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PART NO: seven

CHAPTER:
BUSINESS RISKS
Question #: 1
What is a Business risk? Describe the major kinds of business risks.
List and explain the business risks
BUSINESS RISKS:
DEFINITION:
Business risk means uncertainty of the factors and possibility of
unfavorable conditions in business. It is the possibility of inadequate profits or even
loses due to uncertain future. Many of the expectations of a businessperson can go
wrong in real business. When his expectations fail, a businessperson can lose his
investment or even lose his personal wealth. Profit is in fact, the reward for taking
risk in a business.

TYPES OF BUSINESS RISKS:

Following are the main types of Business risks


Marketing Risks
Credit Risks
Inventory Risks
Equipment Risks
Government Risks
Accidental Risks.

MARKETING RISKS:
1. RISK OF FAILURE OF NEW PRODUCT:
Risks are involved in machines and new products. The probability of success
for any new product idea is not a very serious risk but the risk of failure of a new
product is disastrous because it is possible that the consumers will have no interest in
the new product. Every program of new product may be the start of destruction
because introduction of new product is a very risky matter.

2. RISK FOR OLD PRODUCTS:


Marketing risk is not only restricted to the new product only but there
exists a risk in respect of old products and goods also because if the finished products
are not marketed in a reasonable time. Their qualities may deteriorate or even they
can be damaged, broken or look out of date or due to change of fashions or tastes of
people also such over produced, undisputed products become out of date and out of
fashions.
--------------------------------------------------By Naheed Suleman

------------------------------------------------By Naheed Suleman

3. RISK OF NEW INVENTION & SUBSTITUTE:


In respect of existing products there exists always a risk that a new
invention or a better substitute for them may be introduced in the market which may
render them to be obsolete.

4. RISK OF COMPETITION OF BUSINESS COMBINATIONS:


Some business combinations may also start a severe competition and
start to sell identical products at a price lower than the cost of production. If the
existing goods not sold out in time, then they have to sell by reduction sale and there
would be a very large irreparable loss resulting into stop of production and closure of
firm.

CREDIT RISKS:
Present day business rests on foundation of credit. The producer sells
goods on credit to wholesaler who gives credit to retailers and the retailer gives credit
to the creditors having monthly incomes. Thus, the risk of credit or bad debts is there
if the debtors do not pay the debts and become defaulters for any reason.

INVENTORY RISKS:
The producers/ manufacturers should always keep optimum inventory
neither more nor less and use full production capacity so that the required quantity of
finished goods produced to meet market demand. However, all efforts should be into
sell out the finished goods as early as possible by making suitable contacts with the
prospective wholesalers and sole distributors.

EQUIPMENT RISKS:
New technologies are coming up every now and then hence the producers have
to make suitable arrangements to adopt these technologies to produce model and
latest types of products to meet competition in the market. However, it requires large
investment to purchase new equipments and machines and to dispose of the old ones.
This is indeed a great equipment risk.

ACCIDENTAL RISKS:
Breaking of machines theft of raw material or losses due to fire and natural
calamities cannot control by producers. Such risks always exist.

GOVERNMENT RISKS:
The government changes its commercial, industrial policies, which may be
favorable or unfavorable to producers and businesspersons. Specially, the laws of
taxation, labor and price export and import duties etc may cause positive or negative
effect on executives/ producers. Hence, it is always advisable that government should
frame its policies in consultation with producers.
ANSWER!

----------------------------------------------By Naheed Suleman

Question #: 2
What are the causes of business risks?

ANSWER:

CAUSES OF BUSINESS RISKS:


Business risks arise from various reasons. There are diverse factors
collectively forming the business environment. An unfavorable change in any of the
environmental factors can adversely affect the business result. Following are the
important causes of business risks:
POLITICAL CAUSES:
Price regulations, High rate of taxation, unfavorable economic policies.
SOCIAL CAUSES:
Change of fashions, tastes, incomes and social values of consumers.
ECONOMIC CAUSES:
Economic causes include unexpected fluctuations in demand for goods
and services resulting in fluctuations in price. Activities of competitors also cause
economic risk. When competitors suddenly reduce price of goods, improve quality or
packaging it will affect all other business in the market.
HUMAN CAUSES:
Human causes include carelessness of employees, casual behavior and
mistakes. While these factors cannot prevent completely, it can reduced largely by
taking adequate precautions.
MANAGERIAL CAUSE:
Wrong estimation of demand, trained labor-management relations and
untrained management staff.
TECHNOLOGICAL CAUSES:
Introduction of new technology, lack of technical know how and no big
investments for purchase of new machines and equipments.
MISCELLANEOUS CAUSES:
Changes in Government policies can adversely affect a business.
Insolvency of customers, strike by workers, power failure, death or resignation of
expert managers.

CONCLUSIONS:
Business risks cannot avoid completely. Without risk, there is no business.
Reasonable care and precautions can reduce risk. Insurance can reduce the effect of
loss. By paying a small premium for insurance, the business can protect itself against a
heavy risk. Insurance is actually a method of sharing a risk by a large number of people.
ANSWER!

-------------------------------------------------By Naheed Suleman

Question #: 3
What are the characteristics of Insurable risks?

ANSWER:

CHARACTERISTICS OF INSURABLE RISKS:

Following are the characteristics of insurable risks:

The potential loss must be reasonably predictable:


The insurance companies accept those risks, which frequently occur
repeatedly. Therefore, that they can correctly access expected losses and fix the
insurance premium accordingly.

Loss must the concrete and definite:


Insurance loss should relatively difficult to counterfeit and should
reasonable. Financially insurance companies do not accept catastrophic losses if
war corrupts.

Loss must be accidental:


The risk should be accidental. If the risk is certain it will be
uninsurable. For example, an insurance company does not insure a very old
building, which may collapse at any time or the life of a heroin addict.

Risk should be spread over:


The risks, which are geographically concentrated at one place, are
uninsurable. For example, at present (2006) no insurance company can dare to
ensure any building of earthquake affected area of Pakistan (especially Balakot,
Muzzaffarabad) etc.

Risk should not be calamitous:


The basic principle of insurance is that a minor part of the whole,
which is insured, should involve or covered by risks. In case of natural calamities
like food, earthquake etc, insurance cannot make.

Risk should not be averted:


Expected loss should not be in the control of the insured e.g. if the
insurance policy is purchased against stealing and the theft has been committed by
the policyholder himself then the company will not compensate such loss.
ANSWER!

--------------------------------------------------By Naheed Suleman

Question #: 4
List the name of the uninsurable risks.

ANSWER:

UNINSURABLE RISKS:
Some of the uninsurable risks are as follows.
1. Fall in his demand for goods produced.
2. Risk of loss is in business.
3. Unfavorable changes in prices.
4. Loss due to sea perils in foreign trade.
5. Government taxation, business and industrial policies are adverse.
6. Natural disasters (flood earthquake, heavy rain).
ANSWER!

Question #: 5
How can these risks reduced or avoided?

ANSWER:
METHODS TO REDUCE OR AVOID BUSINESS RISKS:
Following are the method to minimize business risks.
1.
2.
3.
4.
5.
6.

Low investment policy.


Establishment of separate fund.
Insurance against risk.
Substitute goods and services.
Forecasting.
Safety measures.

1. LOW INVESTMENT POLICY:


In the business concerned with rapidly changing public taste and fashion like
cosmetics, garments and electronic good, small amount should invested and
limited production should made.

2. ESTABLISHMENT OF SEPARATE FUNDS:

By depositing, a certain percentage from annual gross profits of a firm a


suitable reserve should formed. Therefore, that in case of unexpected losses the
fund can used to meet them. Still this kind of fund cannot be sufficient for major
losses of big firms.
------------------------------------------- By Naheed Suleman

3. INSURANCE AGAINST RISKS:


To meet business risks the producers and manufacturers insure their
business activities etc with insurance companies and pay premiums. Therefore,
that in case of any loss, the risk shifted to the insurance company.

4. SUBSTITUTE GOODS AND SERVICES:


The big producers always produce some substitute goods and services and
keep them ready to flow in market when the existing products and services are
threatened to be out of date and old fashioned. This saves them to run for new
production of product all of a sudden, if existing products become out of date in
the market.

5. FORECASTING:
Now a days conducting business and to produce goods is not as simple
and traditional as eager of goats and sheep. The businesspersons and producers
have to acquire minute-to-minute information about market fluctuations and
changes in the tastes and fashions of customers. Continuous market survey,
research and proper foresight of business changes can help to avoid many
business risks.

6. SAFETY MEASURES:
Precaution is better than cure should the policy to follow by the present
day producers and businesspersons to avoid all business risks. For example, to
avoid robberies security guards should appointed and fire extinguishers should
keep in factories to extinguish fire etc.
ANSWER!