Question

Discuss nature and cause of business risk?

Answer 1

Nature of business risk
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.

(iii) Business Risks Depend on Size of the Business Enterprise:

Small businesses are less exposed to business risks; because they enjoy flexibility of operations and can easily adapt themselves to changing circumstances. On the other hand, the bigger is the size of business; the lesser is the flexibility possessed by it. Hence bigger businesses are more exposed to business risks.

(iv) Business Risks Depend on the Nature of Business:

In case of business enterprises engaged in the manufacture/purchase of necessary items e.g. salt, sugar, oil, cloth etc. there is lesser risk, because demand for most of the necessary item is inelastic or less elastic. On the other hand, business enterprises engaged in the manufacture/purchase of luxury items are more exposed to business risks; because demand for luxury items is highly elastic.

Cause of business risk
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.
) 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

Answer 2

NATURE OF BUSINESS RISKS :-

♥ Business risks arise due to uncertainties - Lack of knowledge of what is going to happen in future create uncertainties in business . It may be due to natural calamities , change in demand and prices , strikes etc .

♥ Risk is an essential part of every business - No business can avoid risk although the amount of risk may vary from business to business . Risk can be minimized but cannot be eliminated .

♥ Degree of risk depends mainly upon the nature and size of business - Level of risk is lower for small scale business while it is higher for large scale organization .

♥ Profit is the reward for risk taking - A business gets profit as return for undertaking risk . Greater the risk involved in a business , higher is the chance of profit .

CAUSES OF BUSINESS RISKS :-

♥ Natural Causes - Human beings have little control over natural calamities like flood , earthquake , famine , etc... They result in heavy losses of life , property & income in business .

♥ Human Causes - Human causes include such unexpected events like dishonesty , carelessness or negligence of employees , strikes , riots , management inefficiency etc..

♥ Economic causes - They are related to a chance of loss due to change in market condition e.g. , fluctuations in demand and prices , competition , change in technology etc..

♥ Physical causes - Mechanical defects or failures may also lead to losses e.g., bursting of boiler or machine may cause death or destruction .

♥ Other causes - These include unforeseen events like political disturbances , fluctuation in exchange rates etc...