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Tuesday, November 10, 2015

A Discussion on Business Risk

Risk is a possibility that a plan might fail or a situation goes against us. All of us face risks in our day to day lives. For a person commuting to work, the risk is that he might be caught up in a traffic and be late for office. For an investor the risk is that his investments does not generate the kind of returns that he expected.

For a business, risks can take a variety of forms. For a firm involved in real estate development, any rapid fall in property prices represents a potential risk. For a manufacturing firm any increase in raw material cost is a risk.

However, it is important to note that what represents a risk for one firm could well present an opportunity for another. While the falling property price is a risk for the real estate firm, it could be a boom for a company which is looking to acquire a property for setting up a showroom for its products.

Most successful businesses would have some form of mechanism in place to identify and mitigate potential business risks. A business would mitigate risk of product obsolescence by investing in research and development. The real estate firm might try to protect itself against falling property prices by entering into forward contracts with its customers.

Not all risks can however be mitigated. Political instability or war can push an economy into depression. It is during these times that most business would report low turnover and negative profitability.

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