Q.Explain the concept of business risk and its causes.

Business risk arises because no business can know its future outcomes with certainty, and this uncertainty has both a definite meaning and identifiable sources. …

Concept of business risk

• Business risk refers to the possibility of inadequate profits, or even losses, due to uncertainties or unexpected events.
• Example: demand may fall as tastes change or competition grows (lower sales/profits); a raw-material shortage may raise costs and cut profits.

Two types of risk

• Speculative risk — involves both gain and loss, arising from changing market conditions (demand and supply, prices, fashion).
• Pure risk — involves only loss or no loss (never gain), e.g., fire, theft, strike.

Nature of business risk

• It is an essential part of every business — can be minimised but not eliminated.
• It arises due to uncertainties (unknown future outcomes).
• Its degree depends on the nature and size of the business (fashion goods and large-scale operations carry more risk).
• Profit is the reward for risk taking — "no risk, no gain."

Causes of business risk

• Natural causes: natural calamities — flood, earthquake, lightning, heavy rains, famine.
• Human causes: dishonesty, carelessness/negligence of employees, power-failure stoppages, strikes, riots, management inefficiency. …