Risk and Uncertainty + Opportunity Costs Flashcards
Risk
Anyone running a business has to face uncertainties + risk
Aim to try identify all of them they may face
the bigger the risk is taken, the bigger the reward ( no guarantee of it though )
Risk should never be taken recklessly
= needs to be managed
= nature of the risk needs to be understood
What’s pure risk
An event beyond someone’s personal control
Result in a kind of loss (never a gain/good thing)
(Fire, natural disaster, fraud)
Still something can be done about these risks - contingency planning
What’s speculative risk
Carries the possibility of a gain + a loss
(open a new factory in order to increase output)
Costs and benefits to this need to be considered in great detail
Financial will be easy to measure but social costs i.e. social costs like staff morale not easy to measure
Uncertainty
High degree of uncertainty = higher degree of risk
= greater degree of planning required
Still cant eliminate the risks despite all the planning that you’ve taken
Some managers unwilling to get involved in the decision as they feel it may reflect badly upon them
Different risks face by different businesses
=small businesses/sole traders have different uncertainties/risks than a business that’s been successfully trading for 50 years
Some risks are similar = competitor risks (on different scales)
=plc can respond better to competitors due to their better position
risk of failure
=plc can make a loss for a while and still survive
=sole trader with personal bankruptcy with their unlimited liability if they start to make a loss
Will largely influence the objectives that they’ve set too
PLC = maximising profits
Sole trader = survival
Risk Management
risk will never be eliminated
Cannot guarantee success ether
Risk is ongoing not a one off
Careful decision making based on risk is very important
What’s personal risk
Entrepreneaurs taking risks witht heir physical and mental well-being
=working long hours
=found in the early stages of a business existence
Sole traders at personal risk with their homes as loan security or unlimited liability if their business collapses
What’s quantifiable risk
The likelihood of a predictable risk occurring
Measurable and can put a value on it
What’s unquantifiable risk
The risk of an event that is totally unexpected
Cannot put a value on this risk
Opportunity Cost
Not enough resources to do everything they would like to do so something else has to be forfeited
= only has the money to do one option
The real cost of a business decision, time or money that can always be put to better alternative use
Current objectives and the course of action need to be considered before the decision is made as there is no use in it
unless it is going to contribute to the objectives or what the business is trying to achieve
