Business Risk

Because a business commits money, material, and effort today in exchange for a return that will only be known in the future, every business, by its very nature, carries an element of risk -- the possibility that the actual outcome will differ from what was expected, including the possibility of a loss. Risk is not something a business can choose to avoid altogether; it can only be reduced, managed, or shared (for example, through insurance), never eliminated completely, because the future can never be predicted with full certainty.

The nature of business risk has a few well-recognised traits. It is inherent in business -- no business, however carefully run, is risk-free. It arises out of uncertainty about the future -- about demand, prices, competitors' actions, or the economy at large. Its degree varies with the size and nature of the business -- a large manufacturing unit with heavy fixed investment generally faces a bigger risk than a small trading concern, and a business dealing in perishable or fashion goods usually faces more risk than one dealing in staple necessities. And the reward for bearing risk is, in principle, profit -- the more genuine business risk a firm is willing to bear, the greater the profit it can, in principle, aim for.

The causes of business risk are commonly grouped as follows:

• Natural causes -- floods, droughts, earthquakes, fire, and other calamities that damage property, stock, or crops.
• Human causes -- theft, fraud, negligence of employees, strikes and lock-outs, and simple errors of judgement by management.
• Economic causes -- fluctuations in the prices of raw materials or the finished product, changes in demand and fashion, competition from rival firms, and bad debts from customers who fail to pay.
• Other causes -- changes in government policy (taxation, licensing, import-export rules) and rapid changes in technology that can make an existing product or process outdated. …