3. Business Risks and Causes of Failure ISC class 11 Business Studies. Syllabus for the year 2023-2024

3. Business Risks and Causes of Failure

CHAPTER OUTLINE

3.1 Meaning of Business Risks

3.2 Characteristics of Business Risks 3.3 Causes of Business Risks

3.4 Types of Business Risks

3.5 Methods of Handling Managing Risks 3.6 Business Failure - Meaning and Causes

+ Summary

♦ Exercises

Question Bank

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One of the essential features of business is risk. Future being uncertain, all business activities involve risk of one type or the other. From the moment goods are purchased to the point they are sold to the ultimate consumer, risks of various types are involved. Some business ventures involve much greater risks than others. A businessman has to encounter risks in every area or function of business. In production function, risks may arise due to irregular supply of raw materials, power failure, breakdown of machinery, labour unrest, technological obsolescence, inefficient labour, use of faulty tools or materials, defective quality control, etc. In the marketing function risks may occur on account of fall in price, change in fashion, errors in sale forecasting. competitors' activities, trade cycle, etc. In finance function, non-availability of funds, shortage of cash, bad debts, etc. may create risks.

In addition to the above, there may be loss of assets due to fire, flood, storm, theft, earthquake, cyclone, etc. Strikes, riots, civil commotion, war and political events may interrupt business operations. Goods or cash may be lost on account of theft, embezzlement, shipwreck, etc. There are personal risks due to accident, death, loss of goodwill or earning power, deterioration of health, etc.

Thus, business risk is universal and takes a variety of forms. In order to face risks successfully, every businessman should understand the nature and causes of risks and the measures which can be taken to minimise the risk.

3.1 MEANING OF BUSINESS RISKS

Risk implies uncertainty of profits or danger of loss due to some unforeseen events in future. It refers to the chance of loss on account of unfavourable or unpredictable happenings. Risk is the possibility of loss arising out of future uncertainties. Risk occurs when there is an adverse deviation from desired or expected outcome. According to Wheeler, "risk is the chance of loss. It is the possibility of some unfavourable occurrence."

In every risk, there exists a possibility of loss which may or may not be measurable. The person

or organisation exposed to the risk may or may not be aware of the possibility of loss. Every risk arises from a 'peril' or contingency and it is magnified by a 'hazard". A peril creates the risk while a hazard influences the degree of risk. For instance, fire is a peril which creates a chance loss. But the petrol stored in a building is the hazard which increases the possibility of loss. In brief, business risk may the defined as the chance of loss in business activities due to events

which create adverse situations contrary to expectations.

3.2 CHARACTERISTICS OF BUSINESS RISKS

The main characteristics of business risks are as follows. 1. Risks are Inherent in Business: Every business involves some element of risk. Risk bearing is an essential element of business, Business risks are inevitable and unavoidable. They can be minimised but they cannot be eliminated completely. In fact, business means

assuming calculated risks. 2. Business Risks Arise due to Uncertainties: Uncertainty is an essential condition of business because business decisions are concerned with future which cannot be forecasted with 100 percent accuracy. Uncertainties arise due to the ever-changing environment within which a business operates. Natural calamities, changes in demand and prices, improvements in technology, changes in Government policies and rules, etc. are a few examples of uncertainties which create risks in business.

3. Business Risks Vary According to the Nature and Size of Business: All business enterprises are not exposed to the same type or degree of risk. The degree of risk is much higher in big businesses than in small scale operations. Similarly, a business dealing in articles which are subject to frequent changes in fashion or demand faces greater risks. The time and place of business also influence the degree of business risks.

4. Profit is the Reward for Risk Taking: Where there is no risk there is no gain. Greater

the risk inherent in a business, higher is the chance of profits. Higher profits are the

consideration which an entrepreneur gets for bearing risks inherent in business. However,

greater risk is no guarantee of higher profits. Profit is the reward for inherent risks rather

than artificially created or speculative risks.

5. Business Risks cannot be Evaluated Easily: It is difficult to accurately measure or calculate business risks. The risks arise due to conditions many of which are beyond the control of management. A businessman can make an intelligent guess about business risks but cannot predict them with certainty.

3.3 CAUSES OF BUSINESS RISKS

Business risks are of a diverse nature and they arise due to innumerable factors. The various

causes of business risks may be classified into the following categories.

1. Economic Causes: Economic factors are the most common causes of business risks. Economic causes refer to changes in market conditions. Market fluctuations may lead to a fall in demand, price fluctuations, severe competition, trade cycles, etc. For instance, oil crisis reduced the demand for big luxury cars. Similarly, the introduction of a new product like video may affect the sale of cinema tickets.

2. Technological Causes: Unforeseen changes in the techniques of production or distribution may result in technological obsolescence and other business risks. Introduction of synthetic fibre affected the cotton textile industry. Development of supercomputer has made the old models computer obsolete. Automation has resulted in the obsolescence of hand driven machinery.

3. Human Causes: Human activities are an important cause of business risks. Negligence and dishonesty of employees, death of a key executive, irrational approach of manager or owners, failure of suppliers to supply the materials or tools in time, bad debts due to bankruptcy or default in payment by debtors, strikes and lockouts, accidents, riots, etc. are some of the examples of human causes.

4. Natural Causes: Natural calamities give rise to several risks in business. Unforeseen natural events like earthquake, floods, famine, hailstorms, lightning, volcano, heavy rain, tornado, excessive heat or cold, cyclone, etc. causes a heavy loss of life and property. These events may spoil the quality of goods or wipe out the goods itself. Human beings have very little control on natural events.

5. Physical Causes: Physical causes imply the failure of machinery and equipment used in business. For instance, breakdown of cooling machine may result in the damage of perishable goods. There may be destruction of equipment or injuries to employees due to explosion in a boiler. Thus, physical causes are technical or mechanical in nature.

6. Political Causes: Political changes like the fall of a popular government, death of a

well-known political leader, communal violence, civil war, hostilities with a neighbouring

country, changes in government policies, etc. exercise important influence on the

functioning of business. Changes in licensing, taxation, imports-exports, industrial and

such other economic policies may wipe out or reduce the profits of a business enterprise.

3.4 TYPES OF BUSINESS RISKS

Business risks are of several types. These may be classified as follows.

1. Strategic Risks: These risks arise due to errors in strategic decision making. When a business enterprise chooses faulty strategies, it is likely to suffer a huge loss. For example, Raymonds suffered loss by diversifying into cement manufacturing. Tatas faced strategic risk by acquiring Corus Steel and by launching NANO car. Strategic risks occur because the strategies adopted are inconsistent with the internal and external environment of the company. Strategic risks cause a huge loss and threaten the very existence or survival of the enterprise. Too fast growth, acquisition of an enterprise at a very high cost, diversifying into an unknown industry are some of the causes due to which strategic risks arise.

2. Financial Risks: These risks refer to deterioration in the financial position of an enterprise. Reduction in sales volume may reduce the cash flow. As a result the firm may be unable to repay its debts and may became bankrupt. An enterprise may not be able to raise funds required to meet its working capital needs. As a consequence, the earnings may be jeopardised and the firm's financial reputation may suffer. Several companies in India particularly in the real estate sector are over-burdened with debt. They are unable to pay interest and to repay the debt. Launching an issue of shares when the stock markets are badly down, too high debt-equity ratio, mismanagement of funds, diversion of funds into unproductive activities are some of the reasons which cause financial risks.

3. Operational Risks: Such risks arise due to interruptions or shortcomings in day-to-day operations of an enterprise. Interruptions may occur due to labour problem (e.g. strike), breakdown of plant and machinery, shortage of raw materials, shortage of working capital for meeting day-to-day expenses, mismanagement, etc. When operations are interrupted production, sales and earnings decline. But wages, salaries and other operating expenses have to be paid. In some states in India frequent breakdowns of power has caused serious losses to industrial units. Law and order problems, labour unrest, non-availability of essential suppliers, are some of the causes responsible for operational risks.

4. Compliance Risks: Compliance or Regulatory risk means a risk faced by companies where regulatory action may cause loss of business or excess monetary damage, prevalent in sectors where multiple government approvals are required. Failure to comply with the relevant laws, regulations, rules, policies and procedures causes compliance risks. For example, a business enterprise must deposit advance tax by 15th June, 15th September, 15th December and 15th March every year. A listed company must comply with Clause 49 and other clauses of the Listing Agreement. It must hold meetings of Board of Directors and Annual General Meeting as per the provisions of the Companies Act 2013. A specified category of listed companies are now required to spend at least 2 percent of their annual profits on Corporate Social Responsibility (CSR) Companies which fail to comply with the prescribed laws and rules face both civil and criminal They can be fined and their directors can be sent to jail.

5. Competition and Market Risks: Competition risks are caused by activities of competitors. Entry of new firms in an industry, adoption of new technology, introduction of a new and better product or service, reduction in prices, etc. are examples of such activities. For example, e-commerce firms or online sellers such as Amazon, Flipkart, Snapdeal, etc. have affected the sales turnover and profits of offline firms. The launch of Jio by Reliance communications has affected the services of Airtel and Idea cellular companies. Low cost airlines such as Go Air, Spice Jet and others are giving tough competition to Rajdhani and other services of Indian Railways. Uber and Ola have become competitors for individual taxis, magicbricks.com is affecting the business of property dealers. Cut throat competition from low priced Chinese goods has led to closure of several small scale manufacturers in India. Parle had to sell its soft drinks business due to severe competition from Coca Cola and Pepsi.

Market risks arise when a firm does not understand accurately the needs and preferences of consumers. Choice of improper channels of distribution, faulty pricing policy. ineffective advertising and other mistakes in marketing decisions also lead to market risks. Environmental Risks: Central and State Governments have enacted laws, rules and

regulations to check pollution of air, water, land, etc. Failure to comply with these causes

environmental risks. Extreme changes in weather may also be responsible for environmental

risks. Earthquake, storm, volcano, tsunami, fire, flood and other natural calamities also cause

environmental risks. Manufacturers of scooters and motorcycles must now comply with

BS VI emission norms.

7. Reputational Risks: It is the potential loss to the company's financial, or loss of social capital or reduction in market share resulting from damage to its reputation. It is a threat to the standing and the name of a company. Reputational risk have an adverse effect on company's revenue. It can occur due to massive trading loss, fraud by employees or organisation etc.

8. Credit Risks: It is the chance of loss resulting from failure to make payments on debts taken by the borrowers for the business. In other words, credit risks are caused due to borrower's failure to make required payments. This may arise due to non payment of dues on loans, line of credit, wages etc.

9. Innovation Risks: Innovation in business is introducing new ideas, methods, services or products. Innovation always involves risks for the organisation. The riskiness of innovation depends on the choices people make in using it. To minimise risk company's policy makers need to understand how to make informed choices when it comes to new product and services.

3.5 METHODS OF HANDLING/MANAGING RISKS

1. Accept and absorb Risks: Accepting the risk means simply accept that it might happen and decide to deal with it if it does. It is a good strategy to use for very small risks that won't have much of an impact on the business. It could take a lot of time to put together an alternative risk management strategy or take action to deal with the risk, so it is often a better use of the resources to do nothing for small risks. 2. Avoiding Risks: A businessman can avoid some of the risks by not being involved in the action that gives rise to risks. A person or an enterprise may refuse to assume a risk when the potential results or gains are not considered worth the risk. For example, a finn which cannot survive the failure of a new product may not attempt to develop a new product and it may follow the leaders in the industry. In some cases, risk may be avoided by substituting a risky process with a safer one. For instance, a confectioner

may use gas instead of coal in the manufacture of sweets: Avoiding risk is a negative device of handling risk. It may not always be practicable, especially when no alternative exist. Many risks are inherent in business and it is

not possible to avoid them. 3. Transferred Shifting Risks: Many business risks cannot be avoided or reduced but they can be transferred to others who are more willing to bear the risk. The following

methods are employed by businessmen to transfer or shift risks. (D) Hedging: Buying and selling for future delivery is an important method of shifting the possibility of loss on account of price fluctuations during the time gap between purchase and sale of a commodity. Hedging is a form of forward trading to minimise loss due to changes in price. It involves the sale of any commodity which may arise from the ownership or purchase of a similar commodity. Hedging is the process of entering simultaneously into two contracts of an opposite though corresponding nature, one in the spot or cash market and the other in the future market. The purpose of hedging is to protect the trade profit from adverse fluctuations in commodity prices,

For instance, a textile mill which keeps a stock of 200 bales of cotton runs the risk of loss due to a fall in the price of cotton. To shift this loss, the mill sells 200 bales of cotton in the future market. If the price of cotton falls, the loss on the stock of cotton will be offset by the gain in the future contract of sale.

However, hedging is not a foolproof method of shifting risks. Risk is fully shifted only when the prices in the cash and future market change in the same proportion which is not always true in practice.

(ii) Underwriting: A public company issuing shares and debentures faces the risk of loss due to the failure to sell the entire issue of securities. In case it is not able to raise the 'minimum subscription', it may have to be wound up. This risk can be shifted to an underwriter which is the financial intermediary between the company issuing securities and the ultimate investors. Underwriting is an agreement entered into before the securities are brought before the public, that in the event of the public not subscribing to the entire issue, the underwriter will, in consideration of a specified commission, take an allotment of such shares as the public has not applied for.

(iii) Subcontracting: Some firms undertake a contract which extends over a long period of time or which requires the specialised services of several experts. Such a firm faces the due to in the price of materials, labour, and other imports. Such a risk may be shifted to others through subcontracting. For example, a building contractor may engage subcontractors for electric wiring, plumbing, glasses, timbers, cement, bricks, etc. Such subcontracts are helpful not only in shifting the risks but also in bringing the benefit of the expert knowledge of the subcontractors.

4. Preventing Risks: Risks can be reduced in innumerable ways. Action to reduce the frequency of risk may be taken by an individual business enterprise or by several competing firms or by the Government through some form of assistance or regulation. The management of an individual firm can take steps for loss prevention and control. Efficient individual firm can take steps for loss prevention and control. Efficient planning and effective control help to reduce risk. The main techniques of reducing business risks are as follows:

(Forecasting and Marketing Research: Many business risks arise due to errors in planning. Scientific forecasting of future economic conditions makes the management aware of likely opportunities and threats in future business environment. As a result, management can formulate in advance appropriate plans to meet the challenges of the future.

Marketing research provides information about market conditions with the help of

which a businessman can make necessary changes in products, prices, distribution channels and sales promotion techniques. Efficient market planning helps in reducing risks of overproduction, wrong products, defective distribution, etc. Intensive selling campaign may be used to maintain regular demand and to build up brand loyalty among consumers.

(i) Research and Development: Through continuous technological research and development, a business can reduce the loss of technological obsolescence. It can develop new and remunerative products before the present products become obsolete. Research and development is also helpful in standardisation and quality control so that consumers can get safe and reliable products.

(iii) Credit Screening and Control: Careful screening of customers and prompt collection of outstanding debts are useful in reducing the possibility of loss through bad debts. Similarly, tight inventory control can reduce the risk of loss.

(iv) Safety Programmes: Fire fighting equipment and sprinkler system can be used to prevent loss by fire. Burglar alarms, night watchman and safety vaults are employed to reduce the possibility of loss through theft, shoplifting or burglary. Cold storage or refrigeration is helpful in the preservation of perishable products. Special packing may be used to reduce spoilage, breakage or leakage of goods in transit or storage. Similarly, steps can be taken to reduce damage by rats, pests, vermin, etc. Medical care facilities help to reduce the loss of life on account of accidents in the factory. Adequate lighting, covering of damaged floor, keeping aisles free of obstructions, etc. help to reduce accidents.

(v) Training and Development of Employees: Risk of loss due to the death or

incapacity of a key executive can be reduced by training of a successor. Similarly, training of workers helps to the incidence of accidents and spoilage. (vi) Government Regulation: Government action can reduce several business risks. The Government may impose import duty to protect domestic industry from foreign

competition. It may stabilise prices, freight rates, taxes, etc. to make the environment of business less risky. 5. Mitigate Risks: Mitigation means that one should limit the impact of a risk, so that if it does occur, the problem it creates is smaller and easier to fix. If a problem is within the control, it can be prevented onset. But if it originates from beyond your control, then all business can do is to mitigate its impact. It involves putting contingency plans

in place so that if the situation does occur, other plan can be implemented. For

example, for an outside promotional event, the risk is: it might rain, and that would

affect and the potential profit from the event. Possible ways to mitigate this

risk is to rent a large tent to provide shelter from the rain.

6. Exploit the Risk: Acceptance, avoidance, transfer, preventing and mitigation are used when the risk has a negative impact on the business. But what if the risk has an opportunity? For example, the risk that the product becomes so popular that they don't have enough sales staff? This is a a positive risk. Exploitation is the strategy to use these positive situations. Look for ways to make the positive risks happen or for ways to increase the impact if it does. A few junior sales administration people can be trained to give demos do lots of extra marketing, so that if the lots of interest in the new product is increased, there are people to do the demos if needed.

7. Assuming Risks: Risk is assumed when no positive step is taken to avoid, reduce or transfer the risk. Self-assumption of risk may be voluntary or involuntary. A businessman may assume the possibility of loss voluntarily when no better alternative is available to handle the risk. For example, the chance of loss may not be worth the cost of insurance or the loss may not be insurable. Involuntary assumption of risk occurs when the person exposed to the risk faces the financial consequences of loss without recognising or realising the existence of risk.

Every businessman has to decide the risk which he will assume depending upon his ability to stand the loss. A reserve fund may be created within the business to bear successfully the loss of risk assumption.

8. Dividing Risks: Dividing or sharing is an important method of handling business risks. Company form of business organisation is one device of sharing risk. In company organisation, investment of a large number of persons is pooled and the risk of loss is spread over large number of shareholders. Insurance is a more popular method of sharing of spreading risks. Insurance is based upon the law of large numbers. A large number of persons exposed to a risk contribute to a fund which is utilised to compensate the very few who actually suffer loss from the insured risk. The insurance company a reasonable estimate of the cost of loss and thereby assumes the responsibility of loss. In consideration of a small payment (the premium) by one party (the insured), the other party (the insurer) agrees to indemnify the first party up to a certain limit for the specified loss which may or may not occur. Insurance is only a way to average the loss, it cannot eliminate or avert the loss.

3.6 BUSINESS FAILURE - MEANING AND CAUSES

Every year, some business firms fail. There are several causes of failure in business. These causes may be classified into two broad categories- internal and external. (See fig. 3.4)

Internal Causes: Various events within an enterprise may lead to its failure. These are called internal causes. Lack of experience and expertise in business is an example of internal causes. Some of the internal causes of business failure are given below.

1. Poor/Inefficient Management: When the top management team of a company lack expertise in business operations in the chosen industry and market, they cannot draft the right vision, mission, business model and strategy for the company. This happens when the team is selected on grounds other than qualification and experience (e.g. relations, friends, etc.). Their definition of business is vague, business model is faulty and timing is poor. There are cases wherein the founders made the enterprise among the top but subsequent generations brought the enterprise on the verge of bankruptcy due to their poor commitment and inefficiency.

2. Premature Scaling: Premature scaling happens when the business expands faster than expected. Over-hiring, unmanageable customer acquisition and rapid market growth are a few common examples of premature scaling. Growth is good if it is managed effectively. But too fast growth characterised by not taking the time to consolidate a business, not fine tuning the organisation, not systematically meeting the challenges of growth, the very survival of the enterprise is in danger. Subhiksha Enterprise, a retail chain, wounded up due to too rapid growth.

& Funding Shortfall: Whether it is starting a business or expanding one, sufficient ready funding is essential. It is not enough to simply love sufficient financing, knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money. Failure to adequately anticipate cash flow results in shortfall of funds for When business is hist starting out, suppliers require quick payment for inventory. On the other hands, if products are sold on credit, the time between making the sale and getting paid can be. months. This two-way tug of cash can pull business down if not planned properly

4. Inadequate Profits: An enterprise may suffer if its balance sheet is overburdened with debt. Its capital stricture is therefore unbalanced. In times of low or no profits it cannot pay interest and instalments of debt. The creditors may force it become bankrupt. In some cases, too large a part of earnings are spent on excessive personal/family expenditure. As a result the enterprise cannot reinvest its earnings to modernise and expand operations Several real estate firms are over burdened with debt. Mismanagement of funds led to the demise of Kingfisher Airlines: Ballarpur Industries Ltd (BILT) is in trouble due to heavy debt

5. Labour Problems: Faulty recruitment and selection (favouritism, political pressure, etc.), lack of proper training, inappropriate compensation package and other errors in human resource policies and practices spoil the motivation, morale and commitment of employees Such employees either do not stay in the enterprise or their performance remains poor and they may even sabotage. With such a work force, there are frequent conflicts between management and employees. The enterprise cannot succeed and survive with such workforce. They do not devote enough time to the requirements of a business in a highly competitive environment.

6. Small Customer Base: A low customer base is one of the major reason for business

failure. If a business have a low customer base, it will be dependent on them, losing them would mean closing of business. Thus, it is preferred to have a large base of customers. Now a days this may be done through websites, social media etc. 7. Poor Implementation: Poor product design, faulty pricing policy, inappropriate

distribution strategy, defective and other operational problems cause sickness of an

enterprise. In some companies strategies and policies are right but too many delays and

faults in their execution cause failure. Poor financial control is another example of poor

implementation.

8. Lack of Good Governance: Poor corporate governance has been responsible for the demise of several well known companies. Fraud, deception, embezzlement and other forms of unethical behaviour leads to poor governance When the promoters/founders, of Directors and Chief Executive of a company fack commitment to moral values and exercise their powers in an irresponsible manner the company fails. Insider trading is an example of unethical Satyam Computer Services a leading information technology firm of India failed due to falsification of accounts by the promoters B. Ramalingam Raju. In addition to accounting manipulations, insider trading, failure of audit committee flaws in external audit, ineffective board of directors, dubious role of rating agencies and unwarranted acquisitions caused the failure of Satyam Computer Services (India). When the founder(s) and the top management team of a company become dishonest and too greedy, nobody can save the company.

External Causes: Several events and developments, forces outside an enterprise can lead to failure of business. These causes are known as external causes. The main external causes of business failure are given below. 1. Economy Fluctuations: Fluctuations in the economic factors such as labour shortages,

rise or fall in imports/exports etc. may have an adverse impact on business. These factors

are often out of the hands of business owners. 2. Market Fluctuations: When the market demand declines drastically due to recession. sales and profits of companies badly suffer.

3. Non-availability of Credits: Micro and small enterprises often face shortage of capital due to low credit standing, poor bargaining power, etc. plans for start-ups, upscaling. modernisation, etc. cannot be implemented. This is the main cause of large percentage of failure of start-ups.

4. Change in Technology: An enterprise is likely to ultimately fail when its management does not upgrade/modernise plant and machinery. Most of the cotton textile mills in India could not survive due to outdated technology. The managers/owners of these mills did not adopt modem technology. Outdated technology increases the cost of production and spoils quality. As a result the company can no longer compete in the market.

5. Changes in Government Policies and Laws: Frequent and major changes in government policies are another external cause of failure. Demonetisation of high value currency, permission of 100 percent foreign direct investment in single brand retail, and such other major changes in Government policies may no doubt be a boon for some, but can be a bane for other enterprises.

6. Natural Disasters: Disasters, either manmade or natural, can be the death blow to a business. Natural disasters, such as include tornadoes, earthquakes, and hurricanes, can cripple small businesses. While it is often difficult to anticipate and escape natural disasters, business owners must ensure that they have a plan to combat an emergency scenario. They must ensure that they have proper and adequate insurance policies in place for such situations.

7. Non-Availability of Key Inputs: Acute shortage of essential raw materials, supplies and spares is one of the external causes of failure. In case these materials are not available within the country and have to be imported, adequate imports may not be possible. Oil crisis in the past has affected several enterprises.

8. Cut-Throat Competition: Entry of foreign soft drinks companies (Pepsi and CocaCola) killed the soft drink industry of India. Parle drinks and Pure Drinks both could not face competition from big multinationals and had to sell out. Cheap imports from China are threatening the survival of several small and medium enterprises in India. Many such enterprises had to close down.

9. Changes in Customer Habits and Preferences: Today's young men and young ladies

prefer to shop online or in malls. As a result small brick and mortar stores are suffering.

Preference for ready-to-wear garments has led to the demise of tailoring shops.

10. Poor Infrastructure: Shortage of power, good roads in interiors, inefficient railways, inadequate ports, and other shortcomings in India's industrial infrastructure is a major bottleneck in business success. Bureaucratic and corrupt administration of infrastructural facilities is said to be a great handicap for business enterprises.

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SUMMARY

Meaning of Business Risk: Business risk meana chance of loss due to uncertain and unforseen events. Characteristics of Business Risk Inherent, uncertainties, variable, reward for risk taking, difficult to measure.

Causes of Business Risk: Economic technological, human, natural, physical, political and legal

Types of Business Risk: Strategic financial, operational, compliance, competition and market, environmental reputational Credit, Innovation Methods of Managing Risks: (1) Accept and absorb, (2) Avoid (3) Transfer, (4) Preventing (5) Mitigate

(6) Exploit (7) Assume (8) Divide Causes of Business Failure: (1) Interal (2) External

Internal Causes of Business Failure: (1) Poorfinefficient Management (2) Premature Scaling (3) Funding

Shortfall (4) Inadequate Profits (5) Labour Problems (6) Small Customer Base (7) Poor Implementation (8) Lack External Causes of Business Failure: (1) Economy Fluctuations (2) Market Fluctuations (3) Non-availability of Credit (4) Change in Technology (5) Changes in Government Policies and Laws (6) Natural Disasters (7) Non-Availability of Inputs (8) Cut-Throat Competition (9) Changes in Customer Preferences (10) Poor Infrastructure

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EXERCISES

Multiple Choice Questions (Select the best alternativel 1. "Risk is the chance of loss. It is the possibility of some unfavourable occurrence." This statement is of:

(a) Wheeler

(b) Drucker

(c) Hardy

(d) Mehta

2. Causes of business risk are: (a) Human

(b) Physical

(c) Natural

(d) All of these

3. Business risk is not likely to arise due to:

(a) Changes in government policy

(b) Good management

(c) Employee dishonesty

(d) Power failure

4. Which of the following is a external cause of business failure? (a) Change in technology

(b) Change in Government policy

(c) Natural disaster

(d) All of these

5. Which of the following is a internal cause of business failure?

(a) Poor management (b) Premature scaling

(c) Funding shortfall

(d) All of these

6. Which of the following is a method of handling

business risks?

(a) Avoiding Risks

(b) Preventing Risks

(c) Transferred shifting Risks is not example of business risks: 7.

(d) All of these

(a) Change in Government policies

(b) Earthquake

(c) Fire in godown

(d) Helping poor people

8. Which of the following is not a type of business risks?

(a) Strategic Risks

(b) Financial Risks (d) Non-operational Risks

(c) Operational Risks

9. Which of the following is not a cause of business risks? Natural cause (b) Physical cause

(c) Mental cause

(d) Political cause

10. Which of the following is a cause business risks? (a) Economic cause (b) Human cause

(c) Technological cause (d) All of these

11. Greater the risk in a business, higher is the chance (a) Profit

of

(b) Success

(b) Human causes

(b) Political causes

(a) Strategic risk

(a) Risk (b) Profit

12. Bankniptcy payment by debtors is an example of

or default in

(c) Goodwill

(d) Rick

(a) Economic causes 13. Failure of machinery and equipment may be a part of-

(e) Technological causes

(d) Natural causes

(a) Natural causes

(c) Human causes

(d) Physical causes

14. The risks that arise due to

errors in strategic decision (b) Operational risk

making are called as

15. The risk that arise due to interruptions or shortcomings in day to day operation of (c) Compliance risk (a) Strategic risk (b) Operational risk

an enterprise is called as- (d) Financial risk

(d) Financial risk

(c) Compliance risk

16. What is a part and parcel of Business?

(c) Customers

(d) Loss

17. Development of super computers has made the old

models of computer obsolete is an example of

(a) Economic couse

(b) Technological cause

(c) Human cause

(d) Natural cause

18. When operations are interrupted, production, sales and earnings (b) constant

(c) Increase 19. Chinese goods has led to closure of several small scale manufacturers in India. This is an example of-

(d) None of the above

(a) Reputational risk

(b) Competition risk (c) Credit risk

(d) Innovation risk

20. Poor Infrastructure is- (a) External risk

(b) Internal risk

(c) Neither (a) or (b)

(d) Bath (a) & (b)

Ans.

1. (a)

7. (d)

3. (b) 4. (d)

5. (d)

6. (d)

7. (d)

8. (d)

9 (c) (a) 15. (b) 16. (a) 17. (b) 18. (a) 19. (b) 20: (a)

10. (d)

11. (a) 12. (b)

13.

(d) 14.

(a) decline

1. Fill in the blanks.

is the possibility of some unfavourable occurrence.

2. Natural calamities, technological advancement, change in government policies, etc. are few examples of

which creates risk.

3. Greater the risk inherent in a business,

is the chance of profits.

4. Communal war, civil war, changes in government policies, etc. are some of the

causes of business

risks.

5. Risks caused due to borrower's failure to make required payments are known as risks includes day-to-day expenses, strikes, shortage of working capital,etc. 6.

7. Demonetisation of high value currency is an example of

causes of business failure.

8. In internal causes, various events

an enterprises may lead to its failure.

Ans. 1. Risk

2. uncertainities

3. higher

4. political

5. Credit

6. Operational

7. external

8. within

Ill. Short Answer Type Questions

1. Define Business Risks, 2. "Uncertain events are the main cause of business risk." Comment.

3. List two characteristics of business risk.

4. Mention two types of business risks.

5. two natural causes of business risk.

6. Enumerate two economic of business risk.

7. Enumerate two technical causes of business risk. 8. Give two political causes of business risk.

9. What is meant by compliance risks?

10. Define francial risk.

11. What a operational stiks? 

12. What ant by strateg mik?

13. Two methods of preventing business risk?

14. What is hedging?

 15. Define subcontracting.

16. Why does a bone la? Give one reason:

17. What are internal causes of business failure? 

18. How does the technology cause a business failure?

19. What crest rok?

20 what is innovation rok?

4.Long Anwer Type Questions

1. What is meant by Business Risks? Describe the causes due to which risks arise in business.

2. Discs human and natural causes of business risks .

3. Explain different types of business risks.

4. Do the characteristics of business risks 5. Explain various methods of handing business risks.

6. Explain the termal causes of business failure 

7. Explain the extermal causes of business failure.

& Explain how underwriting and subcontracting helps in reducing the risks. 

5. What are the main techniques of preventing or reducing the business risks?

QUESTION BANK

L Very Short Answer Questions 1. What do you meant by business risk?

Ans. The possibility of inadequate profit or even losses due to uncertainties or unexpected events is termes business risk.

2. Give any two causes of business risk. 

Ans. Natural, and (4) Human causes.

3. State any two methods of dealing with business risk.

 Ans. Firms should not enter too risky transaction, and (ii) Firms should take insurance policy

4. Who bears the risk if the subject is insured against that particular risk?

Ans. Insurance Company

5. What reward a businessman gets for bearing the risks?

Ans. The reward of bearing the risk is profit

6. What do you mean by business risk? Ans. risk refers to probability of losses due to circumstances and events

7. Why does a businessman willingly undertake business risk? Ans. A businessman willingly undertakes the risk involved in the business activities because for bearing the businessman gets the reward of earning profit.

3. Why do we insure goods?

Ans. We insure goods to minimise the risk of loss.

9. Which type of business risk involves both the possibility of gain as well as the possibility of less?

Ans. Speculative Risk

10. What is Risk? Or Define Risk.

Ans. Risks may be defined as the possibilities of loss or damages arise due to happening of certain circumstances 11. Give any one/two major causes of business risks.

Ans. (i) Natural causes (i) Human causes 12. Give any two major reason due to which the business fails.

Ans. Internal cause and External cause

13. What is a Strategic Risk? Why is arises? Ans. Strategic risk comes into existence as a result of poor strategic decisions. Such risks are generally connected with the effectiveness of strategies framed by the top management of the company

14. When do we conclude that a business has failed? Ans. We conclude that a business has failed when it is unable to earn revenue to cover its expenses and closes

operations thereafter

II. Short Answer Questions

1. "Risks are a part and parcel of business." Explain.

Ans. Business operates within the framework of environmental forces. Environment keeps on changing. These changes cannot always be predicted with complete accuracy. Therefore, some assumptions are made about future events while taking decisions and actions concerning business. When these assumptions prove wrong, risks arise. Thus,

risks are a part and parcel of business. 2. "Strategic risks are most dangerous for business." Elucidate.

Ans. Strategic risks occur due to errors in strategy making or when business strategies become inconsistent with the

internal and external environment. Strategic decisions relate to the total enterprise and are most difficult to

change.

Therefore, strategic risks are dangerous for business. For example, Tata Motors suffered by launching their low price NANO Car 3. "Environmental risks are becoming increasingly important due to growing pollution". Discuss

Ans. Pollution of air, water, land, soil, etc. is increasing very fast. In several big cities like Delhi air is not worth breathing. Therefore, laws and norms meant to regulate pollution are becoming more and more stringent Business firms which fail to abide by these laws and norms face huge risks in the form of penalty, cancellation

of license and even jail. 4. "Failure in business can arise both due to internal and external causes." Explain.

Ans. A large number of business firms, particularly start-ups, fail every year causing huge loss to investors, employers and the country. Both internal and external causes are responsible for failure in business internal causes are within the control of an enterprise whereas external causes are beyond its control. Poor governance, incompetent management, obsolete plant and machinery, mismanagement of funds, labour trouble, faulty implementation of plans and policies, unmanageable growth are the main internal causes External causes of business failure include shortage of essential inputs, severe competition, recession, changes in the habits and preferences of consumers; non-availability of capital, poor infrastructure and significant changes

in Government policies are some external causes of failure in

5. Why compliance risks of business firms in India are increasing?

Ans. Regulatory environment in India is becoming stricter. Regulations are rising several fold both in volume and Companies are therefore creating dedicated cross functional teams of senior executives to study and adapt to the changes and to manage the increasing risks. Compliance is becoming more and more important issue. One of the vital reasons for the need of a strong compliance function now is to avoid non compliance legal issues. As companies face GAAR, GST, AS, etc. they must analyse and mitigate the negative effects. For example changes in accounting standards affect merger and acquisition strategy More than 25,000 different notifications and circulars were issued by government authorities, an increase of three times last thre years Companies need a dedicated team to go through the changes and see what they need to do. About 50-60% time of all support functions like tax regulations and compliance is going in identifying and analysing change in requirement and updating the management

II. Long Answer Questions

1. What steps can be taken by business to minimise risk?

Ans. Risk is inevitable in every business The business has to face the risky situations. Through careful planning the impact of the risk can be considerably reduced. The business can take the following steps to minimise the r (i) Business should avoid risky transactions Speculations consist of maximum risk. A business enterprise should avoid speculative transaction

(i) in order to reduce the risk due to fire, theft. misappropriation of cash of goods, a business firm should take preventive measures. For example, fire fighting gadgets should be installed to douse fire (i) A business firm should take proper insurance covers for fire, theft, accident, not, marine and against a

insurable risks (iv) A policy of risk sharing or shifting is good to reduce the risk. Subcontracting underwriting and hedging

helps in reducing the burden of risk (v) Provisions should be made for bad debts, depreciation and heavy repairs, to reduce their impact. A business

should create reserves to meet losses arising due to risk

2. 'Business risks take place due to carelessness of people and can be completely eliminated: Do you agree? Ans. No, I do not agree with the statement that business risks take place only due to the carelessness of people The business risks cannot be completely eliminated, but these can be minimised to a certain extent Risk is inherent

Give reasons

in all types of business. It might be high in some types of business as compared to others Risks on account of

uncertainties is termed as business risks Business risk refers to the possibility of inadequate profits or losses

due to unforeseen or unexpected events

() Nature of Business Risks

(a) Risk is an inherent part of all types of business activities (b) There are uncertainties and unfavourable events which might take place within or outside the business Change in fashion, change in government policies, strikes, lockouts, natural calamities are some examples

of risks in business (c) Risk cannot be entirely eliminated. However, it can be minimised to a certain extent,

making, insurance cover and accurate forecasts

by careful decision-

(d) Profit is reward for risk bearing. A businessman undertakes risks in expectation of profits Risk and profit

are directly related, the more the risk, the higher will be the profit and vice-versa

(i) Causes of Business Risks

(a) Natural causes like flood, drought, earthquake, etc. adversely affect business firms (b) Losses arising due to change in economic environment of business are covered under economic causes (c) Risk arising due to ideologies or unstable government policies are examples of political causes.

Risks arising due to conscious and unconscious efforts of human beings working in an enterprise are called human causes, eg theft, forgery, strikes by workers, carelessness or negligence of employees (e) Technical and mechanical causes which affect business are referred to as physical cause.

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