What is business risk? What is its nature?
What is business risk? What is its nature?
Business risk is the possibility of failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which 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 the demand, the businessperson would earn lower profits.
Nature of Business Risk
(a) Risk is part and parcel of business: Risk is an essential feature of a business. Every business, irrespective of its size and nature, whether organised or unorganised, faces risk.
(b) Varying degree- The extent of risk that a business faces depends upon the nature or type of goods produced and the scale of operation. A business that produces goods of daily use, such as soap and toothpaste, faces a lower business risk than a business that produces goods which are highly dependent on consumer preferences, such as cell phones. Similarly, a business operating on a large scale (i.e., a large business firm) faces a higher business risk compared to a small-scale business.
(c) Directly related with profit- We know that profit is the reward for undertaking business risk. The higher the degree of risk involved, the higher would be the amount of profit earned and vice versa.
(d) Results due to unforeseen circumstances: Risks emerge because of unforeseen circumstances and uncertainties. Unforeseen circumstances may include strikes and thefts (termed ‘human uncertainties’) or business uncertainties—such as price change, changes in government policies and natural disasters, such as earthquake and floods.
Business risk is the possibility of failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which 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 the demand, the businessperson would earn lower profits.
Nature of Business Risk
(a) Risk is part and parcel of business: Risk is an essential feature of a business. Every business, irrespective of its size and nature, whether organised or unorganised, faces risk.
(b) Varying degree- The extent of risk that a business faces depends upon the nature or type of goods produced and the scale of operation. A business that produces goods of daily use, such as soap and toothpaste, faces a lower business risk than a business that produces goods which are highly dependent on consumer preferences, such as cell phones. Similarly, a business operating on a large scale (i.e., a large business firm) faces a higher business risk compared to a small-scale business.
(c) Directly related with profit- We know that profit is the reward for undertaking business risk. The higher the degree of risk involved, the higher would be the amount of profit earned and vice versa.
(d) Results due to unforeseen circumstances: Risks emerge because of unforeseen circumstances and uncertainties. Unforeseen circumstances may include strikes and thefts (termed ‘human uncertainties’) or business uncertainties—such as price change, changes in government policies and natural disasters, such as earthquake and floods.
