Any sort of risk in business is known as business risk. No business is business without risk and business may suffer losses due to break down in machinery, 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, rise in the prices of raw material, labor rates my go up, the government my a impose certain restrictions on the business etc. Therefore, business risks, can be defined as “Business risk can be referred to the doubt / worries which can be present concerning the occurrence of some uninvited or bad events”.
Types of Business Risk
Probably there are two types of business risk involved in the over all operations of business.
- Internal Risks
- External Risks
The internal risks of a business are:
- Smash up to the assets by fire or by employees.
- Inadequacy on the part of supervision due to death of the manger, dishonesty, labor strikes, theft etc.
- A business may have to meet a liability for injury or death of an employee/ employees
- Poor internal organization structure may increase cost of manufacturing products.
The external risks of a Business are
- Smash up to factory building by natural incident such as floods, earthquake,
- Price decline by competing business.
- Sudden fluctuations in the prices upsetting inventory values and selling prices of the products
- Crash on business of unfavorable governmental change.
- Loss of outer markets.
- Changes in the habits of consumers
- Accessibility of small priced better alternate goods
The owners and managers being aware of the internal and external risks should try to take protective measures. They first take steps to avoid them. If it is not possible, then they chalk out plans to reduce the losses to an acceptable level without using insurance companies. However, if the risk appears to be insurable, then business should go in for insurance.
Non insurable Methods of Business Risk Protection
The main non insurable methods of business risk protection are as follow:-
- Reducing the risk
The business can reduce or eliminate the risk of theft by appointing watchman, installation of burglar alarm etc.
- Efficient management
Efficient management at all levels can greatly reduce the hazards of business. The big firms appoint risk managers whose main functions are to identify the main forms of risk facing the firms and giving them the best solution.
- Reserve Cash
Some firms maintain a reserve cash to meet the emergency in business. The firm is thus saved of financial loss or a permanent damage.
The firms whose cost of raw material represents a major portion of the cost of financial products, often resort to hedging. Hedging is the process of gaining protection from the risk of loss caused by price fluctuation of raw material. The firm shifts the risk of loss of raw material on to the professional speculators who deal all these matters.
- Shifting of Business Risk
Shifting of business risks to other agencies, which specialize in handling such risks, is also a one way of business risk protection. The insurance is the best way and popular method of handling business risks today.
Insurance and Requirements for Insurance
Business involves many types of risk. One of the methods of protection against risks is to transfer them to specialized institutions called Insurance Companies. All types of risks cannot be insured. An insurable risk must have the following essentials.
- Predictability of Annual Loss
The loss caused each year should be measurable and predictable. The losses caused by war, earthquake etc are not determinable and measurable. In such cases these losses are not insurable.
- Application at Law of Average
The risk to be insured must confirm to the law of large numbers. Insurance of one life or one or two properties cannot be done on scientific basis.
- Accidental Loss
The time and occurrence of risk must involve some uncertainty. If the loss is certain, then it cannot be insured. In case of life insurance, the time of death is uncertain, therefore, insurance may be a cover against untimely death.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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