on this rather than reinvesting profit to improve productivity or working conditions. Managers may be tempted to run companies for their own gain rather than the long-term good of the company.