risk – The possibility that the return on investment will be lower than expected
To remember what risk means use the following mnemonic:
The business owners risk (risk) their money on the new idea. There's a possibility that they will make a loss or a profit.
Risk is an inevitable part of business. There are many internal and external factors than can impact a business’ performance (ability to make a return on investment). Some of these factors are outside the business’ control, such as global economic conditions or natural disasters, while others depend on the level of innovation and quality of management.
A central part of business management is mitigating risk, including contingency planning for possible issues that may arise and competitor analysis to ensure that your product or service is positioned competitively in the marketplace, or different enough (with a big enough market). The better your planning and analysis is, the lower the risk is of making a loss.
Although you can’t run a business without risk, you can help to reduce it:
A high street store was purchased rather than rented with a fixed term of 10 years. Luckily this was a smart move by the owner of the business because although initially the costs were higher, the business failed after two years. Rather than suffer further losses of eight more years rent, the building was rented out. Although the return of the investment is now only 3% it has not turned into a loss. The risk of overall failure was reduced by buying the property.
A manufacturing supplier to a shop recommended that the owners buy from them to sell to their customers, but the product range was very expensive. The owner of the shop agreed to buy the products in only if the manufacturer agreed to buy them back if the product didn’t sell well. This reduced the risk for the shop owner but increased the risk for the manufacturer.