Final answer:
Business risk is the exposure of a company to factors that can undermine its profitability and existence, including uncontrollable economic risks such as natural disasters or economic downturns. Such risks may force a company to reduce operations or exit the market. Companies must manage these risks through careful planning and securing financial capital in tough times.
Step-by-step explanation:
The risk associated with a company's survival and profitability is referred to as business risk. Business risk can arise from various sources, including economic risks over which a business has very little control, such as natural disasters, wars, or massive unemployment within a country. These events can affect the ability of a business to operate and generate profit. In the event of losses, especially if they are sustained, a business may enter a forced exit, where it reduces production or ceases operations entirely. This is a mechanism to prevent further financial hemorrhaging when costs cannot be covered by revenues in the long run.
Furthermore, capitalism has inherent dangers like poverty, inequality, and environmental crises that can contribute to business risk. Even large firms have to navigate occasional low profits or losses and may need to secure financial capital to sustain investments during tough times to ensure their longevity. Hence, managing business risk requires careful planning and a strategic approach to financial management to mitigate impacts that are often beyond the individual firm's control.