- 1 Meaning Nature Causes Management of Business risks
Meaning Nature Causes Management of Business risks
Meaning Nature Causes Management of Business risks :- Hello friends in this post we are provided the materials of the b.com second part its name is fundamental of Business Entrepreneurship notes and its the first chapter of this subject and in this article you learn many more knowledge of Entrepreneurship like as Meaning of business risk, nature and characteristics of business risk, causes of business risks, risk management process, risk – taking capacity, important facts related to risk – taking capacity, types of business risks,
What do you mean by business risk? Discuss the causes of risks. Examine the risk management process in brief.
MEANING OF BUSINESS RISK
Business is a game of risks and uncertainty. J. M. Keynes says, “Entrepreneurs play a mixed game of skill and chances, the result of which is not known to the players.” All businesses have risks of different types as there is always an uncertainty about the future.
A person who cannot take risk, therefore cannot start any venture-small or big. The future holds a certain uncertainty for entrepreneurs. Virtually, risk-taking, whether financial, social or psychological is a part of the entrepreneurship. Risk means the condition of not knowing the outcome of an activity or decision.
A risk situation occurs when the entrepreneur is required to make a choice between two or more alternatives whose potential outcomes are not known and must be subjectively evaluated. As a risk taker, the entrepreneur has to make decisions in conditions of uncertainty, balancing potential success against potential loss. Uncertainty is defined as risk which cannot be calculated. The entrepreneur, according to Knight, is the economic functionary who undertakes such responsibility which, by its very nature, can neither be insured nor salaried.
Entrepreneur prefers to take only moderate challenging risk where moderate returns are attainable and the same is influenced by their abilities.
NATURE AND CHARACTERISTICS OF BUSINESS RISK
Nature and Characteristics of business risk may be summarised as follows:
(1) Essential Element: Risk is an essential element of business. However, extent of risk depends upon the nature of the business, but no business can found risk less.
(2) Uncertainty: Future is uncertain and future events cannot be predicted cent-percent. This creates uncertainty in the business. Risk is the result of uncertainty. High degree of uncertainty in the business, increase the level of risk.(3) Unstable and Changing Nature: The type and nature of risk is not found same in all businesses. Business affected by, demand, social factors, fashion etc. have more risk in comparison to those businesses which are not affected by these factors.
(4) Time Element: Time element also affects the nature of risk. At the time of economic, social and political stability, extent of risk is reduced while instability, social changes, natural calamities etc. increase the amount of risk in the business.
(5) Place Element: Risk also gets changed according to place. On the hilly areas, natural calamities increase the risk for the business while in the plain areas risk gets reduced.
(6) Cause of Profit: Entrepreneurs take risk in the expectation of profit. There is an old saying that there is no gain without risks, the higher one is willing to take the risks, the chances of profit will become high.
(7) Risk can be minimised but cannot be Avoided : One important characteristics of risk is that it can be minimised but cannot be avoided fully. All risks of a business cannot be forecasted. Insurable risks can be minimised to a certain extent but non-insurable uncertainties increase the risk in the business.
CAUSES OF BUSINESS RISKS
Business risks can causes due to the following reasons:
(1) Economic Causes: Economic aspects related to the business such as, shortage of raw material, interruption in power supply, trade cycles, lack of finance, change in technology etc. give rise to business risks.
(2) Social Causes: Change in social activities such as, change in fashion, change in traditions, change in taste and habits etc. give rise to business risks.
(3) Natural Causes: Natural events and calamities also produce risk to the business. Natural events such as, flood, drought, cyclone, earthquake etc. increase the business risk. These are uncontrollable risks, so a businessman has to bear these risks.
(4) Human Causes: Human factors such as, strike, lockout, inefficiency, dishonesty and carelessness of the workers etc. also produce risk to the business, although, these factors can be minimised by the efficient management, but cannot be avoided fully.
(5) Other Causes: Some other causes such as
(i) Change in the government policy. (ii) Communal Conflicts.
(lii) Changes in the international scenario etc. also create risk for the business.
RISK MANAGEMENT PROCESS
Profitability of a business is affected by the extent of risk involved in the business. Therefore an entrepreneur tries to reduce the uncertainties and there by risk by his initiative, skill and judicious approach to the problem standing before him. Risk management is a strategy throe he which risk can be minimised in the business. In simple words, risk management is a process of reducing business risks.
Risk management process involves four stages:
(1) Forecasting of Risks : The first step of business risk management is to make forecasting of risk. Possible risk arises due to business activities are forecasted with the help of appropriate methods.
(2) Risk Analysis : In the second step of risk management, analysis is made that which risks can be borne by the entrepreneur and which risks cannot be borne by him. This analysis helps the entrepreneurs to reduce the extent of unbearable risks.
(3) Evaluation of Risks : Tough taking risk is an essential attribute of an entrepreneur, it is not necessary to be irrational and just plunge in a project just because one feels that it has high potentials or profits. This was the state of affairs two hundred years back when it was difficult to assess various risks scientifically and there- fore every decision was taken on the basis of intuition but now various types of risks are assessed whether they are technical risks, economic risks, financial risks or marketing risks.
(4) Avoidance of Risks: An entrepreneur tries to reduce the uncertainties and thereby risk by his initiative, skill and judicious approach. It is not possible to eliminate the risk completely, efforts should be made to minimise it.
Question : What do you mean by ability of risk-taking? Explain main kinds of risk.
Risk mean-possibility of loss due to uncertainty of future.
According to Wheeler, “Risk is the chance of loss. It is the possibility of some unfavorable occurrence. “Business is a game of skill where in risks and reward: ‘0th are of great importance.
Entrepreneurs play mixed game of skill and chances, the result of which is not known to the players. All businesses have risks of different types as there is always an uncertainty about the future. A person who cannot take risk, therefore cannot start any venture. Virtually, risk taking-whether financial, social or psychological is a part of the entrepreneurship. It is truly said by someone, business is a game of skill and risk which cannot be played by everyone. Only an efficient entrepreneurs can play this game.
Risk-taking is an important concept of entrepreneurship. An entrepreneur is always ready to face uncertainties and risk which occur due to un for seen contingencies of the future. To be an entrepreneur, it is essential that he has the capacity of risk-taking, he has no fear of being failure, he must be optimist and full of self- confidence. Entrepreneurs seem to be well aware of no-risk, no return, high risk-high return theories. However, high-risk sometimes lead to total failure leading to total collapse of business enterprise. Ability of the highest order is required for success in entrepreneur- ship. Entrepreneurs prefer to take only moderate challenging risk where moderate returns are attainable and the same is influenced by their abilities and decisions.
According to Knight, “The entrepreneur is a specialized group of persons who bears uncertainty. One must not confuse between Risk-bearing/ Risk-taking and uncertainty. A risk can be reduced through the insurance principle, whereas uncertainty is the risk, which cannot be insured against and is incalculable. ” The entrepreneur forces the business opportunities and takes decision accordingly, considering all risks regarding plan of investment, product diversification and expansion of his enterprise. It depends upon his ability that upto what extent he is able to bear risk. The greater the ability of risk-bearing/risk-taking, the greater is the success in the entrepreneurship.
IMPORTANT FACTS RELATED RISK-TAKING CAPACITY
Risk is a perception, so a decision taken by the entrepreneur is affected by his attitude towards risk. His risk-taking ability is an important ingredient of his personality. Important facts related to risk-taking capacity of an entrepreneur may be described as follows
(1) Risk is a way of Enterprising : Continued successful enterprise requires that entrepreneurs take risks in introducing new things. Making bold decisions is a way of life at many enterprises. Risk taking is what sets entrepreneurs apart from
those of many other persons. Growth requires risk-taking. An entrepreneur is a ‘risk manager by choice,’ not by sheer necessity. He doesn’t allow his people not to take risks. He says, we are a risk venture, and we’re going to take more risks in the future.
(2) Risk Eliminators, Not Risk Takers: Zimmerer and Scarborough write, “Successful entrepreneurs are not as much risk takers as they are risk eliminators, removing as many obstacles to the successful launch of their ventures as possible. One of the most successful ways of eliminating risks is to build a solid business plan for a venture.”
(3) Preference for Moderate Risk : Entrepreneurs are not ‘wild risk takers,’ but are instead calculating risk takers. Unlike gamblers, they rarely gamble. Even T. Robbins write, “Entrepreneurship IS not the same thing as throwing darts and hoping for the best. It is about planning and taking calculated risk based upon knowledge of the market, the available resources or products, and a predetermined measure of the potential for success.’
(4) Realistic and Attainable Goals : Risk taking behavior of an entrepreneur is greatly associated with his self experience. They usually spot opportunities in areas that reflect their knowledge, backgrounds and experiences. They fixed realistic and attainable goals for their enterprise.
(5) Risk Improves Entrepreneurial Performance: Good entrepreneurs do everything to anticipate the risk, minimize it. control it or manage it. They work with their maximum efficiency to improve their performance. Thus risk improves entrepreneurial performance.
TYPES OF BUSIIVESS RISKS
The business risks are of various types which may be described as follows:
(1) Financial Risks: Any new venture has to face financial risks of various types, First, one may not be able to get adequate capital from the capital market and from the financial institutions and the project may not materialize or an entrepreneur may be forced to borrow at extra-ordinary cost which may upset all the calculations and may make venture more risky than planned.
There may be fall in selling prices due to sudden increase in internal competition from existing or new players; new substitutes or foreign goods. The entrepreneur has to take the risk of financial uncertainty.
(2) Marketing Risk : Many a times an entrepreneur at the time of setting up a plant is not able to guage exactly how consumers will behave, will like a product or not and if like up to what extent. Thus, there is great uncertainty about the future size of the market. Many products failed because they could not meet the expectations of consumers and they were e, forced to close down their establishments. Thus, there is great risk and uncertainty how consumers will react to a particular product. However entrepreneurs have tried to reduce this risk by test marketing and consumer research on a continuous basis.
(3) Technical Risks : Sometime there are revolutionary changes which throws out of gear all the calculations. The business has to face various types of technical risks because entrepreneurs do not know how long the present product will be in demand. These days there are fast discoveries which make old product obsolete. For instance, when ball pens were developed fountain pens went out of order. When washing detergent was developed, the traditional washing soaps went out of demand. When motor cycle with low consumption of petrol was introduced, the demand of two-wheeler scooters has gone down.
(4) Natural and Human Risks: Natural risks arises due to natural causes such as earthquake, flood, drought etc. The firm has no control over these risks. These risks produce heavy losses to an entrepreneur.
A human risk arises due to human causes such as, lock-out, strikes, theft, misappropriation of cash and goods etc. Although these factors can be minimized by efficient management but cannot be avoided completely.
(5) Insurable and Non-insurable Risks : The risks which can be insured by the insurance company such as risks of fire, theft etc. are termed as insurable risks, Such type of risks can be shifted by an entrepreneur to the insurance company by making insurance against these risks.
The risks which cannot be insured are termed as non-insurable risks. The entrepreneurs have to bear these risks by own, Change in demand, change in the position of competition, change in government policy etc. are such type of risks which cannot be insured.
(6) Internal and External Risks : Risks arise due to internal causes of a firm is termed as internal risks. Inaccurate forecasting of demand, wrong schedule of production, inadequate use of production capacity, wear and tear of machines, inefficiency of workers etc. are the main examples of internal risks. Such types of risks can be minimised with the use of efficient management.
External risks includes those risks which a firm has no control over them. Change in economic conditions, change in government policy, change in technology etc. are external risks which a firm has to bear by its own.
(7) Pure and Speculative Risks: Risks having no possibility of profit, ‘is termed as pure risks. For instance, risk arises due to fire has no possibility of profit, It gives rise only loss to a firm. These risks cannot be forecasted in advance.
In the Speculative risk possibility of both i.e. profit and loss exists. If a decision taken by a firm proves accurate then there will be profit otherwise firm will have to bear the loss. For instance, an entrepreneur increases production in the expectation of high demand. If demand is not increased according to the expectation and produced goods cannot be sold in the market, then he will have to bear the loss of unsold stock. On the other hand, if demand increased according to the expectation then entrepreneur gain high profits. Speculative risk is the essential part of a business as elimination of such risks will eliminate the possibilities of profit.