Explain the concept of business risk and its causes.

The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Lower demand results in long sales and profits. Business enterprises constantly face two types of risk i.e. speculative and pure. Speculative risks involve both the possibility of gain, as well as, the possibility of loss. Speculative risks arise due to changes in market conditions, including fluctuations in demand and supply, changes in prices or changes in fashion and tastes of customers. Favourable market conditions are likely to result in gains, whereas, unfavourable ones may result in losses. Pure risks involve only the possibility of loss or no loss. The chances of fire, theft or strike are examples of pure risks.

Cause of Business

(i) Natural causes: Human beings have little control over natural calamities, like flood, earthquake, lightning, heavy rains, famine, etc. property and income in the business.

(ii) Human causes: Human causes include such unexpected events, like carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.

(iii) Economic causes: These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems, like rising in an interest rate for borrowing, levy of higher taxes, etc, also come under these types of causes as they result in a higher unexpected cost of operation or business.

(iv) Other related causes: These are unforeseen events, like political disturbances, mechanical failures, such as the bursting of a boiler, fluctuations in exchange rates, etc., which lead to the possibility of business risks.