The role of business enterprise and entrepreneurship - OCRThe concept of risk and reward

Risks

Every businesses decision has an element of risk. A successful entrepreneur must be willing to take risks. However, they should also be able to recognise when the level of risk is too high, by using information, such as market research data, that is available to them.

Business activity can expose an entrepreneur to different types of risk:

• financial loss
• lack of security
• business failure

Financial loss

An entrepreneur needs money to set up a business. This may be their own money or borrowed money, perhaps from a bank or an investor. The business will then need to ensure that profits are sufficient to pay this money back.

If the business is not profitable then the entrepreneur, and any lenders, risk losing the money.

Lack of security

Setting up and running a business takes time and energy. Entrepreneurs often have to give up their existing job to pursue their business idea, along with the security of a regular income. In addition, they may have to work long, irregular hours, and may find it difficult to take holidays in the early days of running a business.

Business failure

A major cause of business failure is a lack of cash flow. A business can face serious problems if they don’t have enough money coming in to cover costs. A customer paying late may mean a business is unable to buy supplies or pay its employees.

Another big risk that a business faces is the failure to make enough money to survive and being forced to close. This usually happens due to poor revenue, which can be caused by:

• a lack of market research to find out what customers want
• running out of raw materials
• poor management, with not enough thought given to the consequences of decisions on how to manage the business

Minimising the risks

Risk is unavoidable. However, with careful planning, an entrepreneur can minimise the amount of risk they face by:

• carrying out market research to find out what customers want
• writing a business plan to identify potential problems
• ensuring that there is sufficient money available

Rewards

Starting a business always involves risk, as success is never guaranteed. Some entrepreneurs will make the decision to start a business based on their intuition, because they have an idea that they really believe in. Most entrepreneurs will calculate the risks involved in starting a business, and weigh them against the potential rewards that they might receive.

The rewards of starting a business might include:

• profit
• business success
• independence

Profit

Making money is the driving force behind many business start-ups. This is because profits can be put back into the business, to help it survive and grow.

Profit also provides an incentive for an entrepreneur to start a business, if they believe they can earn more money than they would if they worked for someone else.

Business success

Success in business can mean various things. For many entrepreneurs, seeing their ideas become popular is sufficient reward. Other entrepreneurs may see success in the form of:

• a growing business
• a positive reputation
• winning business awards
• becoming a well-known business person

Independence

Some entrepreneurs choose to set up their own business because they want to do something that interests them. Other entrepreneurs may not want to work for someone else – having the independence to make their own decisions and control their own working hours can be sufficient reward for some entrepreneurs.