Question

explain causes of business risk ​

Answer 1

Business risk is the possibilities a company will have lower than anticipated profits or experience a loss rather than taking a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, and the overall economic climate and government regulations.

Causes of Business Risks

• Natural causes. Natural causes of risk include flooding, earthquakes, cyclones, and other natural disasters that can lead to the loss of lives and property.
• Human causes. Human causes of risk refer to negligence at work, strikes, work stoppages, and mismanagement.
• Economic causes.

Answer 2

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.

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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:

Types of Business Risks

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

(1) Natural Causes:

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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:

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(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:

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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

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(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.

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(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:

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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.