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Friday, 24 June 2011

Define Business Risk and explain its various kinds and and also discuss those methods which can be used to protect the risks

Business Risk :-
In every business there is a chance of loss, because future is uncertain. So business risks means the occurrence of those events which become the cause of loss in the business. A businessman earns the profit at the risk of loss. So risk is an essential element in business. While in business decision making means the evaluation of risks and profits involved in business activities.
There are large number of uncertain events in business like fall in demand, strike of workers, theft, break down of machinery etc.

KINDS or TYPES OF BUSINESS RISK :-
The risk may be classified in to various types. Following are the important kinds of risks :

1. By Organization.
2. By Occurrence Events.
3. By Nature.
4. By Controllable.
5. By Protection.

1. CLASSIFICATION OF ORGANIZATION :-
In this regard there are two types of risks :

A. Internal Risks :-
This risks of losses due to internal affairs of the business organization are called internal risks. These can be normally controlled by management.

B. External Risks :-
There are large number of external factors like fall in demand due to war or the change in fashion are called the external factors which become the cause of loss. So such type of risks of losses are called external risks. Normally these are beyond the control of an organization.

2. CLASSIFICATION BY OCCURRENCE EVENT :-
It has two kinds :

A. Property Risks :-
If due to any event property of the firm destroys it will be called property risks. For example if building of the firm destroys due to fire, it will be called property risk.

B. Liability Risks :-
Some time a firm held responsible for losses by any other firm or a person. Such type of losses risks are known liability risks. For example there is a firm which is providing food to the people now if one person eats the food and dies. Now a firm will be held responsible for such loss.

3. CLASSIFICATION BY NATURE :-
It can be classified in two types :

A. Speculative Risks :-
In this risk the chance of profit and loss both are involved. Each firm starts the business to earn a profit. It is the basic objective of each firm but due to some uncertain events and firm suffers loss. For example a firm produces a new product, now there is a chance that it may capture the market and earn a profit. On other aside if it fails to create the demand then it suffers a loss.

B. Pure Risks :-
In such types of risks there is no chance of profit and possibility of losses are pure. For example in case of destruction of ship there is a pure risk.

4. CLASSIFICATION OF CONTROL LIABILITY :-
It has following two kinds :

A. Controllable risks :-
If management of business can control the risks by making the favorable decision these are called controllable risks. For example there a loss due to the regular breakdown of electricity, this can be controlled by the management by using the generators of electricity.

B. Uncontrollable Risks :-
Some risks are beyond the control of management. For example war spreads in the world and a firm suffer a loss due to fall in the exports. Such type of loss is called uncontrollable.

5. CLASSIFICATION BY PROTECTION OF RISKS :-
In this case there are two types of risks :

A. Insurable Risks :-
If the risks can be controlled by purchasing the insurance policy it is called insurable risks. Such type of loss is covered by the insurance company. In such cases loss is shifted from insured to the insurance company. The losses which may occur due to the fire, accident or theft are included in the insurable risks. In case of insurable risks following conditions must be fulfilled.

1. The losses must be calculate able.
2. The loss must not be caused internationally.
3. The cost of insuring must be feasible.
4. There should be an insurable interest for the insured.
5. To get insurance there should be large number of similar cases.
6. Loss probability must be predictable.
7. Expected over loss should be spread over the total number of insured.

B. Non Insurable Risks :-
If we cannot purchase the insurance policy against any risk, it is called non insurable risks. For example if the price of cotton falls in the market due to any reason, and a businessman suffers a loss, such type of loss is not insurable.


PROTECTION METHODS OF RISKS :-
There is two types of protection methods of risks :
A. By Insurance Policy.
B. Non Insurable Methods.

A. By Insurance Policy :-
Management purchases the insurance policy to protect the business from losses caused due to risks. A firm or a person when pays a premium to the insurance company, risk of loss transfers to insurance company. In case of insurable risks, this method can be used.

B. Non Insurable Methods :-
When the risks are non insurable and these can not be protected by the insurance the other techniques can be used to protect these risks. These are following :

1. Precautionary Measures :-
In some cases it is not possible to avoid the risk the precautionary measures can be adopted to reduce the risk. For example in case of production proper planning should be made and market should be also tested. How the product will compete the market price , quality and quantity? Necessary measures must be taken to start the business.

2. Contingency Fund :-
To cover the unexpected losses companies set a side an amount from the current revenue to establish this fund compensates the loss from this fund. So by using this fund a firm saves itself from any financial loss.

3. To Avoid the Risks :-
Management can adopt the technique to minimize the chance of occurring any particular event which may cause the loss. All the risks can not be avoided but these can be minimized. So such policies are adopted which reduce the loss. For example there is a greater risk to send the product by air then by train. So the risk can be reduced by sending the product by train. Similarly when you introduce new product, there is a greater risk, so you may refuses to avoid the risk.

3 comments:

Anonymous,  1 December 2012 at 04:13  

I am a photographer and this article really helped. Thanks for sharing

Anonymous,  17 January 2014 at 00:35  

Really good

iHowPC 22 November 2016 at 14:17  

Insurable risk has 7 elements that insurance providers looks for to measure levels of risk and levels of the premium for insurance protection of anything.

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