losses due to uncertainties or unexpected events. Risk is different from uncertainties. Nature of Business Risks Business risks can be understood in terms of their peculiar characteristics: (i) Business Risks Arise Due to Uncertainties Uncertainty refers to the lack of knowledge about what is going to happen in the future. Natural calamities, change in demand and prices, changes in government policy, improvement in technology, are some of the examples of uncertainty which create risks for business because the outcome of these future events is not known in advance.
(ii) Risk is an Essential Part of Every Business Every business has some risk. No business can avoid risk, although the amount of risk commerce - - . . PM may vary from business to business.
Risk can be minimized, but cannot be eliminated. (iii) Degree of Risk Depends Mainly Upon the Nature and Size of Business Nature of business (i.e. type of goods and services produced and sold) and size of business (i.e., volume of production and sale) are the main factors which determine the amount of risk in a business. For example, a business dealing in fashionable items has a high degree of risk.
Similarly, a large-scale business generally has a higher risk than what a small scale business has. (iv) Profit is the Reward for Risk Taking: ‘No risk, no gain’ is an age-old principle which applies to all types of business. Greater the risk involved in a business, higher is the chance of profit. An entrepreneur undertakes risks under the expectation of higher profit.
Profit is thus the reward for risk taking. Types of Business Risks The business risks may be classified as i) Speculative Risks Speculative risks are the kind of risks which have the possibility of gain as well as the possibility of loss. Such risks are the result of market conditions. Favourable market conditions result in gains whereas unfavourable market conditions result in losses.
Example: Use of better technology helps to produce better quality products at cheaper prices. This may increase the demand and thus result in higher profits. ii) Pure Risks Pure risks