Business Risk

Business Risk
Business risk can be defined as uncertainties or unexpected events, which are

beyond control. In simple words, we can say business risk means a chance of
incurring losses or less profit than expected. Business risk may be defined in terms
of the possibility of occurrence of un-favorable events; which maximize chances
of losses and minimize chances for gain, in business.
According To B.O.Wheeler,
“Risk is the chance of loss. It is the possibility of some

un-favourable occurrence”
According To C.O. Hardy.
“Risk may be defined as uncertainty in regard to

cost, loss, or damage.”
Nature of Business Risks
1. Arises due to Uncertainties
Uncertainties mean when you are not sure

of what is going to happen in future. Common examples of uncertainties are:
change in demand, government policy, technology etc. Business risk is due to
these uncertainties.
SKT THE AMAZING WORLD OF COMMERCE 1

2. Essential part of any Business
A risk is an important characteristic of

business. No business can avoid risk although the degree of risk may vary Risk can
be reduced but cannot be eliminated.
3. Business Risks Depend on Time:

In ancient times, business risks were
less and limited. In the present-day-times-characterized by intense competition,
advanced technology and globalization of the economy; business risks are quite
severe. Further, in times to come, business risks are likely to increase in intensity.
4. Business Risk Depends on the Degree of Competition:

In those lines
of business activities, where there is intense competition; business enterprises
are exposed to severe risks caused by the actions and reactions of competitors. As
such, business enterprises characterized by monopolistic situations face little risk
on account of competition. Actually in a perfectly monopolistic situation, the
business enterprise has no risk caused by competition.
5. Degree of Risk Depends upon the Nature and Size of Business
The degree of
risk depends upon the type of business; for example, a business involved in
fashion items bears more risk as compared to the business involved in
standardized goods. Similarly, a business operating at large scale bears more risk
as compared to small-scale business houses.

6. Profit is the Reward for bearing the Risk:
The business earns a profit

because they are bearing risk.”No risk no gain” larger the risk more is the profit.
An entrepreneur bears risk with the expectations of earning a profit.
Causes of Business Risks

Some risks are common to all human being alike everywhere e.g. risks due to fire,
theft, flood, earthquakes, cyclones, drought, war, civil riots etc. As such these are
not the risks peculiar only to business. Moreover, some risks are insurable with
insurance companies.
Hence, as such, in the present- day-times offering many types and varieties of
insurances; these risks could not be termed as risks in the real sense of the term.
Accordingly, business risks are those which are peculiar only to business, and are
also non- insurable.
Various types of business risks could be illustrated, by means of the following

chart:
Following is a brief account of the above types of business risks:

(1) Natural Causes:
Risks which arise due to the actions of Nature (and
hence uncontrollable) are called natural risks. For example, risk of rainfall not
occurring on time or excessive rainfall causing flood is a serious risk for farmers.
Again, there may be risk of hail storm destroying crops in the field.
(2) Political Causes:

Risks due to political causes may arise, in the forms of:
(i)Price regulations, restricting profit margins for businessmen
(ii)High rates of taxes, taking away a major part of business profits
(iii) Un-favourable economic policies, discouraging some lines of business

activities
(iv)Strict legislations imposed on business enterprises etc.
(3) Social Causes:

Risks due to social causes are those which may arise
from consumer behaviour or due to changes taking place in the social scenario.
Examples of social risks may be:

1. Changes in fashions.
2. Change in the tastes or preference of consumers
3. Changes in the income of consumers
4. Changing social values leading to a new pattern of social life etc.

(4) Economic Causes:
Some of the economic causes leading to business risks
may be:
(i) Rising cost of raw-materials due to inflation or crop failure
(ii) Economic recession in industry, leading to poor demand.
(iii) Increase in the rate of interest, making borrowings costlier
(iv) Pessimistic capital market conditions, discouraging people to invest in

companies etc.
(5) Managerial Causes:

Risks due to managerial causes may be (a few
examples only):
(i) Wrong estimation of demand by management.
(ii) Poor labour-management relations.
(iii) Inefficient operational life of the business enterprise due to incompetent or

untrained managerial staff.
(6) Competitive Causes:

Competitive causes may cause business risks e.g. in
the form of the following:
1. Entry of an unduly large number of persons in the same line of business
activity.

2. Entry of multinational companies threatening the very survival of domestic
companies.
(7) Technological Causes:

In the present-day times, technology is changing
at a very fast pace; so much so that business experts call this phase of changes as
a ‘technological revolution’. Appearance of new technology renders the old
technology as obsolete (i.e. out of use); causing severe financial losses to firms
operating with old technology.
They are virtually compelled to install new technology to ensure their survival
amidst intensely competitive conditions.
(8) Miscellaneous Causes:

Some miscellaneous causes of business risks may
be:
(i) Insolvency of a customer.
(ii) Workers’ strike.
(iii) Sudden power failure.
(iv) Premature death of an expert employee or manager.
(v) Speculative losses.

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Business Risk

Business risk can be defined as uncertainties or unexpected events, which are

“Risk is the chance of loss. It is the possibility of some

According To C.O. Hardy.

“Risk may be defined as uncertainty in regard to

Nature of Business Risks

1. Arises due to Uncertainties

Uncertainties mean when you are not sure

SKT THE AMAZING WORLD OF COMMERCE 1

A risk is an important characteristic of

3. Business Risks Depend on Time:

4. Business Risk Depends on the Degree of Competition:

5. Degree of Risk Depends upon the Nature and Size of Business

SKT THE AMAZING WORLD OF COMMERCE 2

The business earns a profit

Causes of Business Risks

Various types of business risks could be illustrated, by means of the following

Following is a brief account of the above types of business risks:

SKT THE AMAZING WORLD OF COMMERCE 3

(2) Political Causes:

(ii)High rates of taxes, taking away a major part of business profits

(iii) Un-favourable economic policies, discouraging some lines of business

(iv)Strict legislations imposed on business enterprises etc.

(3) Social Causes:

Examples of social risks may be:

2. Change in the tastes or preference of consumers

3. Changes in the income of consumers

4. Changing social values leading to a new pattern of social life etc.

SKT THE AMAZING WORLD OF COMMERCE 4

(ii) Economic recession in industry, leading to poor demand.

(iii) Increase in the rate of interest, making borrowings costlier

(iv) Pessimistic capital market conditions, discouraging people to invest in

(5) Managerial Causes:

(ii) Poor labour-management relations.

(iii) Inefficient operational life of the business enterprise due to incompetent or

(6) Competitive Causes:

SKT THE AMAZING WORLD OF COMMERCE 5

(7) Technological Causes:

(8) Miscellaneous Causes:

(ii) Workers’ strike.

(iii) Sudden power failure.

(iv) Premature death of an expert employee or manager.

(v) Speculative losses.

SKT THE AMAZING WORLD OF COMMERCE 6

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