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Business risk, this term is referred to as the possibility of earning inadequate profits or losses due to unforeseen or unexpected circumstances. It can happen when demand for a particular product declines due to increased competition or change in customer preferences. It is very difficult to determine customer preferences as it is subject to change.
Business risk is of two types namely pure business risk and speculative business risk.
a. Pure Business Risk: In this type of risk, there is chance of losses or no loss whatsoever. Such risks can be associated with theft, various natural calamities and fire.
b. Speculative Business Risk: In this type of risk there is an equal chance of earning profit or incurring loss, such type of risk arises due to changes in government policy, competitor’s policy, price change or a change in consumer preferences.
Business risk is caused due to the following as discussed below:
1. Economic Causes: These types of business risk arises due to uncertainty surrounding the changes in policy of competitors, price change or changes in preference of consumer.
2. Natural causes: Natural calamities such as flood, earthquake and famine can cause extensive loss to a business. Such risks are beyond control.
3. Human causes: These are caused by negligence on part of humans like carelessness, riots, strikes are some examples.
4. Other causes: There are some events that are unpredictable such as political disturbances, interest and exchange rate fluctuations.