The term ‘Business risk’ refers to the possibility of inadequate profits or even losses due to uncertainties or demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Decrease in demand will result in lesser sales and thereby lesser profits.
Causes of business risks: Business risks arise due to a variety of causes, which are classified as follows :
- Natural causes : Human beings have little control over natural calamities like flood, earthquake,
lightning, heavy rains, famine, etc. These natural calamities result in heavy loss of life, property and income in business.
- Human causes : Human causes include such unexpected events as dishonesty, carelessness or negligence of employers, stoppage of work due to power failure, strikes, riots, management inefficiency, etc.
- Economic Causes : These include uncertainties relating to demand for goods,competition,price,collection of dues from customers,change of technology or method of production etc.Financial problems like rise in interest rate for borrowings,heavy or higher taxes,etc.also come under these type of causes as they result in higher unexpected cost of operation of business.
- Other causes : These are unforeseen events,such as political disturbances,mechanical failures such as bursting of boiler,fluctuations in exchange rates, etc.,which lead to the possibility of business risks.