1.6 Business Risks

Risk means uncertainty of the future and possibility of unfavourable conditions in business. It is the possibility of inadequate profits or even loses due to uncertain future. Many of the expectations of a businessman can go wrong in real business. When his expectations fail a businessman can lose his investment or even lose his personal wealth. Profit is in fact the reward for taking risk in a business.



Causes of business risks



Business risks arise from various reasons. There are diverse factors collectively forming the business environment. An unfavourable change in any of the environmental factors can adversely affect the business results. Following are the important causes of business risks:




i) Natural causes

This is one of the important factors of business risk. Natural factors include possibility of losses due to earthquake, flood, lightning etc. These factors are mostly unpredictable. They are beyond human control. (There are unconfirmed reports about success in controlling natural forces as a war technology) A business can do very little to reduce the risk of natural calamity.



ii) Economic causes

Economic causes include unexpected fluctuations in demand for goods and services resulting in fluctuations in price. Activities of competitors also cause economic risk. When competitors suddenly reduce price of goods, improve quality or packaging it will affect all other businesses in the market.



iv) Human causes

Human causes include carelessness of employees, casual behavior, dishonesty and mistakes. While these factors cannot be prevented completely, it can be reduced to a great extent by taking adequate precautions.



v) Physical Causes

Physical causes include losses arising from mechanical defects, technical changes etc.



vi) Miscellaneous causes

Changes in Government policies can adversely affect a business. Sometimes business will have to find out solutions when the government suddenly increase in tax or duties on products. Reducing of customs duties can bring in competition from foreign goods. Inefficiency of management is another factor of risk in business.



Business risks cannot be avoided completely. Without risk there is no business. Reasonable care and precautions can reduce risk. Insurance can reduce the effect of loss. By paying a small premium for insurance, the business can protect itself against a heavy risk. Insurance is actually a method of sharing a risk by a large number of people.