Explain the concept of business risk and its causes.


By Harshvardhan, the Subject Matter Expert at Edumarz

Solution: The concept of Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. 

For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Lower demand results in long sales and profits. In another situation, the shortage of raw materials in the market may shoot up its price. The firm using these raw materials will have to pay more for buying them. As a result, the cost of production may increase which, in turn, may reduce profits.

Business risks arise due to a variety of causes classified as follows:

  1. Natural causes: Human beings have little control over natural calamities, like floods, earthquakes, lightning, heavy rains, famine, etc., property and income in business.
  2. Human causes: Human causes include unexpected events, like dishonesty, carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.
  3. Economic causes: These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, change of technology or method of production, etc. Financial problems, like a rise in interest rate for borrowing, levy of higher taxes, etc., also come under these types of causes as they result in the higher unexpected costs of operation or business.
  4. Other causes: These are unforeseen events, like political disturbances, mechanical failures, such as the bursting of the boiler, fluctuations in exchange rates, etc., which lead to the possibility of business risks.

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