The term ‘business risks’ refers to the
possibility of inadequate profits or even
losses due to uncertainties or
unexpected events. For example,
demand for a particular product may
decline due to change in tastes and
preferences of consumers or due to
increased competition from other
producers. Decrease in demand will
result in lesser sales and profits. In
another situation, the shortage of raw
materials in the market may shoot up
its price. The firm using these raw
materials will have to pay more for
buying them. As a result, cost of
production may increase which, in
turn, may reduce profits.
Business enterprises constantly
face two types of risk: speculative and
pure. Speculative risks involve both the
possibility of gain as well as the
possibility of loss. Speculative risks
arise due to changes in market
conditions including fluctuations in
demand and supply, changes in prices
or changes in fashion and tastes of
customers. Favourable market
conditions are likely to result in gains
whereas unfavourable ones may result
in losses. Pure risks involve only the
possibility of loss or no loss. The chance
of fire, theft or strike are examples of
pure risks. Their occurrence may result
in loss whereas non-occurrence may
explain absence of loss, instead of gain.