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Causes of Business Risks

Business risks arise due to a variety of causes, which are classified as follows:
  1. Natural causes: These include probability of loss due to floods, storms, cyclones, earthquakes and such other convulsions of nature. They result in heavy loss of life, property and income in business. These risks can be encountered by taking up specific and comprehensive insurance covers.
  2. Human causes: Human causes include such unexpected events like dishonesty, carelessness or negligence of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc. Risks from such causes have to be actively managed and alternative plans in case of stoppage of work and the like should be drawn up in advance.

Methods of Dealing with Risks

Though a firm can never escape from a presence of any risk it can still employ methods to avoid them. For instance, the firm can (a) avoid itself from entering into a risky transaction; (b) preventive measures can be taken like firefighting; (c) transfer the risk to an insurance company by taking a policy; (d) assume risk by making provisions in the current earnings like it will be in a bad case or while in debt; or (e) share risks with other enterprises by making the manufacturers agree to compensate the losses in the case of falling prices.

  1. 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 borrowing, levy of higher taxes, etc., also come under these types of causes as they result in higher unexpected cost of operation of business. These will have to be countered by way of active risk management tools like risk avoidance, risk reduction and risk transfer by way of hedging operations using financial derivative products.
  2. Other causes: These are unforeseen events like political disturbances, mechanical failures such as the bursting of boiler, fluctuations in exchange rates, etc., which lead to the possibility of business risks. Most of these risks will have to be borne by the business entity. The impact can be reduced by way of maintaining surplus reserves for emergency situations.
  3. Risk Management: Although no business enterprise can escape the presence of risk, there are many methods it can use to deal with risk situations. For instance, the enterprise may (a) decide not to enter into too risky transaction - this is called risk avoidance; (b) take preventive measures like firefighting devices to reduce risk - risk reduction; (c) take insurance policy to transfer risk to insurance company - risk transfer; (d) assume risk by making provisions in the current earnings as is the case of provision for bad and doubtful debts - risk retention and management; or (e) share risks with other enterprises as manufacturers and wholesalers may do by agreeing to share losses which may be caused by falling prices. Hence, risk management involves a gamut of decisions concerning identification of risks, estimating probable losses, ways of dealing with them like risk avoidance, risk reduction, risk transfer, etc. Risk management, by itself, is becoming a specialized service these days. Risk management which was mainly confined to financial enterprises has now become an integral part of every other kind of enterprise too in view of its being indispensable in the wake of modern day uncertainties.

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