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.