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Nature of Business Risks

Nature of business risks can be understood in terms of their peculiar characteristics:
  1. Uncertainties in business environment lead to risks: 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, etc., are some of the examples of uncertainty which create risks for business because the outcome of these future events is not known in advance.
  2. Risk is inherent in every venture: Every business has some risk. No business can avoid risk, although the amount of risk may vary from business to business. Risk can be minimised but cannot be eliminated.
  3. 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 has a higher risk than what a small scale has.
  4. Profit is the reward for risk taking: It is seen that the most profitable ventures have often been the result of risk bearing of the next level. Risk and reward go hand in hand i.e. most risky ventures have the most potential for turning out the highest rewards and low risk profile ventures are usually less risky. Hence, in a way, profit is the reward for risk taking. However, it should be remembered that merely taking up risky ventures would only push someone to the deepest of pits unless he actively participates in the risk management process.

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