BUSINESS RISKS - TYPES, NATURE AND CAUSES

                                                   https://youtu.be/5JYNLsO1jio

RISK is defined as the possibility of uncertainties and unexpected events which are beyond our control.

BUSINESS RISK - 

When we think of starting a business or when we start any business, we often have some questions in our mind like - 

• There is so much risk in doing business, should I start it?
• What if I incur a loss in my business?
• What if I earn less profit than expected or less than the amount I have invested?
• What if my business fails?

Why do we think so? Because there are some uncertain and unexpected events which can occur anytime and affect our business.

So, Business risks refer to the possibility of inadequate profits or losses due to unexpected and uncertain events.

Few examples are cited below:

1.You own a restaurant and suddenly prices of daal and onion shoot up – your cost will increase and low profits would be there!

2.New technology & e-commerce – customer shift- low profits or loss!

3.Change in fashion – low demand – low profits or loss!

4.Corona – business shut down or low profits or loss!

There are various causes of risks that could affect the profit of your business. 

TYPES OF BUSINESS RISKS-

As you can see in the image, Business Risks are of two types-

1. SPECULATIVE RISKS

2. PURE RISKS

1. SPECULATIVE RISKS - 

Risks which involve both the possibility of gain, as well as possibility of loss and arises due to factors like -

• Fluctuations in demand and supply
• Changes in price
• Change in trends
• Change in consumers' taste

Favorable market conditions likely to result in profits, whereas, unfavorable may lead to losses.

For an example - I run a business of women's dress material, when the demand was high, my business was generating higher profits. But due to a change in fashion, readymade Kurtis came into trend and demand for my dress material declined, hence my business suffered a loss.

2. PURE RISKS-

Pure risks involve only possibility of loss or no loss. It arises due to factors like-

• Fire
• Theft
• Natural calamity
• Strike
• Accident

The occurrence may result in loss, whereas non-occurence may explain absent of loss, instead of gain.

Example -

NATURE OF BUSINESS RISKS-

The peculiar characteristics of Business risks are discussed below-

1. Arise due to Uncertainties- 

Uncertainty refers to a lack of knowledge about what is going to happen in future, as it is very difficult to predict. Natural calamities, change in demand and prices, changes in government policies, improvement in technology, change in trends, change in consumers’ preferences are some of the samples of uncertainties which create risks for business as the outcomes are not known. 

2. Risk is an essential part of the business- 

Every business has some kind of risks. No business can avoid risks, although you can minimize the effect, it is impossible to eliminate it from the business.

3. Degree of risk depends mainly upon the nature and size of the business.

For example, a business dealing with fashionable items has a high degree of risk. Similarly, a large-scale business generally has a higher risk than what a small scale has. 

4. Profit is the reward for risk-taking- 

Anybody starts a business with a motive to earn a high profit. High profits are only possible when high risk is taken to establish that business. 'No risk, no gain' is an old age principle that applies to all types of business. Profit is thus the reward for risk-taking. 

If an entrepreneur invests in his business and takes high risk, there is always a potential to earn more profits and higher returns. Profit is thus the reward for risk-taking.

For example, If I invest 15,00,000 in my business of clothing retail store, I do good interiors, sell good quality products, set up efficient management, insure my business, I have potential of generating higher profits and vice-versa. 

CAUSES OF BUSINESS RISK-

Although, no business enterprise can escape the presence of risk, there are many methods by which a business enterprise can use to deal with risk situations. For instance, the enterprise may-

• decide not to enter too risky transactions.
• take preventive measures to avoid accidents.
• take insurance policy to cover the risk.
• share risks with other enterprises as manufacturers and wholesalres do by agreeing to share losses which may be caused by falling prices.
• risk management strategies should be framed to minimize the cause and effect of risks.

In case of doubt, leave a comment.

Watch whole tutorial on my youtube channel for better understanding of concept.

Thanks

Isha :)