Explain the concept of business risk.
Business risk is the possibility of a business failing to earn sufficient profits or incurring losses as a result of various unforeseen circumstances which are beyond its control. For instance, there is always a risk associated with the demand for a product, which is highly influenced by changes in consumer preferences. It is extremely difficult for a businessperson to correctly anticipate consumer preferences, as a result of which he or she always faces the risk of unforeseen fluctuations in demand. In case consumer preferences go against the product, then, because of the fall in the demand. the businessperson would earn lower profits.
There are two types of business risks, namely, speculative business risk and pure business risk.
(a) Speculative business risk refersto an equal chance of earning gains or incurring losses. It arises because of changes in the external forces, such as changes in the competitor’s policies, changes in government policies, price change, and changes in consumer preferences.
(b) Pure business risk refers to the chance of either incurring only losses or incurring no loss at all. Examples of pure business risk are the risk associated with theft, fire and various natural calamities.