Nature, Purpose and scope of Business — OCM STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceOCMNature, Purpose and scope of Business5 Marks
Question
What is business risks? State the causes of business risk.
✓
Answer
Introduction :
Profit does not occur only by investing capital in business. Without finance, entrepreneurship and physical or mental hard works, business is not possible.
Thus in reality profit is a result of capital, entrepreneur too is a form of economic activity. Compare to them a businessmen takes highest risks.
What is Business Risk? :
Business risk means uncertainty of profit in business or risk of loss in business.
In any business, profit is uncertain means there is increase or decrease in profit.
Continuous decrease in profit leads to risk of loss in business.
In these circumstance business would not be last long.
Forms of business Risks :
Businessmen bears many risks. Out of which two main risks are as under :
$(A)$ Natural Risks $(B)$ Man – made Risks
Natural risks :
Natural calamites like earthquake, cyclone, heavy rain, drought, flood etc. natural calamities, which affect adversely to business, due to which business development ceases.
Man is helpless before this type of risks.
He bears loss in helpless condition.
Due to earthquake many industries are crumbled down and heavy rain causes water runs in to lower level areas and many useful things are destroyed.
Man – made Risks :
Man – made risks include theft, robbing unit suffers.
Due to change in fashion in ready – made garments, demand of the present garment, demand of the present decrease and it is Difficult to sell the garments.
Machinery becomes useless when there is change in technology.
Due to the strike of truck drivers or the employees, the work of transportation is change disturbed, Bad debt risk occurs when the amount of goods sold on credit is not recovered.
Besides this change in the rate of interest or change in the rate of government taxes, financial risks arises.
Due to business risk sometimes cost of product increase, As a result it is difficult to sustain in the market.
When provisions of law change, business is compelled to be closed down.
Sometimes branded item is imitated and inferior quality goods are sold in the market and company has to bear loss economically and company faces the loss of prestige too.
Causes of business risks :
There are three main causes arising from business risks.
Uncertainty of Demand :
Due to certain changes in business circumstance, sometimes there is increase or decrease in demand e.g. T.V. is in high demand when world sports or cricket World cup is organized.
Demand decreases when the number of competitors increase.
Change in Technology :
Due to change in technology, machinery purchased in business like existing Computer and other instruments become out of date and modern instruments have to be bought.
There is risk of failure of capital investment.
Threat of Substitute products :
due to change in technology, there is a possibility of substitute product. e.g. television in the place of radio, ball pen in the place of fountain pen, vessels of steel in the place of brass and copper,. So customers may turn to substitute product.
Government Legislation :
Government laws regarding minimum wages, workers industries and factories pollution, customers etc. affects the business while taking the decisions and framing the policy.
Business Competition :
Due to competition in business. Expense of advertisement and growth of sale increases.
Sometimes due to the entry of competitor company, the price of the of the product is lowered, company is compelled to reduce the price which reduces the profit of business.
Sometimes the existence of business is under risk.
Economic Risks :
fluctuations in interest rate, dearness allowance, increase in salary, electricity bill, government taxes, trade cycle etc. create economic risks.
Conclusion :
Basic cause of business risk is future uncertainty.
It can not be prevented but through management degree of loss arising from risk can be reduced.
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