question_answer 21)

Explain the concept of business risk and its causes.

Answer:

The term 'business risk' refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events, e.g., decline in demand for a product due to change in tastes and preferences of consumers resulting in lesser sales and profits; shortage of raw materials in the market leading to rise in its price and in turn raising cost for the business which uses them thereby reducing profits. Business risk is of two types (i) 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. (ii) Pure Risks involve only the possibility of loss or no loss. The chance of fire, theft or strike is example of pure risks. Their occurrence may result in loss whereas non-occurrence may explain absence of loss, instead of gain. Business risks arise due to a variety of causes, which are classified as follows (a) Natural Causes Natural calamities like flood, earthquake, lightning, heavy rains, famine, etc are beyond human control. They result in heavy loss of life, property and income. (b) Human Causes Human causes include such unexpected events like carelessness, negligence or dishonesty of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc. (c) Economic Causes These include uncertainties caused due to economic fluctuations such as changes in demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems like rise in interest rate and higher taxation, etc also come under economic causes as they raise the cost of operation of business unexpectedly. (d) Other Causes These are unforeseen events 'like .political disturbances, mechanical failures, fluctuations in exchange rates, etc which lead to the possibility of business risks.