This document discusses business risks and risk management. It defines business risks as uncertainties that can result in losses. The main characteristics of business risks are that they are inherent in business due to uncertainties from changing environments. Risk levels vary by business size and type. Profits reward risk-taking. The document outlines various causes of risks including economic, technological, human, natural, physical, and political factors. It categorizes risks as pure versus speculative and insurable versus non-insurable. Risks can be internal or external. Management of risks involves identifying, evaluating, selecting handling methods, and evaluating outcomes. Methods to handle risks include avoiding, preventing, assuming, dividing, and transferring risks.

1. LESSON 11 ENTERPRENUERSHIP SKILLS
BUSINESS RISKS
One of the essential features of business is risk. Future of businesses is uncertain; all
business activities involves risk of one type or the other.
Meaning of business Risks
- Risk implies uncertainty of profits or danger of loss due to some unforeseen events
in future. It refers to the chance of loss on account of unfavourable or
unpredictable happenings.
- Risk is the possibility of loss arising out of future uncertainties
Nature of Business Risks
The main characteristics of business risks are as follows:
i. Risks are inherent in business- this implies every business involves some
element of risk, and risk bearing is an essential element of business
ii. Business risks arise due to uncertainties- uncertainty is an essential condition
of business because business decisions are concerned with future, which
cannot be forecasted with 100% accuracy. Uncertainties arise due to ever
changing business environment
iii. Business risks vary according to the nature and size of business- the degree of
risk is much higher in big businesses than in small-scale businesses
-similarly, a business dealing in things which are subject to frequent changes
in fashion or demand faces greater risks
- time and place of business also influences the degree of business risks
iv. Profit is the reward for risk taking- where there is no risk, there is no gain
v. Business risks cannot be evaluated easily- It is difficult to accurately measure
or calculate business risks
Causes of Business Risks
1. Economic causes- they refers to changes in market conditions, and are the most
common causes of business risks. Market changes may cause fall in demand
making businesses to make losses
2. Technological causes- This refers to the changes in techniques of production due
to changes in technological. E,g introduction of synthetic fibre affected the cotton
textile industry
3. Human causes e,g negligence and dishonesty of employees, death of the key
executive etc
4. Natural causes- those are unforeseen natural events like earthquakes, floods,
famine, lightening, volcano, heavy rain etc. These events may spoil the quality of
goods or wipe out the goods altogether

2. 5. Physical causes- implies failure of machinery and equipment used in business.
E.g. breakdown of cooling machines may result in the damage of perishable
6. Political causes- Political changes like the fall of a popular government, death of
a well-known political leader, election disputes, civil war, hostilities with a
neighbouring country, changes in government policies
Types of Business Risks
Business risks may be classified in the following ways including:
1. Pure and Speculative risks- pure risks refer to a chance of loss without any
possibility of gain. E,g when fire breaks out, there is a chance of loss only, no gain.
Theft, accident, strikes, damage in transit are some examples of pure risk
- Speculative risk- implies a situation, which involves not only the chance of loss
but a possibility of gain also. A businessman takes speculative risks in the hope of
making profit. Example of speculative risk is the development of new products,
which may result in large profits or big loss
N/b pure risk may further be divided into three categories:
a) Personal - These risks refer to loss of capacity of human beings e.g. old age,
sickness, disability, unemployment, premature death etc., which may lead to
loss of income or assets
b) Property risks- such risks include the possibility of loss of property or its use
or income. E.g Direct physical loss or damage to property, loss of income from
the property, non-availability of property for use, additional expenses incurred
on the property to make it usable
c) Liability risks- These risks involves the possibility of loss due to the damages
or compensation payable to third parties on account of intentional or
unintentional torts or injury to the rights of others
2. Insurable and non-insurable risks- Insurable risks are those risks which can be
covered under different types of insurance policies. The following are the
essentials/characteristics of insurable risks
a) The risk must arise out of ordinary course of business i.e. it must be accidental
not artificially created by the insured
b) There must be an element of uncertainty as to the occurrence of risk of risk or
the time of its occurrence
c) The risk must be common to a large number of a similar business units so as to
justify its spreading at a nominal cost
d) The loss or incidence of risk must be definite and capable of being estimated or
measured with a fair degree of accuracy
e) The party/insured must have some interest in avoiding the risk

3. f) The likely loss must be large enough to cause hardships but should not be
catastrophic
-Non-insurable risks- Those are risks that cannot be insured against because the
probability of their occurrence cannot be determined i.e. those uncertainties which
cannot be forecasted, and which are caused due carelessness of the
entrepreneur/businessman/managers are the non-insurable risks. Meaning that
he/she could have done something to prevent them from occurring. E.g. fall in
demand due to changes in prices, changes in fashion due to change in technology
etc.
3. Internal and external risks
- Internal risks- are those risks which arise from events within the business
enterprise. E.g. fire, breakdown of machinery, dishonesty of employees and loss
due strike of workers
- External risks- Those are losses which result from forces outside the particular
business undertaking e.g. changes in market conditions, technological changes,
political changes, natural calamities, social disturbances etc.
4. Fundamental and particular risks: Fundamental or general risks are group risks
which affect the entire population or a large segment of it. These risks are
impersonal in origin and consequence. They include: Floods, earthquakes, storms,
famine, war, inflation etc.
- Particular risks- they arise from mistakes of a particular individuals, and they
affect only a few persons e.g. bank robbery, burning of the factory, murder of a
manager etc.
5. Static and dynamic risks: Static risks results from factors other than changes in
the economy. Such risks lead to the destruction of an asset or changes in its
possession. E.g. dishonesty of employees, natural calamities etc. these risks are
generally predictable because they tend to occur at regular intervals of time
- Dynamic risks- Those are risks caused by changes in the economy e,g inflation,
changes in consumers incomes, technological changes, changes in consumer tastes
etc.
Risk Management
It involves the following stages:
i) Identification of the risk
ii) Evaluation of the risk
iii) Choice of the method of handling risk
iv) Utilizing the selected device/method
v) Evaluating the aftermath

4. Methods of handling Risks
a) Avoiding risks- where the entrepreneur can become not involved in the actions
that gives rise to risk. However, this may not be practicable i.e. it may not be
possible sometimes
b) Preventing risks by:’
i. Forecasting and marketing research
ii. Research and development to prevent losses due to fall in fashion of
products
iii. Credit screening and control i.e. careful screening of customers before
giving them goods/services on credit
iv. Safety programmes. These would prevent losses due to fire and other
accidents
v. Training and development of employees- this reduces the incidence of
industrial accidents and spoilage
vi. Business combination- this is where firms cooperate to control supply to the
market in order to reduce/control losses due to fall in prices
vii. Shifting risks- hedging e.g. textile mill which keeps a stock of 200 bales of
cotton runs the risk of loss due to a fall in price of cotton. This firm may
hedge by selling those 200 bales waiting to buy the same number of bales
at future low prices
- Subcontracting- where the firm buys specialized services from external experts
c) Assuming risk- where no steps are taken to avoid it
d) Dividing risk e.g. where the firm sells its shares to the public, in case of loss, it is
shared between all the shareholders. Taking insurance cover is also a method of
sharing risk