The interdependent nature of business - OCRThe impact of risk and reward on business activity

Risk

Every businesses decision has an element of risk. A successful entrepreneur must be willing to take risks, but should also be able to recognise when the level of risk is too high.

Business activity can expose an entrepreneur to three different types of risk:

1) Financial loss

When starting a business an entrepreneur will need money. This may be their own money, or borrowed money, perhaps from a bank.

The business will then need to ensure that profits are sufficient to pay this money back.

If the business is not profitable then the entrepreneur, and any lenders, risk losing the money that has been used within the business.

2) Lack of security

Setting up and running a business is a full time job. Entrepreneurs often have to give up any previous job in order to pursue their business idea, along with the security of a regular income from it. In addition, they may have to work long, irregular hours, and find it difficult to take holidays unless their business becomes successful.

3) Business failure

The biggest risk that an entrepreneur faces is that their business fails to make enough money to survive, and is forced to close.

This usually happens due to poor sales caused by:

• A lack of market research to find out what customers want.
• Poor management, with little thought given to decisions

If this happens then the entrepreneur is also likely to experience financial losses.

Minimising the risks

Risk is unavoidable, but with careful planning, an entrepreneur can minimise the amount of risk that they face by:

1. carrying out market research to find out what customers want
2. writing a business plan, to identify potential problems
3. ensuring that there is sufficient money available

Reward

Entrepreneurs will be willing to take a risk in starting a business if they think the potential rewards are greater. Rewards might include:

1) Profit

Making money is the driving force behind many business start-ups. This is because profits can be put back into the business, to help it survive, and grow bigger.

It also provides an incentive for an entrepreneur to start a business, if they believe they can earn more money than they would if they worked for someone else.

2) Business success

Success in business can mean different things. For many entrepreneurs, seeing their ideas become popular is sufficient reward. Other entrepreneurs may see success in the form of:

• a growing business
• a positive reputation
• winning business awards
• becoming a well-known business person

3) Independence

Some people choose to set up their own business because they want to do something that interests them. Other entrepreneurs may not want to work for someone else; having the independence to make their own decisions, and control their own working hours can be sufficient reward for some entrepreneurs.