A firm is a for-profit business organization—such as a corporation, limited liability company (LLC), or partnership—that provides professional services. Most firms have just one location. However, a business firm consists of one or more physical establishments, in which all fall under the same ownership and use the same employer identification number (EIN). Show
When used in a title, "firm" is typically associated with businesses that provide professional law and accounting services, but the term may be used for a wide variety of businesses, including finance, consulting, marketing, and graphic design firms, among others. Key Takeaways
1:14 FirmTheory of the FirmIn microeconomics, the theory of the firm attempts to explain why firms exist, why they operate and produce as they do, and how they are structured. The theory of the firm asserts that firms exist to maximize profits; however, this theory changes as the economic marketplace changes. More modern theories would distinguish between firms that work toward long-term sustainability and those that aim to produce high levels of profit in a short time. Firm vs. CompanyAlthough they appear synonymous and are often used interchangeably, there is a difference between a firm and a company. A company can be any trade or business in which goods or services are sold to produce income. Further, it encompasses all business structures, such as a sole proprietorship, partnership, and corporation. On the other hand, a firm typically excludes the sole proprietorship business; it generally refers to a for-profit business managed by two or more partners providing professional services, such as a law firm. In some cases, a firm can be a corporation. Types of FirmsA firm's business activities are typically conducted under the firm's name, but the degree of legal protection—for employees or owners—depends on the type of ownership structure under which the firm was created. Some organization types, such as corporations, provide more legal protection than others. There exists the concept of the mature firm that has been firmly established. Firms can assume many different types based on their ownership structures:
Most firms will not operate as a sole proprietorship as this means the individual is personally liable for faults of the firm. Resources Used by FirmsThe objective of a firm to is convert inputs into outputs. For this reason, firms use a variety of resources to generate products, services, and offerings to clients. These resources may include but aren't limited to:
Activities of a FirmThe activities of a firm can often be broken down into three categories: business operating activities, investing activities, and financing activities. These three categories are listed on a firm's statement of cash flow and are discussed further below. Business Operating ActivitiesThe primary activity of a company (and the primary section on a statement of cash flow) is the operating activities section. This section ties to the actual core business of the company. These activities include selling products or incurring business expenses. Most of these activities are related to the income statement, as these activities most often relate to a company's day-to-day operations and income. In some cases, the operating activities section of a statement of cash flow is negative. If the amount is negative, that means the company is using/spending more cash than it is bringing in specific to business operations. This also means the company must rely on the other two sections to ensure enough cashflow is coming into the company to maintain operations. A statement of cash flow will not include non-cash transactions. Be mindful that firms may have activity not impacting their bank balance but impacting their net profit. Investing ActivitiesInvesting activities are the long-term cashflow activities a company incurs to plan for the future and ensure it has the infrastructure to scale operations. Examples of investing activities include acquiring equipment, constructing office buildings, or buying heavy equipment. Although these activities may not be required for day-to-day operations, investing activities play an integral part in a firm's long-term success. Consider a firm that makes its own goods. By investing in a corporate warehouse and robust manufacturing plant, the firm is more likely to achieve business operation success. Financing ActivitiesThe last section of activities of a firm are the financing activities. Although these are also not usually part of the day-to-day operations of a firm, the financing activities play an important in ensuring the long-term financial health of a firm. Some financing activities are cash inflows, while other are cash outflows. For example, firms may decide to award dividends to investors funded from net income of the firm. Alternatively, firms may borrow money from lenders or issue equity to investors to raise capital to support the day-to-day operations. Why Is a Business Sometimes Called a Firm?The word 'firm' has Latin roots to the word "signature", indicating the word may have historically been used to describe the name of a company. In addition, the etymology of the word translates back to "a business" or "a name of a business". What Are the 4 Types of Firms?A firm may take a variety of legal structures including sole proprietorships, partnerships, corporations, or cooperatives. The rules dictating the operations and organizational structure of the company is often heavily dictated by the legal type of the firm. What Is the Purpose of a Firm?Though an oversimplification, the purpose of a firm is to make money. A nonprofit is often not referred to as a firm; therefore, a firm's purpose is to facilitate trade between a manufacturer or retailer with a client. A firm's purpose is to ensure a good or service is transmit to those who need it with the expectation that the firm can generate a profit along the way. The Bottom LineA firm often refers to a company that sells a service to customers, though sometimes a physical good may be transmitted as well. The ultimate goal of a firm is to make money, as a firm is often not a non-profit. The activities of a firm can usually be broken into the operating, investing, and financing aspects of the firm. Which of the following is not one of the primary reasons for firm growth?Answer and Explanation:
Increasing the compensation of a firm's top managers is not a good reason for a firm's growth.
Which of the following is one of the primary reasons that people become entrepreneurs and start their own firms?7 Reasons People Become Entrepreneurs. Reason 1: Achievement, Challenge, & Learning. ... . Reason 2: Independence & Autonomy. ... . Reason 3: Income Security and Financial Success. ... . Reason 4: Recognition and Status. ... . Reason 5: Family. ... . Reason 6: Dissatisfaction with Current Work Arrangements. ... . Reason 7: Community and Social Motivation.. Which of the following is one of the fastest growing section of small business quizlet?Sole proprietorships are one of the fastest-growing segments of small business in both the United States and Canada.
In which stage in the organizational life cycle does growth slow down quizlet?-A business answers the maturity stage when its growth slows.
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