1.2a Calculated Risk Flashcards
What is calculated risk?
A chance of exposure to loss or injury that might be undertaken after its advantages and disadvantages have been carefully weighted and considered. Many business operators need to take a calculate risk to expand their business activities into a new competitive arena.
What is one ratio to calculate business risk?
Contribution Margin Ratio: The contribution margin ratio is the contribution margin as a percentage of total sales. The contribution margin is calculated as sales minus variable costs. The contribution margin ratio is calculated as: Contribution Margin/Sales = 1 - variable costs/sales. If a company’s contribution margin ratio is 20%, then a $50,000 increase in sales will cause a $10,000 increase in profit.
What does setting up a business come with?
Setting up a business involves risks and reward. Profit is the reward for risk-taking. Losses are the penalty of business failure.
Why do entrepreneurs have a business plan?
Most small businesses have very limited resources. Research is costly and can seem like a poor use of time. Some entrepreneurs ignore planning and analysis and instead rely on their gut instinct. They launch products they believe customers want and competitors cannot match. Poor planning is a major cause of business failure.
What is a business plan?
A business plan is a report by a new or existing business that contains all of its research findings and explains why the firm hopes to succeed. A business plan includes the results of market research and competitor analysis.
What is analysis?
Analysis is when a business interprets information.
What do business plans do?
Drawing up a business plan forces owners to think about their aims, the competition they will face, their financial needs and their likely profits. Business plans help to reduce risk and reassure stakeholders, such as banks.
What do businesses need to do in order to attract customers?
In order to attract and satisfy customers, businesses need to be competitive and make products that are superior to their rivals.
Is attracting customers easy?
This is not easy because businesses operate in a dynamic and challenging market place. Business rivals are likely to be at work creating new products or improving operations to reduce costs and drive down prices. Businesses may need to adapt their products because ever-changing fashion trends mean that customer requirements evolve over time. Success today is no guarantee of future profits.
What will a competitive market have?
A competitive market will have many businesses trying to win the same customers. A monopoly is either the only supplier in a market, or a large business with more than 25% of the market.
When do businesses face the most risks?
They usually face the most risk in the start up of the business. Due to this one third of new businesses fail within the first three years.
Why is taking calculated risks important?
They allow a business to grow and progress at a faster rate.
What are the 4 steps of risk management?
Assess,
Evaluate,
Manage,
Measure
Why are the 4 steps of risk management, essential for a business to go through?
Without planning and going through each step, a business may be taking too big of a risk that could destroy their company.
What is risk management?
Risk management identifies risks that a business could potentially face. It also implements strategic methods that tackle risk in an effective way.
