Risk and starting a business

Business risk is the possibility of earning too little profit or even making a loss, because the future is uncertain. Risk is not only loss: if you planned to sell 1,000 units and sold only 400, that shortfall is also risk.

Risks are of two kinds:

• Speculative risk: may bring gain or loss, such as a change in market prices or demand.
• Pure risk: can bring only loss or no loss, never gain: fire, theft, a strike.

Some facts about risk: it cannot be eliminated, only reduced; how much risk a business faces depends on its nature and size (a dealer in fast-changing fashions faces more risk than a grocer); and profit is the reward for taking risk.

Risk has four kinds of causes:

• Natural: floods, earthquakes, heavy rain, famine.
• Human: dishonest or careless employees, strikes, riots, theft.
• Economic: changes in demand, competition, prices and technology.
• Other: political disturbances, changes in government policy, equipment failure.

Starting a business needs careful planning about:

• the type of business, its size, and its location;
• finance, physical facilities (machines, buildings) and a skilled workforce;
• tax planning;
• and finally launching the business.