Q.What is business risk? Explain its nature and causes.

Every business commits resources today for a return that can only be known in the future, and that gap is the source of risk. …

Meaning: Business risk is the possibility that the actual result of a business decision -- particularly the return earned -- will differ from what was expected, including the possibility of a financial loss. It exists because resources are committed in the present while the outcome is realised only in the future, and the future can never be predicted with complete certainty.

Nature of business risk:

1. It is inherent -- no business, however carefully managed, can be entirely free of risk.
2. It arises from uncertainty about the future -- about demand, prices, competitors, and the economy generally.
3. Its degree varies with the size and nature of the business -- a large manufacturing concern with heavy fixed investment usually faces greater risk than a small trading concern, and a business in perishable or fashion goods usually faces more risk than one in staple necessities.
4. Profit is, in principle, the reward for bearing risk -- a business willing to take on more genuine risk can, in principle, aim at a higher return.

Causes of business risk:

1. Natural causes -- floods, droughts, earthquakes, and fire, which damage stock, crops, or property.
2. Human causes -- theft, fraud, employee negligence, and strikes or lock-outs.
3. Economic causes -- fluctuations in the price of raw material or the finished product, changes in demand or fashion, competition from rival firms, and bad debts. …

Students often name only natural causes (fire, flood) and forget the economic causes (price/demand fluctuation, competition, bad debts), w …