Business Risk

Business risk refers to the possibility of inadequate profits, or even losses, due to uncertainties or unexpected events.

How risk arises — two examples

• Demand for a product may fall because consumer tastes and preferences change, or because competition increases; lower demand means lower sales and profits.
• A shortage of raw materials may push up their price, raising the cost of production and, in turn, reducing profits.

Two types of risk

• Speculative risk — involves both the possibility of gain and the possibility of loss. It arises from changes in market conditions — fluctuations in demand and supply, changes in prices, or changes in fashion and tastes. Favourable conditions are likely to bring gains, unfavourable ones losses. …