Here, you understand about the Business Risks. What are the different types of risks that effect the business? And, what are the Causes of business risk that effect the profit and business growth.
There is a risk of uncertainty or loss of profits in the business. Uncertain future events affect profits. Thus, it can be said that the return on business risk is profit.
There are two types of risks to a business:
- Natural Risk
- Man-made risks
(A) Natural Risk: Natural risk, such as earthquakes, floods, etc. impede business development. Destroys or harms business assets. The business does not have control over natural risk.
(B) Man-made risks: Man-made risks hamper the growth of the business and cause loss to the business, such as the strike of employees, changes in technology, changes in consumer interest and demand, political instability, risk of competition in the market.
Manufacturing practices have to change due to technological inventions. New technology has to be adopted to produce the highest quality product. Older machines have to be replaced with new ones.
Fear of alternative products
Customers are turning to alternative products due to technology changes. For example, ball pens in place of fountain pens, steel utensils in place of copper and brass utensils, televisions in place of radios.
Competition increases the risk of a business which has a direct impact on the profitability of the business. In order for the business unit to maintain its position in the market and face competition, the sale price of the item has to be reduced and the cost of advertising, thus reducing the profit.
Changes in Government Laws
The government makes laws for pollution, consumers, workers, industry, etc.; but these laws also pose a risk to the business. For example, the minimum wage and factory law prevents the business unit from making certain decisions.
Uncertainty in the demand for goods poses a risk to the business. Customers’ income, interest, price changes, inflation etc. make the demand for the item uncertain, which has an impact on the profitability of the business.
Damage to property used in the business poses a material risk. If the machines and equipment stop working, there is a material risk when goods are damaged during transport.
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