Uncertainty in Business Quiz PDF

Anticipating risk and uncertainty in the business environment Definition: Risk This is the possibility that the business will have a lower than expected profit or a loss Financial risks Starting a business can be a financial risk for the owner The owner may put their own cash and other...

Anticipating risk and uncertainty in the business environment Definition: Risk This is the possibility that the business will have a lower than expected profit or a loss Financial risks Starting a business can be a financial risk for the owner The owner may put their own cash and other assets (e.g. a van) into a business If the business is sole trader or partnership then they have “unlimited liability” which means they could lose their personal assets to pay the business debts Lack of security If an entrepreneur has a regular job, and they decide to leave that job to open their own business this is a huge risk; They may have a mortgage, a car and other bills to pay Also there may be insecurity of sales with falling consumer incomes Definition: Uncertainty Uncertainty is when businesses are unable to predict external shocks or future events Uncertainty (unlike risk) is not objective and does not assume knowledge of alternatives Uncertainty and extreme weather: example Toyota Toyota has made changes to its production system after the 2011 quake exposed the vulnerability of the "just in time" system, which allows companies to operate without big and costly inventories and instead receive small quantities of parts from suppliers only when needed. All the parts were made in Japan and shipped to the UK plants where they were assembled into cars Uncertainty and health scares A health scare is a widely reported story about the danger of something, usually a consumer good or medical product In 1988 Health Minister Edwina Currie said most of Britain’s eggs were infected with salmonella, as a result sales of eggs dropped dramatically by 60% and farmers were forced to slaughter 4 million hens and destroy 400 million unwanted eggs Uncertainty and commodity price shocks Commodity means: a raw material or primary agricultural product that can be bought and sold, such as copper or coffee If a business relies on commodities as raw materials then price shocks could mean a significant impact on profit Have a look at the FT.com commodity prices data What is a commodity? Uncertainty and changes in exchange rates An exchange rate is the value of one currency valued in terms of another UK exporters benefit from a fall in the value of sterling. However British firms importing raw materials, components or foreign-made goods face higher costs and must either put up their prices or reduce their profit margin Key factors that influence exchange rates: Economic uncertainty £1 to $ today is____________________ Political stability and performance Inflation Interest rates Uncertainty and changes in interest rates The UK Interest rate is the cost of borrowing to consumers If interest rates go up then consumers are less likely to borrow for cars, houses, furniture, holidays etc. If consumers stop spending and start to save then the economy may start to enter a recession Have a look at the chart on the right. What happened 2008/2009?