1. The relationship of businesses’ profit to risk assumption
Since the business environment is constantly changing, starting a new business comes with huge risks. “Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable.” (Nickels, McHugh, & McHugh, 2019, p.5). Professor and economist F.B Hawley states that profit is the reward of risk taking in business and that the higher the risk, the greater the potential financial reward for the business owner. New and older businesses both have potential risks that should be assessed frequently, and steps should be taken to reduce them. A loss occurs when a business’s expenses exceeds its revenues. It is important to estimate the probability of financial loss in various situations. Risk assumption is when an entrepreneur assumes the financial burden of a business loss.
“Profit is money a business earns above and beyond the money that it spends for salaries and other expenses.” (Nickels, McHugh, & McHugh, 2019, p,4). “Profit is the reward for uncertainly-bearing and not of risk-taking in a business”. (“Theories of Profit/Role of Profit in the Operation of a Free Economy,” n.d.) Profit is simply the money you have left over after paying all your expenses. Not all businesses make the same amount of profit each year. In most cases, those who take more risks end up making more profit. It is important to assess all risks carefully, before starting new ventures.
“Risk management is the process of identifying, quantifying, and managing the risks that an organization faces. These risks include strategic failures, operational failures, financial failures, market disruptions, environmental disasters, and regulatory violations.” (“Risk Management Definition from Financial Times Lexicon,” n.d.). Many companies welcome high-risk situations with the intend to make substantial profits. By employing professionals to secure high profits and putting a risk management plan in place, the business can take on new ventures easier.
The relationship of profit and risk assumption, allows the business owner to take a risk in entrepreneurial activity that could potentially produce a greater profit. My conclusion is that without taking risks, a business cannot truly obtain substantial profits.
2. Entrepreneurship has become increasingly popular with the change in time because of the freedoms that come along with working for oneself. An entrepreneur is a person who risks time and money to start and manage a business. A business is any action that provides goods and services to another for a price. The primary goal for a business is to be able to make a profit. Profit is the amount of money left over after paying all operating expenses and salaries for all employees, including yourself. (Nickels, 2016, pg.4). The profit from the business is the owner’s to use however they choose. Some options include hiring more employees, expanding the business, or just making changes to keep up with the competition. However, to make a profit, you must be willing to take risks. The bigger the risk you are willing to take, the more potential you have for a greater profit.
The relationship between risk and profit are not always the same in every situation. Some risks you can foresee the outcome and manipulate as needed until you achieve your desired goal, but some risks are not able to be manipulated. Some risks an entrepreneur takes must be completely blind. Often, the most potential for profit spurs from risk that are unable to be manipulated. There are three types of risks that are taken in business: insurable, eternal, and internal. Insurable risks have a small relationship with profit and are very low risk. They are essentially what they sound like; risks that are insured. These risks do not generate a lot of profit. External risks are risks that cannot be controlled, such as business to business competition. An entrepreneur must take on these risks to keep customers happy. Internal risk can be controlled. (Lohrey, n.d.).
The Hawley Economic Theory suggests that profit is a reward for risk, and the bigger the risk, the greater the potential financial reward. The theory implies that without the relationship between profit and risk, an entrepreneur would have no desire to take risks. It also works the assumption that without taking risks, there can be no great profit for the entrepreneur. (Lister, n.d.). However, when taking risks in business we should strive to ensure our risks are ethical. Yes, the goal is to make a profit, but they should not be made at the expense of your beliefs. Mark 8:36-37 says “For what shall it profit a man, if he gains the whole world, and lose his own soul? Or what shall a man give in exchange for his soul?” (KJV).
