Common Causes of Business Risk
A business risk may be defined as the possibility of loss due to some unforeseeable, unpredictable and unfavorable event in the future. It is defined as the riskiness on the firm’s stock provided that the firm has used no debt capital. It is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, the overall economic climate and government regulations.
Business risks arise due to a variety of causes, which are classified as follows –
(i) Natural Causes: Natural calamities like flood, earthquake, lightning, heavy rains, famine, etc are beyond human control. The natural causes are such type of uncertain factors that human beings cannot make any preparation against. They result in heavy loss of life, property, and income.
(ii) Human Causes: Human causes to include such unexpected events as carelessness, negligence or dishonesty of employees, stoppage of work due to power failure, strikes, riots, management inefficiency, etc. The employees may hamper the production by going on strikes, riots etc.
(iii) Economic Causes: These include uncertainties caused due to economic fluctuations such as Changes in demand for goods, competition, price, a collection of dues from customers, change of technology or method of production, etc. Economic causes are related to a chance of loss due to change in the market. There can be a change in the degree of competition.
Financial problems like rising in interest rate and higher taxation, etc also come under economic causes as they raise the cost of operation of business unexpectedly.
(iv) Physical Causes: All the causes which result in damage of assets are considered as a physical cause, for example, change in technology may result in machinery being outdated, use of old technology, mechanical defects may also result in damage of assets such as the bursting of a boiler, accident to employee etc.
(v) Other Causes: These are unforeseen events like political disturbances, mechanical failures, fluctuations in exchange rates, etc which leads to the possibility of business risks.