Question

Long answer Type questions

What is business risk? Explain various causes of business risk

Answer 1

Business risk is the possibility of failure to earn sufficient profits or incurring losses as a result of various unforeseen circumstances that are beyond the control of a business. 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 demand, the businessperson would earn lower profits.

The following are the various causes of business risk.

i. Natural causes: Unforeseen natural calamities, such as earthquake, flood and famine cause heavy and irreplaceable losses to a business. The business risk posed by natural factors is beyond the control of businesses.

ii. Economic causes: These causes are related to the uncertainties associated with changes in competitors’ policies, price change, change in consumer preferences, change in technology, etc. Demand of goods are highly affected with all these factors.

iii. Human causes: These causes are related to the actions of human beings. Among the human causes of business risk are carelessness, strikes, riots, bomb blasts etc. Such factors affects the business to a great extent.

iv. Governmental causes: The government policies play an important role in the working of a business. However, uncertainties associated with changes in government policies such as price policy or change in export-import policy may bear an impact on the business.

v. Changing technology: In today’s world, technology keeps on changing and evolves with time. In such a scenario, it adds to the business risk, as with the introduction of new technology and techniques, the existing machinery becomes obsolete and useless resulting into huge losses for the businessmen.

vi. Other causes: Besides the causes mentioned above, there are a few unpredictable events that cause business risk—for example, political disturbances, change in tastes and preferences of people, exchange-rate or interest-rate fluctuations and change in competition levels.