What is Business Risk

Business is mainly run to earn profit. However, there is always a

chance of suffering loss in it. This danger of loss from
unforeseenable events in future in business is named as business
risk. Business risk is an essential element of business. It goes side by
side with it. There is no business in the world which can
guarantee,claim or insure for “no business risk” and the fact is that it
cannot be avoided, but, it can be minimized by taking timely
suitable measures by the businessman.
1. Natural Factors
2. Competition
3. Mismanagement
4. Change in demand
5. Change in government policy
6. Use of modern techniques of production
7. Human Causes
 There are certain Natural Factors like
earthquake,floods,famine,hailstorm etc, which cause
damage to business. Since human beings have no
control over nature, therefore, the loss caused to
business due to natural causes is unavoidable.
 Natural disaster is a terrible dream for business,
because, when it occurs, it doesn’t effect only one
business, but effects on all the business community of
the area, and similarly, it’s effect touches the whole
economy.
 For example, the natural disaster (tsunami) that hit
Japan, it effected not only the business community of
the place where it hit it, but the whole business
structure of Japan was disturbed and great damage
was caused by it.
 If there is stiff competition for the sale of a product
in the market and the manufactures indulge in cut
throat competition by cutting down price of the
goods or by producing cheaper quality of the
product, it will increase business risk.
 For example the business risk increased for NIKE
few years ago. They were producing high-quality
shoes,but they were not stylish as well as the price
of the products was high. One of the biggest
competitors of NIKE, known as Reebok
International found Nike’s problem and they
started to give good quality shoes with style and in
low price. NIKE had to bear big business loss
before they recognized that their competitor has
taken advantage of it.
 If the management running the business is inefficient and there is
no proper planning and control in it, it will increase the cost of
production of goods,lower its quality,it may load to decrease in
profit and eventually flop the business.
 If there is a sudden change in demand for the
product, it will lead to loss in business.
 The demand of the customer never remains
the same and it changes with time to time. So
one has to be ready to change according to the
demands.
 Not changing with demands will effect only
one’s business,because in the field of business,
there are always competitors who are ready to
take advantage of any weak point of their
competitors and it greatly increases the risk in
business.
 For example, Blackberry Mobiles, they tested
their luck, but many can see that blackberry
instead of changing with the demands, they
are sticking to their own business techniques,
while on the other Hand, Nokia after
outrunning it’s competitors attaining the
“Worlds number 1 manufacturing handset
company” title, they flourished all over the
world because of their business technique of
“Change in Demand”.
 If there is a sudden shift in monetary and fiscal
policies of the Government, it may lead to loss
in business.
 The best example of this can be the Petrol
Pumps. As everyone knows that the Petrol
Pumps store petrols, now when the
government announces that petrol prices are
increased, then the same petrol which was
bought for less price from government, sell on
higher prices or the new implemented prices,
similarly when the prices are decresed from
the government then they had to sell the
stored petrol on lower prices which causes loss
to the business of petrol owner, so one has to
be ready for any upcoming surprise.
 If the manufactures set up heavy machinery and
begin to use modern techniques of production,
which lower per unit cost of production of goods,
the small business units producing similar goods
will suffer losses as they will not be able to
introduce heavy machinery.
 For example, The carpeting industries which
produces hundreds of carpets everyday, is greatly
disturbing the business of small units which
produces carpets on a small scale or by hiring alot
of people to make carpets by hands which take
months and even years to produce a single carpet.
So the modern techniques and equipments also
minimizes the risk of loss in business.
 Business loss may also occur due to
corruption,theft, forgery, lavish expenditure, top
heavy management etc.
 Business risk maximizes when bad elements
effects the organization which are present within
the organization.
 Loss in Business risk is always high when it is
caused by humans in it,because it constantly
keeps the business of the organization under
threat.
 For example, Steel Mills Corporation is nearly
destroyed because of corruption in it. If somehow
the corruption and the other bad things are
removed in it, not only it’s risk of loss in business
can be recovered but can be made on of the
profitable organizations.
1. Market Research
2. New techniques
3. Effective advertisement
4. Insuring goods
 The businessman before establishing the
business should search the market and must
attain knowledge about the market and it’s
environment. Then, the business in operation
should keep a constant eye on the quality,
prices, advertisement and promotion of the
goods produced by competitors. This will
enable him to adjust his own goods according
to the prevailing conditions of the market.
 For example, China Mobiles, they came into
markets, and adjusted themselves according to
the conditions of the market. Within a short
span of time, they were able to rule the local
markets of many countries including Pakistan
and hence they flourished very quickly by
researching and understanding the rules and
demands of the local markets!
 The production of goods according to the new
techiniques will help in minimizing the business risk.
 New techniques doesn’t only mean the approach to
sell goods but it includes the production and all the
other requirements to fulfill as well.
 It includes the new machineries, which help a lot in
the production facility. With the passage of time new
techniques were introduced, resulting in more
production and obviously less business risks.
 For example, Fed Ex, which was once only used to
deliver goods in specefic locations or on local level
and taking limited number of delivering orders. But
with the passage of time, new techniques were
brought in view and similarly they expanded their
business in the whole wide world. With the help of
new machineries, and new techniques, they are
delivering the goods all over the world and are
becoming more popular with the introduction of
online system. So new techniques does minimize the
risk in business.
 There should be effective management for the sale of goods in
order to compete in the market with others, and, it will also help
in minimizing the business risk.
 A business man can also minimize the risk by insuring
the goods.
 Insuring about the goods means satisfying the customer
in one way about the products quality. Giving
insurance of the product, the customer feels satisfy and
are more interested in buying the goods which are of
their choice and with warranty.
 Insuring goods is one of the strategic skill that can help
alot in flourishing a new business and upholding the
level of business growth.
 People always prefer to buy goods with some warranty,
rather than buying a high quality product but without
insuring it, most of them won’t go for buying that
product, because satisfaction is not there for the
customer.
 So one can say that insuring the goods minimize the
loss in business.
 For example, people prefer to buy new cars instead of
used cars because of the assurance provided by the
company with new car.