Explain the concept of business risk and its causes.
Explain the concept of business risk and its causes.
Business risk is the possibility of a business failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond its control. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a businessperson to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand. the businessperson would earn lower profits.
There are two types of business risks, namely, speculative business risk and pure business risk.
(a) Speculative business risk refers to an equal chance of earning gains or incurring losses. It arises because of changes in the external forces, such as changes in the competitor’s policies, changes in government policies, price change, and changes in consumer preferences.
(b) Pure business risk refers to the chance of either incurring only losses or incurring no loss at all. Examples of pure business risk are the risk associated with theft, fire and various natural calamities.
Causes of Business Risk
The following are the various causes of business risk.
(a) Natural causes: Unforeseen natural calamities such as earthquake, flood and famine cause heavy and irreplaceable losses to a business. The business risk that comes from natural factors is beyond the control of businesses.
(b) Economic causes: These causes are related to the uncertainties associated with changes in competitors’ policies, price change and change in consumer preferences.
(c) Human causes: These causes are related to the actions of human beings. Among the human causes of business risk are carelessness, strikes and riots.
(d) Other causes: Besides the causes mentioned above, there are a few unpredictable events that cause business risk—for example, political disturbances, exchange-rate and interest-rate fluctuations and budget amendments.
Business risk is the possibility of a business failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond its control. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a businessperson to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand. the businessperson would earn lower profits.
There are two types of business risks, namely, speculative business risk and pure business risk.
(a) Speculative business risk refers to an equal chance of earning gains or incurring losses. It arises because of changes in the external forces, such as changes in the competitor’s policies, changes in government policies, price change, and changes in consumer preferences.
(b) Pure business risk refers to the chance of either incurring only losses or incurring no loss at all. Examples of pure business risk are the risk associated with theft, fire and various natural calamities.
Causes of Business Risk
The following are the various causes of business risk.
(a) Natural causes: Unforeseen natural calamities such as earthquake, flood and famine cause heavy and irreplaceable losses to a business. The business risk that comes from natural factors is beyond the control of businesses.
(b) Economic causes: These causes are related to the uncertainties associated with changes in competitors’ policies, price change and change in consumer preferences.
(c) Human causes: These causes are related to the actions of human beings. Among the human causes of business risk are carelessness, strikes and riots.
(d) Other causes: Besides the causes mentioned above, there are a few unpredictable events that cause business risk—for example, political disturbances, exchange-rate and interest-rate fluctuations and budget amendments.
