Risks & Uncertainty (AQA GCSE Business)

Key Business Risks

• Business uncertainty is when a business cannot predict what is going to happen or directly influence it

  • All businesses face uncertainty

• Uncertainty cannot be prepared for because it is unknown and cannot be measured

  • Factors that typically cause uncertainty include:

    • Environmental factors such as the Japanese Tsunami in March 2011

    • Economic changes such as Covid lockdowns, Brexit or collapses in the banking system

    • The entry of new competitors

    • Changes in local and national legislation (laws)

    • Changes in the political party governing the country

• Risk can be measured, allowing business owners to make informed decisions before taking action

  • E.g. Awareness of increased demand for music on vinyl, extensive market research and a strong business plan convinced entrepreneurs Joel Magill and Will Greenham to set up Smugglers Records in the small seaside town of Deal

Diagram: Risk versus Uncertainty 

Whilst risk can be calculated and planned-for, uncertainty does not allow for preparation as it is based on the unexpected

• Business risks can be classified as internal risks or external risks

  • Internal risks arise from inside of a business, over which the business often has a significant level of control

  • External risks are those outside of the business over which the business is likely to have less control

Examples of Internal and External Business Risks

• Business owners have varying levels of risk they are willing to accept

  • Risk-averse entrepreneurs may prefer to start small and achieve slow growth

  • Some entrepreneurs may prefer to share risks with others in a partnership or protect their personal assets by forming a private limited company

• Successful entrepreneurs can manage risk and quickly respond to uncertainty in the business environment

An Example of Entrepreneurial Response to Uncertainty

Minimising Risks

• Although some level of risk is to be expected, businesses can reduce the level of risk they face by taking a range of actions

Diagram: Ways to Reduce risk

Businesses can reduce risk by investing in training, careful business planning, using experts and carrying out research

Invest in training

• Providing employees with the necessary skills, techniques and information can have a significant impact on risk reduction, as they will know how to respond when facing risks

  • E.g. Public relations training can improve communication with the media, whilst IT training can help workers understand how to protect the security of systems with which they work

Diversification

• Developing new products and targeting different markets helps a business diversify into different markets and reduces the risk of overall failure

  • If a key market is affected by an unexpected event, resources can be focused on a different market, allowing business objectives to be met

Carry out research

• Market research helps businesses find out what customers want, reducing the risk of developing products that fail to meet their needs

Business planning

• Business planning involves detailed forecasting of what is likely to happen in the future

  • It can help businesses make appropriate decisions and prepare resources in anticipation of external events that could affect business success

Use experts

• Taking on board the advice of business consultants and experts can aid business planning with a deeper understanding of risks

  • E.g. Finance consultants can improve understanding of economic factors that could impact a business, and help managers make appropriate decisions to avoid the worst impacts

Take out insurance

• Businesses can purchase insurance policies that provide some protection against the most common risks, such as fire, floods and theft

  • Financial compensation can fund business recovery from these kinds of risks