Q1-Define risks relating to business. Also discuss its kinds.
What are major types of risk faced by business man?
Risk is a part of human life and starts with life and continues till death.
Risk refers to hazard, peril, chance of loss or injury. It implies the degree of probability of any type of loss. The risks human face include death, accident, fire, and business losses.
Kinds Of Business Risks
Business risks are subdivided into:
- Marketing risks
- Credit risks
- Equipment risks
- Inventory risks
- Government risks
- Fire, theft, and accidental risks
Marketing involves risks which assume different forms:
- Goods may bet damaged, broken or over-ripe.
- The whole stock may become outdated or out of fashion
- The taste, preference, likes and dislikes of consumer may change.
- The business may face unfavorable change in prices
- Competition may damage the business.
- New models and design may affect the demand for present product
- A key manager may leave the firm or he may die.
Credit risks are of two kinds:
- Credit Of The Company:
Any unsuitable business transaction or activity may damage the credit of the company.
- Bad Debts:
Account receivables and note receivables may not be collectable and may turn into bad or doubtful debts.
A large part of capital is invested in fixed assets including machinery, equipment, and tools. Fast changing and growing science and technology may render these assets obsolete.
If the company rejects the new technology, or inventions but the competitor accept it, the latter will capture the market share of the former owing to better product, price, costs, design and so on, which are the result of new technology.
Overstocking and under stocking always run many risks and hence right amount of capital should be invested to keep a right level of inventory. Over-or-under-stocking runs the following risks:
- Unfavorable change in prices
- Likelihood of theft
- Fire, rain, sun, dust may damage merchandise.
- Development of new inventions, innovations, or new substitutes.
- Competition and change in the brand loyalty
Government policies sudden or routine, always pose a risk on business corporation. Budgets and policies on import, export, and labor, and continuous changes in them always effect business at that substantially.
Fire, Theft & Accidental Risks:
These risks are uncontrollable and always present. The factory may catch fire owing to short circuit or otherwise, goods may be stolen, cash may be misappropriated or accounts may be manipulated. Floods, earthquakes, storms may also damage business assets.
Q2- Describe different kinds of risks by insurance.
Certain risks cannot be insured, biggest being the failure of a product of incurring a net operating loss.
Some uninsurable risks are these:
· Fluctuations in Price Level:
A business firm typically produces goods in anticipation of demand and incurs expenditure on raw material, wages and various other costs with a view to sell goods at profit. In the meantime of the prices of the product fall, the firm will have to bear loss.
· Changes in Distribution Method:
The recent development of chain stores, supermarkets and shopping centers has had an impact on small, independently owned stores. Many of them have been forced to shut their doors.
· Changes in Laws:
Often changing of laws also affects business e.g. if the government bans the import of certain items for any reason or plates excessive duties on their import, the dealers of such items will be forced out of business.
· Change in Technology (Advancement):
The development of new products or new brands of better quality, new production techniques etc constitute a continuous hazard for those who do not keep up with time.
· Change in Consumer Tastes
A company produces goods keeping in view the tastes of customers. A shift in the whims and fancies of customers and consequently a fall in demand constitute a risk and bring loss to the company.
Certain kinds of risks can be insured. Insurance of a risks never means that it has been totally controlled or eliminated. It refers to the shifting of the risk from an individual or a firm to the society or a group (e.g. Insurance company) and in case of a loss the group will accept the responsibility.
By definition, insurance is a system devised to reduce the burden of financial loss due to some specified but uncertain event.
· Risk of Fire:
A factory or office building may be damaged by fire. This risk is insured with the insurance company, whereby the insurance carrier agrees to make goods any loss sustained by a person on property destroyed by fire.
· Risk of Theft:
A business may be robbed by burglars or a dishonest employee may steal money or goods handled by the business.
· Transportation Risk:
Maritime perils like sinking, capsizing, damage by sea water etc, and risks due to rains, accidents etc faced by goods while in transit come under this category.
A business may suffer losses due to each casualties as wind store or earthquake, employee accidents, suits against directors and officers by disgruntled stockholders etc.