1.1.2 Risk and Reward

Question 1

What are the risks of starting a business?

Answer 1

- Business failure
- Financial loss
- Lack of security
- Poor management
- Poor market research
- Sales lower than expected
- Start-up costs too high
- Unexpected shocks
- Too reliant on a small number of customers
- Poor quality
- Overworking/Stress
- Bankruptcy

Question 2

How is poor management a risk of starting a business?

Answer 2

• planning is inadequate leading to poor decision-making
• costs not kept under control
• business owners or managers do not understand their market and customers well enough and/or quality of product is not provided

Question 3

How is poor market research a risk of starting a business?

Answer 3

• market research should be carried out
• this will need to be reliable enough to predict future sales
• it is however, often not conducted as it is too expensive or, if it is completed, the data is frequently out of date or not relevant

Question 4

How is sales being lower than expected a risk of starting a business?

Answer 4

• it is very each to over-estimate the sales that will be achieved by a start-up
• the business plan can be over-optimistic about the price that customers will accept and the volumes they will buy

Question 5

How is start-up costs being too high a risk of starting a business?

Answer 5

• sometimes costs are simply missed out altogether or under-estimated
• this is a big concern at the start-up stage, where finance is limited
• a delayed product launch or store opening may be the cause of start-up costs being higher than expected

Question 6

Examples of unexpected shocks:

Answer 6

• for example, flash floods that hit different places in the UK from time to time
• a new competitor entering the market
• a global recession
• a change in government
• the UK leaving the EU

Question 7

How is being too reliant on a small number of customers a risk of starting a business?

Answer 7

• being too reliant on one or a few customers means a business is at a grater risk of failure than one which has a broader, more diverse customer base
• if the customer relationship breaks down and/or the customer stops buying the products from the business, then it puts the business at risk

Question 8

How is poor quality of products/services a risk of starting a business?

Answer 8

persistent poor quality goods or services will ultimately “ruin” a business, as rival businesses will produce superior products that customers will undoubtedly prefer

Question 9

How is overworking/stress a risk of starting a business?

Answer 9

risk on mental health, increasing stress levels meaning not able to focus as much on business having negative effective on quality of products/services of business reducing sales

Question 10

How can you reduce the risks of starting a business?

Answer 10

• Business plan
• Market research
• Be cautious
• Finance with care
• Take calculated risks
• Keep costs down
• Protect
• Monitor and review
• Ensure that the business is competitive

Question 11

How can planning reduce the risk of starting a business?

Answer 11

prepare a realistic business plan - don’t overestimate sales or levels of production

Question 12

How can researching e.g. market research reduce the risk of starting a business?

Answer 12

market research should be valid, up to date and specific to the business’s needs

Question 13

How can being cautious reduce the risk of starting a business?

Answer 13

the business should avoid growing too fast

Question 14

How can doing finances with care reduce the risk of starting a business?

Answer 14

• raise sufficient start-up finance
• an entrepreneur’s own savings, shares and retained profits are safer than loans as these sources of financed do not need to be paid back

Question 15

How can taking calculated risks reduce the risk of starting a business?

Answer 15

weigh up the possible positive and negative impacts of the risk your taking to know whether its worth it

Question 16

How can keeping costs down reduce the risk of starting a business?

Answer 16

premises and staff are expensive - start off small (don’t try to expand immediately) and the grow business as to avoid taking out loans and getting into too much debt

Question 17

How can protecting the business reduce the risk of starting a business?

Answer 17

a company with limited liability will protect investors which protects money used to create products/services

Question 18

How can monitoring and reviewing the business reduce the risks of starting a business?

Answer 18

• look back and look forward
• ensure the business is on track and where it should be
• monitor finances and review the aims and the objectives of the business to assess progress

Question 19

What are the rewards of starting a business?

Answer 19

• Profits
• Business success
• Independence
• Capital gains
• Financial security
• Satisfaction
• Success

Question 20

How is profits from the business a reward of starting a business?

Answer 20

• money that is earned in trade or business after paying the costs of producing and selling goods and services
• income for the owner

Question 21

How can capital gains be made (a reward of starting a business)?

Answer 21

capital gains can be made for the owner by selling the business

Question 22

How is independence a reward of starting a business?

Answer 22

• having total control over your business
• being your own boss
• having freedom over your work

Question 23

How is satisfaction a reward of starting a business?

Answer 23

satisfaction from building something that is successful

Question 24

How is success a reward of starting a business?

Answer 24

financial success and fame

Question 25

How is the risk of starting a business worked out?

Answer 25

risk is worked out by considering probability of a negative outcome occurring and the impact of the negative outcome

Question 26

How does starting a business involve risk?

Answer 26

starting any business will involve taking a risk because there are so many unknown factors that affect long-term business success

Question 27

How is business failure a risk of starting a business?

Answer 27

through poor cash flow, fall in sales revenue or the action of competitors

Question 28

How is financial loss a risk of starting a business?

Answer 28

• financial loss → because starting a new business is expensive and requires finance from owners savings/assets → as a result if sales fall and the business begins to fail this would cause the entrepreneur to lose money
• an owner may lose the capital they invest in business if it fails
• could inc. their personal belongings if business has unlimited liability

Question 29

How is lack of security a risk of starting a business?

Answer 29

not working for someone else means no guaranteed income, sick pay or holidays

Question 30

How are profits a reward of starting a business?

Answer 30

• when revenue exceeds the costs of producing and selling goods and services
• income for the owner

Question 31

How is business success a reward of starting a business?

Answer 31

• to accomplish the company goals and aspirations
• personal satisfaction
• excellent products/services
• business growth
• awards and recognition

Question 32

Business success:

Answer 32

the chance of the business surviving and growing

Question 33

Explain financial risk for starting a business:

Answer 33

• An entrepreneur may take a financial risk when starting a business
• This is because a new business will need financial investment to start up
• If the business fails then the entrepreneur could lose this money (1)

Question 34

Explain how giving up your job is a risk of starting a business:

Answer 34

• An entrepreneur may have to give up their job to start the business
• This could lead to them losing regular income from wages/salary
• This will lead to a lack of security in their lives