Risk - Business Finance - ثاني ثانوي

6.1 Risk Key Terms Risk Natural risks Economic risk Human risks Link to digital lesson www.den.edu. Pure risk Speculative risk Controllable risks Uncontrollable risks Each day, everyone faces uncertainty and risk. Businesses face risks that can have a significant economic effect. Property and inventory can be damaged, lost, or stolen; personnel can become ill, injured, or even die, and the company's products or employees can cause damage to property or harm to others for which the business is liable. Risk carries with it the possibility of financial loss. янк The degree of uncertainty about whether an antipared return will be achieved 6.1a Types of Risk An economic risk has a potential financial impact. Some risks are not economic in that they have no direct or immediate financial impact. When you attend a social activity with friends you risk not enjoying yourself. If you do not study for an exam, you risk earning a poor grade. But if an employee becomes ill and cannot work for several weeks, the person faces a financial loss of wages. If a business warehouse is destroyed by fire, the money invested in the building, equipment, and inventory is lost. Economic risks are either pure or speculative. 1. With a pure risk there is no opportunity for financial gain but only loss. For example, businesses that face the risk of fire earn no more money if the fire does not occur but suffer financially if property is damaged by fire. Severe weather is another example of a pure risk. 2. Á speculative risk has the possibility of either financial loss or gain. Investments have speculative risk. By investing money where the value of the investment may rise or fall, the investor can make money or lose money. Uncertainty with a potential financial impact Pure Uncertainty with no Opportunity for financial gam, only a potential loss Speculae ush A situation with the possibility of either financial loss or gain وزارة التعليم CHAPTER Risk and Its Measurements 225

Why Do Individuals and Businesses Take Risks? Individuals and businesses take risks because of opportunities, or the possibility for success. Financial success is one of the possible outcomes of a speculative risk. In addition to financial gain, success can be measured in non-financial ways. Recognition and personal satisfaction are viewed by some as successful outcomes that do not carry a financial reward. What risks might a business encounter? 2200

' Risks Sources or Causes Risks have many sources or causes. 1. Natural risks arise from natural events or phenomena. Hurricanes, floods, earthquakes, droughts, and sand storms are all natural risks that can result in damage and loss. 2. Human risks result from the actions of individuals, groups, or organizations. Injuries suffered by negligent driving, losses from customer or employee theft, or fires that start from unsafe storage of products are results of human risks. Controllable and Uncontrollable Risk Some risks can be controlled while others cannot: 1. Controllable risks can be reduced or avoided by careful actions. Most human risks are controllable, for example, safe driving, employee safety programs, and proper maintenance of buildings can reduce accidents and injuries. 2. Uncontrollable risks cannot be influenced by human action. Natural events such as floods and hurricanes cannot be stopped, although careful planning and preparation can reduce the losses that result from many natural risks. Neiral Fisks Uncertainty resulting from of natural events or phenomena Uncertainty resulting from the actions of individuals, groups or organizations Controllablensks Unexpected possibilities that can be avoided or whose negative effects can be reduced by careful actions Uncertainties that cannot be influenced by human action 6.1b Uncontrollable Business Risks Whenever a company implements a business decision, risk is involved. An accidental fire may destroy a factory in another country, or a company may go bankrupt and not be able to repay its debts. The four common uncontrollable risks faced by companies are geographic risk, economic risk, cultural risk, and political risk, (see Figure 6.1). وزارة التعليم CHAPTER & Risk and Its Measurements 227

FIGURE 6.1 Uncontrollable Business Risks GUERAPHIC FACIONS CONUMIC FAL (OR 228 Business Finance CULTURAL ACTIONS UNCONTROLLABLE BUSINESS RISKS BEN AND LIAORK Filmsbilly Geographic Risks A geographic risk is the risk which is incurred in certain geographic regions worldwide. Examples include extreme weather conditions such as hurricanes, typhoons, and flooding, as well as sand storm and earthquakes. As a result, poor weather conditions can destroy agricultural crops. or a rough terrain in a country can result in transportation difficulties, resulting in widespread economic and infrastructural problems. These and other geographical factors create risks for businesses. Economic Risk Changing prices, currency values, and consumer spending create economic uncertainty. Economic conditions have ups and downs affecting the demand for a company's goods and services.

What type of geographic risk might a business be subject (o? Cultural Risk Cultural differences such as traditions, social values, and family relationships can create uncertainty when doing business in different settings. Business activities are conducted differently in different parts of the world. Companies doing business in other countries must respect and be sensitive to cultural variations and beliefs of people in those nations. Failure to do so is likely to result in an unsuccessful endeavor even if all other business actions are appropriate. In a similar manner, companies that stress individualism would face greater risk when doing business in nations that emphasize collectivism. Also, the connection between family and business is very important in some cultures and less important in others. Companies must work within this cultural environment to minimize business risk. وزارة التعليم CHAPTERA Risk and Its Measurements 229

230Business Finance 921-19 Political-Legal Risk Political risk is difficult to evaluate. Government instability and political uncertainty are risks global companies must monitor constantly. Business regulations vary from country to country. Regulations on business might be very tight in one nation, while great freedom is allowed elsewhere. Food packages in one country may require extensive nutritional information. However, another market may have different laws regulating food labeling. Trade barriers also pose a potential political risk. Tariffs, anti-dumping laws, import quotas, and currency exchange controls are examples of political actions taken to limit imported goods. Awareness of these international business risks is especially important for Saudi Vision 2030 with diversified economic activities expanding in various global markets. In contrast to uncontrollable uncertainty, controllable risks are often related to internal business situations. 6.1c Controllable Business Risks Operational Risks The day-to-day activities of a company also create risks. Failure to innovate or to meet the needs of customers can cause lost profits. A disruption in the supply chain or distribution process also means a disruption in business. Higher prices of production inputs or a shortage of raw materials are other possible risks.

Exercises Choose the correct answer. 1. A pure risk is a situation with an opportunity for a future financial gain. True/False 2. A risk is a situation with the possibility of either financial loss or gain. a. pure b. speculative c. natural d. controllable 3. Government regulations of business can create a a. political legal b. geographic c. cultural d. controllable وزارة التعليم risk. CHAPTER Risk and Its Measurements 231