Business risk may be defined as uncertainties or unanticipated events, which are outside control. That is to say, we could say company risk means a prospect of incurring deficits or less gain than anticipated. These factors cannot be controlled by the businessmen and these can bring about a decline in gain or may also cause a loss.
Character of Business Risk
Business Risk is the possibilities a company will have lower than anticipated profits or experience a loss instead of taking a profit. Business risk depends upon numerous variables, such as sales volume, per-unit price, enter costs, competition, and the general economic climate and regulations.
- Arises because of Uncertainties
Uncertainties imply whenever you aren’t sure of what is going to occur in future. Frequent examples of uncertainties are: change in demand, government policies, tech etc.. Business risk is due to those doubts.
- An essential Component of any Small Business
A risk is an important characteristic of company. No company can avoid risk, although the amount of risk may vary Risk can be reduced but cannot be eliminated.
- Amount of Danger Depends upon the Nature and Size of Business
The level of risk depends upon the form of company; for example, a company involved in fashion items bears more risk as compared to the company involved in standardized products. Similarly, a business operating at large scale bears more risk as compared to small business houses.
- Profit is the Reward for bearing the Risk:
The business earns a profit because they’re pose danger.” No risk no gain” larger the danger more is that the profit. An entrepreneur bears the risk with the expectations of making a profit.
Causes of Company Risk
Nature is an independent phenomenon and human beings don’t have any control over it. Natural calamities like earthquake, flood, drought, famine etc.. Affect a company a lot and can result in heavy losses. The organic causes are such kind of uncertain aspects that human beings can’t make any preparation against.
Human triggers are related to a prospect of loss due to human being or personnel of the business. The dishonesty of workers can bring significant losses for business e.g., the employees may leak a business secret to a rival and might commit fraud also bring significant reductions by wastage of funds.
The employees may hamper the creation by heading on strikes, riots etc.. Furthermore, this may lead to heavy loss of business condition. There can be price fluctuations in the market, there can be a change in style, taste, tastes, and requirements of customers
Fiscal causes are associated with some chance of loss due to change in the market. There may be a change in the degree of competition. These have an immediate impact on the earnings of the business.
Even change in Government policy affects the business a good deal. By Way of Example, in 1971 when Janata authorities came to power that the Coca-Cola Company and many other foreign companies were shipped back to India
All of the causes that result in harm of assets are considered as a physical trigger, by way of instance, change in technology may result in machinery being obsolete, use of older technology, mechanical flaws may also result in damage of assets such as the passing of a boiler, or injury to an employee etc.
Types of Business Risk
The Company risk can be classified into two major classes:
The risks which may be retrieved are called insurable risks. The losses that can be created good or losses because the company can get reimbursement from the insurance company are called Insurable Risks. Generally, the physical and natural risks are insurable risks, e.g., businessmen can choose a fire insurance policy to get protection against flood, earthquake or from the harm of assets such as the passing of a boiler etc..
The dangers for which no protection can be obtained are called Non-insurable risks. The businessmen can’t get payment for a change in demand or loss due to negligence or carelessness of workers. Whether the risk is insurable or non-insurable, only the loss can be shared but the threat remains
Minimization of Risk
Business has lots of risks, but it can also be avoided by adopting some steps. Direction can adopt the technique to minimize the opportunity of occurring any specific occasion which form may cause the loss. All the risks cannot be prevented but these can be minimized.
So such policies are adopted which reduce the loss. As an instance, there’s a larger risk to send the product by air then by train. Hence that the risk can be reduced by sending the item by train. Likewise, when you present a brand new product, there’s a greater risk, which means you might refuse to avoid the risk.
Though a firm can not escape from a presence of any risk, it can still employ methods to avoid them. As an Example, the firm can:
Avoid itself from entering into a risky trade
Preventive measures can be taken like firefighting
Transfer the risk to an insurance company by choosing a policy
Share risk with other businesses by making the manufacturers agree to compensate the losses in the case of decreasing prices.