Today I want to share information about Business risks. As you all know that business is not easy to run. Businessmen facing different types of business risks in their business careers.
Risks are natural in business. A business may suffer losses due to breaking down in machinery, a strike by workers, theft of goods, misappropriation of cash, etc. The losses in business can also be caused by a fall in demand for the product and risk in the prices of raw material, labor rates may go up, the government may impose certain restrictions on the business, etc. Business risks, therefore, can be referred to as the uncertainties, which exist regarding the occurrence of some undesirable or unfavorable events.
Business risk is a term used to define a factor or factors that may have a negative impact on the profitability or success of a company.
KINDS OF BUSINESS RISKS:
Business risk is divide into:
- Marketing risk
- Credit risk
- Equipment risk
- Inventory risk
- Government risk
- Fire, theft, and accidental risk
- Other business risks
1- Marketing Risk:
Marketing involves risks which assume different forms :
- Goods may get damaged, broken, or overripe.
- The whole stock may become outdated or out of fashion.
- New substitutes or inventions may render the product obsolete.
- The taste, preferences, likes, and dislikes of consumers may change.
- The business may face unfavorable changes in prices.
- Competition may damage the business.
- New models and designs may affect the demand for the present product.
- A key manager may leave the firm or he may die.
- Fire, theft, pilferage may take place.
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2- Equipment Risks:
Much capital is invested in fixed assets including machinery, equipment, and tools, Fast changes in science and technology may render these expensive assets obsolete. If the company rejects this new technology but the competitor adopts it, the competitor will capture our customers owing to a quality product , low prices, costs , design , and so on which will be the result of new technology. On the other hand, if the old company purchases new machinery it may be full of risk. Because it is possible that the parts are short in the market or no mechanic is available to repair the new machine. Apart from this, the training of the technicians will be too necessary, time-consuming & costly.
3- Inventory Risks:
Businesses carry large stocks of merchandise to meet customer demands. A fairly large amount of capital invest in the stock. Overstocking and understocking always run many risks. Over – or understocking run the following risks:
- An unfavorable change in prices.
- Likelihood of theft or pilferage.
- Fire , rain , sun, dust may damage merchandise .
- Development of new inventions, innovations , or new substitutes .
- Competition and change in brand loyalty.
- Handling and carrying costs.
4- Credit Risks:
Credit risks are of two kinds:
a) Goodwill or credit of the company:
Any unsuitable business transaction or activity may damage the credit of the company.
b) Bad debts:
Account receivable and note receivable may not be collectible and may turn into bad debts or doubtful debts.
5- Government Risks:
Government policies, sudden or routine, always pose a risk to business corporations. Budgets, and policies on import, export, and labor, and continuous changes in them always affect businesses at that substantially.
6- Fire, Theft, and Accidental Risks:
These risks are uncontrollable and always present. The factory may catch fire owing to short circuit or otherwise, goods may be stolen, cash may be embezzled or misappropriated, accounts may be manipulated, or the worker may meet an accident. Floods, earthquakes, storms may also damage business assets.
7- Other Business Risks:
- The departure of key employees
- Problems due to lack of training
- Employee disputes among themselves may hurt the interest of business
- Poor customer service
- The entrance of the Competitor in the market
- Shrinkage of Market size
Methods to reduce or to avoid or to protect from Business Risks
1. Insurance policy:
Management purchases the insurance policy to protect the business from losses cause due to risks. A firm or a person paying a premium to the insurance company transfers the risk of loss to the insurance company.
2. Pre Cautionary Measures:
In some cases, if it is not possible to avoid the risk, the precautionary measures can be adopted to reduce the risks. For example in the case of production proper planning should be made, and the market should be also searched.
3. Contingency Fund:
By setting aside a certain amount, a suitable reserve should be form so that in case of unexpect loss the fund can be use to meet losses. But still, this kind of fund can not be sufficient for major losses of big firms.
4. Low Investment Policy:
The business of the modern age is very risky to start and operate, with rapidly changing public taste and fashion, small amounts should be invest and limit production should be made.
5. Substitute Goods and Services:
For being save cut-throat competition, firms should produce some substitute goods and services with another title name in order to save themselves from any major loss of competition.
6. Safety Measures:
“Precaution is better than cure” should be the policy to be followed by the present-day, businessmen to avoid all business risks. Example to avoid robberies, security guards should be appointed and fire extinguishers should be kept in factories to be saved from fire loss, etc.
The businessmen should acquire recent information about market fluctuations and make changes in the product in accordance with the tastes and fashions of the customers. Continuous market surveys, research, and proper foresight of business changes can help to avoid many business risks.
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