1.1.2 Risk & reward Flashcards
The impact of risk and reward on business activity:
*Risk: business failure, financial loss, lack of security
*Reward: business success, profit, independence
Business failure
If a business fails to plan for the future it may risk losing out to competitors
A business must have a clear strategy and plan if it is to survive in a today’s dynamic business world
For example Blockbuster failed to take up the Netflix offer as they had no digital strategy
What is the chance of failure in a new start-up?
20% of small businesses fail in their first year
30% of small business fail in their second year
50% of small businesses fail after five years in business
70% of small business owners fail in their 10th year in business.
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: Business rewards
Not everyone defines reward the same way. For some it might be seeing a new venture grow and succeed. For others it may be conquering the unknown and striking out on their own
A business reward is a benefit that it brings to the owner e.g. better working conditions
Business success
The rewards of a good business is success
This may mean; awards, fame, survival, growth or making more money than they would working for someone else
Keep all the profit
Profit = Total revenue – Total
costs
A reward of setting up your own business is you get to keep all the profit that the business makes
In time equipment may break or get old and you may need to invest some of your profit back into the business
If you take on a business partner you may also need to share the profits with them
Independence
A reward of setting up your own business is that you could be your own boss
Being your own boss means you get to make the major decisions in the business
You can also change the business if you want to
Many people would like to have this degree of control in their working lives, which motivates them to start their own business
