Yes, we agree. We cannot think of any business which is risk free. You start a general store—the simplest business. There is a risk of things you buy getting wasted due to changes in demand pattern. You start a garments shop, fashion may change making your stock a waste and so on. There is not even a single business where there is no risk. It will be clearer when we look at the nature and causes of risk.
1. Nature of Business Risks
- Business risks arise due to uncertainties: Natural calamities, change in demand and prices, change in technology, etc. are some of the examples of uncertainty which create risks.
- Risk is an essential part of every business: No business can avoid the risk. Risk can be minimized, but cannot be eliminated.
- Degree of risk depends mainly upon the nature and size of business: For small scale business it is less and for large scale business it is more.
- Profit is the reward for risk taking: An entrepreneur bears risks and in consideration, he gets rewarded in the form of profit. Greater the risk higher is the chance of profit.
2. Causes of Business Risk
- Natural causes: These are beyond human control, e.g., flood, earthquake, heavy rains, famine, etc.
- Human causes: It includes carelessness or negligence of employees, e.g. theft, strikes, riots, misappropriation of cash and goods, etc.
- Economic causes: These are related to a chance of loss due to changes in market condition, e.g., fluctuations in demand and prices, competition, change in technology etc.
- Physical causes: Mechanical defects or failures may also lead to losses, e.g. bursting of the boiler or machine may cause death or destruction.
- Legal and Political Causes: These causes of business risk include:
(а) Changes in government policies regarding foreign trade
(b) Entry of multinational companies
(c) Changes in laws affecting the business like to license, taxation, etc
(d) Changes in consumer laws and labour laws.
Think of any business. Risk in one way or the other must be applied to it. Hence, we may conclude that no business is risk free.
