Why Business is so Important

We have all been told that business a mechanism for individuals or groups to deliver a goods or service in exchange for monetary benefits. What we haven’t been told is what does that really mean? In order for this to make sense, we need to understand, fundamentally, what a business is and why it is so important to current and future society.

It starts with money

Way back when there wasn’t an agree method of value, people had to rely on barter transactions. Barter transactions are acts of exchanging goods and services WITHOUT money. How? I could be a baker and you a farmer raising cows. We mutually agree that every week I’ll bake you 3 loaves of bread in exchange for 1L of your cow’s milk. No money involved. With the introduction of fiat currency, USD, EUR, AUD, etc. society more or less has an ‘agreed’ store of value. Now, because it creates a baseline agreed pricing for goods and services, it creates the potential for value to be created. What does that mean? Let’s take a look at case study.

Case Study: Bakery (I’m not a baker but a thought experiment on how a bakery is run)

Starting with the most obvious. Bread. The bread requires ingredients, it requires people with the expertise and knowledge to make specific types of bread, the bakery needs to be found which means marketing might be important, etc. The point here is that bakery’s, like every business, have fixed and variable costs that are involved in keeping it functional or ‘operational’. Now, if we take 5 bakeries all making similar breads and produce, what makes one better than the other? If all things equal except for 1 factor, i.e. all things same except 1 spends more on premium ingredients or more on marketing or pays better so better chefs, this is, at its core, what the difference is; the allocation of resources and efforts determines how much value is generated from each. Bakery 1 could invest more in premium ingredients but as a result increase their sell price because they need to cover their cost base (how much they paid for their initial ingredients). Bakery 2 could invest more in salaries so the expertise of the chef could be higher so they could make a more diverse range of pastries that attract more customers but will also have to increase their cost of pastries to cover the chef’s salary.

What’s the point of anything I’m saying?

If we take ‘business’ away from society, we have a bunch of individuals doing things their own way, highly likely that it is less efficient than businesses that have gone through trial and error, tested, failed, standardised, reviewed and iterated. In short, value is lost when things are inefficient and ineffective. This is the point of business. The product or service is greater than the cost or the sum of the cost involved to serve or produce it, this is value or in business terms, profit. If a business is not generating profit, then its not producing MORE value than its taking from the collective. At a single point in time it might seem like thats a terrible idea but creating something from nothing (starting a business from scratch means literally starting with nothing) generally means setting up the infrastructure, hiring people, building something new, will all cost more than the value it generates in the short term but these costs are usually front-loaded (meaning it’ll way a lot more upfront than later) so as the business starts standardising their practices, people start gaining expertise and training others to produce quality, then the business starts reducing their variable costs while at the same time generating more and more revenue (ideally).

Richard

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