Meaning of Business Risks. (Business Studies)
The possibility of some unfavorable occurrence is termed as business risks. it denotes the chances of loss. There are two types of business risks like internal risks and external risks.
The risks which are caused by the circumstances inside the factory are called internal risks. They arise due to mishandling of a situation. The various types of internal risks are:
I. Loss by fire etc:
There may be fire accident in the business and property is destroyed due to it. Sometimes the products traded or produced are fire prone and lack of precautions may cause an accident. This generally happens in coal mines, oil refineries, cooking gas centres etc. On the other hand, there may be a fire due to negligence on the part of employees or failure of equipment may also cause it. In all these cases the property is destroyed.
II. Business Environment:
The environment in business may be such that there is a possibility of loss because the things are not properly managed. Lack of effective control on cash transactions may cause misappropriation of cash or lack of stock control system may encourage theft of goods, etc.
III. Liability of the Business:
The business may be held responsible for the loss caused to employees or public by the business. There may be an accident on a machine and a worker may be injured. The business will have to pay compensation to the worker. Similarly, a loss caused to the public by way of pollution or wastes of the concern may bring a liability to the business.
IV. Mismanagement of Business:
Risk may arise due to mismanagement of business. There may not be proper control over labour or production, resulting in increased costs. Lack of demand for products may compel the business to slash down prices causing loss. There may be a lack of planning inadequate capital, lack of co-ordination among different departments, inefficient management. All or any of these factors bring risks to the business.
V. External Risks
There may be factors outside the business which may bring risks. These factors or causes are generally beyond the control of the management.
I. Natural Calamities:
There may be natural calamities like earthquake, storm, floods etc. These causes cannot be precisely predicted and a business is always exposed to such risks.
A business may suffer due to competition from other business undertakings. Some concerns might have introduced better methods of production and are able to reduce costs of production. The business will suffer if prices are reduced due to competition and in case the prices are kept the same, then goods will not be sold in the market because the customer will prefer to buy cheap goods.
III. Price Fluctuations:
The price fluctuations may adversely affect cost of materials, cost of materials, costs of other inputs, budget forecasts etc. Price fluctuations are generally influenced by the factors which are not in the hand of the businessman but he has to bear the risks arising out of such causes.
IV. Change in Demand:
There may be a change in demand for the products. Consumer tastes may change, new fashions may come in, likings or disliking for certain goods may cause a change in demand. A sudden change in demand may create a problem for disposing of the stocks. New methods of productions may be required to cope with the changing situation. This will cause unnecessary financial burden on the business.
V. Government Policy:
Risks may arise due to change in government policies. The rates of taxes may be increased, changes in imports and exports regulations may cause additional burden, some restrictions may be imposed on stocking of certain items, the production of certain goods may be taken by the government itself etc. The changes in policies may not only cause losses but may compel the business, in certain cases, to close down its production. So the causes mentioned above create uncertainties and bring risks to the business.