Lessons 28 · 1 lessons · U. G‘afurov, Q. Sharipov. Basics of Entrepreneurship: textbook for Grade 11 of general secondary schools and for secondary specialised and vocational institutions. 1st edition. “O‘zbekiston” publishing house, Tashkent, 2018
28
Assessing entrepreneurial risks
Textbook: pp. 128–132
GoalExplain business risk, its main types and ways of assessing it, calculate the expected value and apply ways of reducing risk (diversification, insurance).
New words
risk: the chance of loss when a planned action does not turn out as expected · Riskprobability: how likely an event is, written from 0 to 1 (or from 0 % to 100 %) · Ehtimolexpected value: the average of all possible results, each weighted by its probability · Kutiladigan miqdorinsurance: paying a small fixed amount to be compensated for a possible large loss · Sug‘urta
Explanation
The result of business cannot be fully known in advance, so risk, the chance of loss when planned work does not succeed, is a constant feature of business. The main types are production risk (being unable to meet obligations or to sell the product), financial risk (loss linked to credit, interest and currency) and investment risk (invested money not paying off). Risk is assessed by statistical, analytical, analogy and expert methods. Expected value: E(X) = P₁x₁ + P₂x₂ + … + Pₙxₙ, where the probabilities add up to 1. Ways of reducing risk are diversification (spreading over several products), insurance (replacing a random large loss with a small regular payment), sharing risk and gathering more information. Diversification does not remove risk, it only reduces it. These exercises only teach calculation and do not recommend any financial decision.
Worked examples
An imaginary workshop wants to try a new product. If it succeeds (probability 0.7) the profit per unit is 30 000 so‘m, if it fails it is 10 000 so‘m. E(X) = 0.7 × 30 000 + 0.3 × 10 000 = 21 000 + 3 000 = 24 000 so‘m. The probabilities add up: 0.7 + 0.3 = 1.
Diversification: an imaginary small firm sells lemonade in summer (revenue 40 million so‘m) and hot tea in winter (revenue 40 million so‘m). If it sold only lemonade, winter revenue would be very small; with two products revenue is stable all year.
Class activity
Risk map: a group invents three risks (production, financial, investment) for an imaginary café, gives each an estimated probability (low/medium/high) and writes one measure to reduce each.
Practice
1
What is risk and why is it typical of business?
Risk is the chance of loss if planned work does not succeed; it is always present because the result cannot be fully known in advance.
2
Three outcomes are expected for a new product: probability 0.2 — 25 000 so‘m profit per unit; 0.5 — 10 000 so‘m; 0.3 — 0 so‘m. What is E(X) in so‘m?
10000
3
The expected profit per unit is 10 000 so‘m and 500 units are made. What is the total expected profit in so‘m?
5000000
4
A loss of 6 000 000 so‘m has a 3 % chance per year. What is the expected yearly loss in so‘m?