DEFINITION of 'Business Risk'

The possibility that a company will have lower than anticipated profits, or that it will experience
a loss rather than a profit. Business risk is influenced by numerous factors, including sales
volume, per-unit price, input costs, competition, overall economic climate and government
regulations. A company with a higher business risk should choose a capital structure that has a
lower debt ratio to ensure that it can meet its financial obligations at all times.

Risk means that there is a chance that you won’t receive a return on your investment. It is an
exposure to danger to your bottom line. When you are in business, you need to consider the
kinds of events that could pose a risk to your business and take steps to mitigate them.

Identifying business risk

There are many different types of business risk. Risks can be internal and external to your
business. They can also directly or indirectly affect your business's ability to operate. Risks can
be hazard-based (e.g. chemical spills), uncertainty-based (e.g. natural disasters) or associated
with opportunities (e.g. taking them up or ignoring them). The Australian standard defines risk as
'the chance of something happening that will have an impact on objectives'.
Types of risk
The types of risk you face are specific to your business and its objectives. To effectively manage
risk you should prepare for internal and external scenarios that may directly affect your business.

Systematic Risk
Systematic risk refers to the chance an entire market or economy will experience a downturn or
even fail. Economic crashes, recessions, wars, interest rates and natural disasters are common
sources of systematic risk. Any business operating in the market is exposed to this risk, and the
amount of systematic risk does not vary between businesses in the same market. Therefore there
is little small business owners can do to decrease their exposure to systematic risk.

Unsystematic Risk
Unsystematic risk describes the chance a specific company or line of business will experience a
downturn or even fail. Unlike systematic risk, unsystematic risk can vary greatly from business
to business. Sources of unsystematic risk include the strategic, management and investment
decisions a small business owner faces every day. Investors decrease their exposure to
unsystematic risk by diversifying their portfolio and holding ownership in a variety of companies
operating in a variety of industries.

1.Strategic Risk
Strategic risks result directly from operating within a specific industry at a specific time. So
shifts in consumer preferences or emerging technologies that make your product-line obsolete--
eight-track, anyone--or other drastic market forces can put your company in danger. To
counteract strategic risks, you’ll need to put measures in place to constantly solicit feedback so
changes will be detected early.
2.Compliance Risk
Risks associated with compliance are those subject to legislative or bureaucratic rule and
regulations, or those associated with best practices for investment purposes. These can include
employee protection regulations like those imposed by the Occupational Safety and Health
Administration (OSHA), or environmental concerns like those covered by the Environmental
Protection Agency (EPA) or even state and local agencies.

3.Financial Risk
Direct financial risks have to do with how your business handles money. That is, which
customers do you extend credit to and for how long? What is your debt load? Does most of your
income come from one or two clients who might not be able to pay? Financial risks also take into
account interest rates and if you do international business, foreign exchange rates.

4.Operational Risks
Operational risks result from internal failures. That is, your business’s internal processes, people
or systems fail unexpectedly. Therefore, unlike a strategic risk or a financial risk, there is no
return on operational risks. Operational risks can also result from unforeseen external events
such as transportation systems breaking down, or a supplier failing to deliver goods.

5.Reputational Risk
Loss of a company’s reputation or community standing might result from product failures,
lawsuits or negative publicity. Reputations take time to build but can be lost in a day. In this era
of social networking, a negative Twitter posting by a customer can reduce earnings overnight.
According to Matt McGee, a search engine optimization consultant, “One negative blog post or
product review can spread online in a flash and change the direction of a company.”

6. Other Risks
Other risks are more difficult to categorize. They include risks from the environment, such as
natural disasters. Difficulties in maintaining a trained staff that has up-to-date skills to operate
your business is sometimes called employee risk management. Health and safety risks not
covered by OSHA or state agencies fall into this category as do political and economic instability
in countries you import from or export to.

Managing risk in your business

The process of identifying risks, assessing risks and developing strategies to manage risks is
known as risk management. A risk management plan is an essential part of any business as it
helps you to understand potential risks to your business and identify ways to minimise them or
recover from their impacts.

Preparing a risk management plan and business impact analysis

The process of identifying risks, assessing risks and developing strategies to manage risks is
known as risk management. A risk management plan and a business impact analysis are
important parts of your business continuity plan. By understanding potential risks to your
business and finding ways to minimise their impacts, you will help your business recover quickly
if an incident occurs.
Types of risk vary from business to business, but preparing a risk management plan involves a
common process. Your risk management plan should detail your strategy for dealing with risks
specific to your business.
It's important to allocate some time, budget and resources for preparing a risk management plan
and a business impact analysis. This will help you meet your legal obligations for providing a
safe workplace and can reduce the likelihood of an incident negatively impacting on your
business.
Role of Profit in Business

We know that business is an economic activity . Business has many responsibility towards
society but despite such responsibilities , The main and most prime aim of business is to earn
profit . A businessman Undertakes business only with the desire to earn profit . SO PROFIT IS
THE IMPORTANT PART OF BUSINESS.

First, let's start with the definition of profit being profit is the difference that arises when a firm's
sales revenue exceeds its total costs. This can be shown in an equation Revenue-Total
Cost=Profit. With profit, there is also different types of profit. One type of profit managers use a
lot is operations profit, which is the amount remaining once all fixed and variable costs have
been deducted from total revenue, but before tax has been paid.

The Roles and Importance of Profit in Business are as follows:

Profit is a reward for risk-taken in the business. Business is the wealth- creating institution of
society. Every business operates in order to earn profit. The main goal of a business is making
profit. A business may have other goals but if they do not make profit then they will have to end
the business.

The importance of profit can be explained with the help of following points:
1. Employment generation:

Profits lead to an inducement to invest as well as to innovate. As the entrepreneur begins to

forecast more profits he undertakes more investment which in turn creates more employment.
This will generate more incomes which in turn, will create more demand for the goods in the
market.

2. Profit is essential for the survival of business:

Profit is necessary for the survival and growth of business enterprise. If the business does not
make enough profit it will not survive in the growing competitive world. Profit means survival.

It enables the business to grow, helps employee motivation, eases negotiations with banks,
attracts investors, and gives clients and customers a confidence in business. All that adds up to
success.
3. Reward for risk taken:

Profit is a reward for risk taken in the business. It is a return on investment. Business expects
highest profit as they expect return on their investment. A firm invests money with the
expectation of higher returns on their investment.

The shareholders expect higher returns in the form of dividend. Banks and financial institutions
expect better rate of interest on the loan given to the business enterprise.

4. Profit is an indicator of efficiency:

Profit is a yardstick that tests the efficiency of the business firm. The success of the business can
be judged by the extent of profit earning capacity.

5. Reserves to meet future contingencies:

Profit can be used to meet future contingencies. The business is subject to many risk and
uncertainties such as changing customer preferences, increasing competition, changing
government policies etc. In such cases profit is used to meet those unfavorable business
difficulties.

6. Increases volume of business:

Retention of profit is the internal source of funds. This profit can be used for increasing the
volume of business through expansion and diversification. The portion of profit is re-invested in
the business for further development.
IMPORTANCE OF PROFIT IN BUSINESS ARE :

SURVIVAL : A Business cannot survive for a long time if it is not earning sufficient profit.
Profit is the source of income for the businessman. It is actually a means of livelihood for the
businessman and his/her family. Profit can also used to meet the expenses of business .Profit is
used to pay the salaries of the employees , buying raw material etc. Hence without profit , no
business can survive .

EXPANSION AND GROWTH OF BUSINESS : Business can be expanded only if it is

earning large profit . Profit which is not only sufficient to meet expenses of business and
businessman but sufficient enough to be reinvested to increase reach of the business . In simple
words , When profit is large , then part of it can be reinvested for expanding business .With large
profit , businessman can produce products in bulk which can reduce the production cost. Hence
Profit plays a major role in expansion and growth of the business.

INDEX OF SUCCESS OF BUSINESS: A business can only earn profit if it is managed

efficiently. A business with higher profit means it is managed efficiently and is successful and
business with low profit indicates that management of the business is not efficient and is not
successful. In short , higher profit helps in framing good reputation of the business and reflects
the quality of its management. Hence , The success of the business is measured in terms of
profit.

MOTIVATION TO BUSINESSMAN : Profit is considered as reward for bearing risk . Every

businessman invests money with a hope of earning profit . This desire of earning money
motivates the businessman to take risks . Profit and risk have a direct relation . High risk taking
means higher profit and lower risk taking means lower profit.

HELPS TO GAIN REPUTATION : A company earning profit has a better reputation in

market then company in loss . Better reputation motivated customers to buy the products of the
company . This increases the sales of the products launched by the company , thereby ,
increasing goodwill of the company . With higher reputation and profit , a company becomes
capable of raising loans and obtain credit facility . Also , worker prefer to work in profit earning
companies as these companies can pay high wages .