Risk & Return.

The term business risk is used to refer to the uncertainty associated with the future projections or expectations that company holds in relation to the returns from the business (Besley, 2008). This risk is calculated either on the basis of assets or it may be calculated in terms of equity. In other words an organization tries to identify the return or loss it will face by investing a certain amount of money in assets or the return the company will gain by investing money that it has obtained through the measure of equity financing. If an organization does not obtain money from external sources and only obtains money from internal shareholders, the business risk is calculated in terms of the risks associated with organization’s own operations.

The level of business risk an organization experiences is dependent on the stability of its operations. A business is said to have stable operation when organization experiences a steady flow of sales and purchases over a long period of time and there are lower chances that there will be any changes in these trends. A business is said to have unstable operations when the demand and supply of that business is difficult to predict or keeps on changing. For example: a power supplying monopoly is said to have lower risk of business since it is the only supplier and consumers do not have different options to choose from so its sales may not decline or fluctuate in the long run. A business that has stable operations is said to have lower business risk because it can easily meet its debt requirements in future through its sales and returns. On the other hand, a business that is unstable may not be able to meet its debt requirements on time and that is why such a business is said to have a higher business risk.

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