5 Nature of business risk


Meaning of Business Risk

Business risk refers to happening of inadequate activities in the business. These activities affect business performance. It affects profits and even brings large losses to the business. It is the one which affects the business ability to meet its targets.

The level of risk depends on the size of the business. A proper strategy should be there to handle these risks. If timely these risks not handled, they create a big problem. These risks may either be internal or external. Internal risk arises due to management fault.

External risks arise due to worse conditions in the economy. These risks are unforeseen and cannot be detected earlier. These risks cannot be avoided but need to be deal with care.

Nature of Business Risk

Nature of business risk
Nature of business risk

These risks cannot be detected earlier. Risks are the product of uncertainties in the future. When there is no knowledge about the future, assumptions are made. When these assumptions become wrong, it leads to the risk of loss for the business.

These risks, therefore, need to be dealt with proper strategy. Technology changes, variations in prices & demand, changes in rules & policies are some of the uncertainties which bring the risk of losses for the business.

Varies according to business size.

Level of business risk varies in accordance with the size of the business. A business carrying large scale operations may face a higher risk. Larger profit involves a higher risk involved in the business.

Also, the business engaged in large production activities faces large risk as compared to one providing services. Production companies make a large investment in business & face more uncertainties bringing large losses. 

Risk is part of every business.

Risk is involved in every business. It cannot be avoided nor be eliminated. Every business needs to deal with the risk involved in its operations. However, the level of business risk differs from one another. Some faces are higher while other faces lower risk. These risks vary in accordance with the business size. The level of these risks can be minimized by making a proper strategy.

Risks bring profit.

Higher risk brings in more profit to the business. Businessman undertakes risk in his business for the sake of earning the profit. Profit is termed as the reward of taking risks. Higher the profit one want to earn, higher is the risk one needs to take. Profit and risk are both related term and need to be monitored. One’s risk-bearing capacity reflects its profit earning power.

Affected by competition in Market.

Competition in the market affects the level of risk for the business. It there is intense competition in the market, the business will be facing a higher risk. Risk arises due to the actions of competitors in the market. Business needs to respond to its competitors to minimize these risks.