Understanding Business Risk and Uncertainty

Anticipating Risk and Uncertainty in Business

• Risk is the possibility a business will have lower profits or losses than expected.

Financial Risks

• Starting a business is a financial risk for the owner.
• Owners may invest personal cash or assets (e.g., a van) in the business.
• Sole traders and partnerships have unlimited liability, meaning personal assets can be used to pay business debts.

Lack of Security

• Entrepreneurs leaving a stable job to start a business face significant risk.
• Existing financial obligations like mortgages, cars, and other bills create pressure.
• Insecurity of sales, especially with falling consumer incomes, poses a considerable risk.

Definition: Uncertainty

• Uncertainty is the inability of businesses to predict external shocks or future events.
• Unlike risk, uncertainty isn't objective and doesn't assume knowledge of all alternatives.

Uncertainty and Extreme Weather: Example - Toyota

• Toyota adjusted its production system after the 2011 earthquake.
• The "just-in-time" system, minimizing inventory, became vulnerable.
• Toyota now receives parts from suppliers only when needed.
• This change reduces inventory costs and improves efficiency.

Uncertainty and Health Scares

• Health scares are widely reported dangers associated with consumer goods or medical products.
• The 1988 salmonella scare in Britain drastically reduced egg sales.
• Farmers slaughtered millions of hens and destroyed eggs due to the crisis.

Uncertainty and Commodity Price Shocks

• Commodities are raw materials or agricultural products (like copper or coffee).
• Businesses reliant on raw materials are significantly impacted by price shocks.
• Commodity price data is available online (e.g., FT.com).

Uncertainty and Changes in Exchange Rates

• Exchange rates are the value of one currency in terms of another.
• UK exporters benefit from a weakening pound.
• Importers face higher costs, needing price increases or reduced profit margins.
• Key factors affecting exchange rates include economic uncertainty, political stability, inflation, and interest rates.

Uncertainty and Changes in Interest Rates

• The UK interest rate measures the cost to consumers of borrowing.
• Higher interest rates decrease borrowing rates for cars, houses, and other goods.
• Reduced consumer spending can signal an economic recession.

This quiz explores the concepts of risk and uncertainty in business, focusing on financial risks associated with entrepreneurship and the lack of security faced by new business owners. It also discusses the impact of unforeseen external events, using Toyota as an example to illustrate how companies adapt to uncertainty.