Business Risks and Causes of Failure — Practice Quiz

Entering simultaneously into two contracts of an opposite nature to protect against price fluctuations

Step 1: Hedging is a method of transferring or shifting risk. Step 2: It involves entering into two opposite contracts – one in the spot/cash market and another in the future market – at the same time. Step 3: The goal is that if you lose money on one contract due to price change, you gain on the other, thus minimising the overall loss. Step 4: Option A describes Underwriting (a different risk transfer method). Option C describes Subcontracting. Option D describes Accepting and Absorbing risk. Step 5: So the correct answer is Option B – the definition of Hedging.

Training and Development of Employees

Step 1: One of the methods to prevent or reduce risk is training and development of employees. Step 2: If a key executive leaves or becomes incapacitated, the company faces huge risk. Step 3: By training a successor (a junior employee) in advance, the company reduces the impact of losing that key person. Step 4: Hedging is for price fluctuation risk. Underwriting is for share issue risk. Subcontracting is for shifting risks in long-term contracts. Step 5: Therefore, the correct answer is Training and Development of Employees.

A business expanding faster than it can manage, leading to collapse

Step 1: Premature scaling is an internal cause of business failure. Step 2: 'Scaling' means expanding the business. 'Premature' means too early or too fast without proper preparation. Step 3: When a business hires too many people, acquires too many customers, or grows too rapidly without consolidating its structure, it cannot sustain itself. Step 4: Example: Subhiksha, a retail chain, wound up because it grew too rapidly without proper management systems. Step 5: Options A, C, and D describe different causes. Option B correctly captures the meaning of premature scaling.

Poor and inefficient management

Step 1: Causes of business failure are divided into internal (from within the company) and external (from outside the company). Step 2: Internal causes are those that the business itself is responsible for. Step 3: Poor and inefficient management is clearly an internal cause – it depends on the quality of people running the business. Step 4: Natural disasters, change in government policies, and non-availability of key inputs are all external causes because they originate outside the business. Step 5: Therefore, the correct answer is Poor and Inefficient Management.