Business Risk - Nature, Types and Causes

What is Business Risk?

Business risk is defined as the possibility of occurrence of any unfavourable event that has the potential to minimise gains and maximise loss of a business. In simple words, business risks are those factors that increase the chances of losses in a business and reduce opportunities of profit.

These factors are not under the control of the business and result in declining profits of the business.

Nature of Business Risk

The following are some of the nature or characteristics of business risk:

1. Business risk arises due to uncertainties. Uncertainty is when it is not known what is going to happen in future. Examples of uncertainties that affect a business are, change in government policy, change in demand, change in technology, etc.

2. Risk is an essential part of the business. The risk involved in a business can be reduced to some extent but it is not possible to eliminate the risk involved.

3. Every business has risk which varies in severity based on the type of business. For example a large corporation or business will carry more risk as compared to small scale businesses.

4. Businesses take risk with the motive or expectation of earning profit.

Types of Business Risk

Following are the types of business risk:

1. Strategic Risk: Strategic risks are such that can happen to a business at any time. This could be due to the change in customer preferences. Hence, businesses need to have a real time feedback system for recognising customer feedback.

2. Compliance Risk: Compliance risk relates to the risk that arises from the changing rules by a regulatory body or government that a company needs to adjust accordingly and implement the same in their operations.

3. Financial Risk: Financial risk is related to the financial health of the business. It relates to the companies ability to carry on operations in case of non-payment by some clients.

4.Operational Risk: Operational risk is where there is a risk arising from the execution of the processes or operations of the business. It can be due to sudden breakdown of machinery or the system which can result in delay in operations, that can be detrimental to the business.

Causes of Business Risk

Some of the causes of business risk are as follows:

1. Natural causes: Natural causes of business risk include natural calamities like earthquake, tsunami, tornado, famine, floods and drought, etc. Humans and businesses do not have a control over the natural causes and there certainly isn’t any kind of preparation that can be undertaken for such a business risk.

2. Human Causes: The human causes of business risk are due to the loss of business that arises from changes in customer preferences, employee mindset, agitation by workers, negligence by employees, strikes and lockouts.

3. Economic Causes: Economic causes of business risk arise from changes in the different economic factors such as increasing competition, changing market conditions, increase in price of raw materials, production cost and wages.

This concludes the topic of Business Risk – Nature, Types and Causes, which is an important topic of Business Studies for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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