Risk and Reward

Why take the leap?

Starting a business is a gamble: you give up a steady wage and put money on the line. So why do it? Because with the risk comes the chance of reward. Understanding both sides, and weighing them up, is the heart of enterprise.

Risk against reward

Every point on one side has a mirror on the other, and an exam answer is expected to weigh them against each other rather than list one side:

Mark the claims

Five statements about starting a business. Tap the TWO that are WRONG.

• Giving up a secure, regular wage is one of the risks of starting a business.
• A well-run business removes the risk of failure completely.
• Independence means being your own boss and making your own decisions.
• Profit is guaranteed as long as the entrepreneur works hard enough.
• Financial loss means losing the money that was invested in the business.

Profit

The headline reward is profit: what is left when you take your costs away from your revenue, the money coming in. Profit = revenue - costs If costs are bigger than revenue, the business makes a loss. Note that revenue is not the same as profit, and a business with huge revenue can still be losing money. Examiners are watching for that confusion.

Work out the profit

In a month a market stall takes 5000 pounds in revenue and has 3000 pounds of costs. Using profit = revenue - costs, what is the profit in pounds?

The entrepreneur

The person who takes all this on is the entrepreneur: the driving force willing to accept the risk in the hope of the reward. Three things define the role:

Is she still an entrepreneur?

Nadia founded her bakery and owns it outright, but she now employs a manager who makes almost all of the day-to-day decisions. Is Nadia still the entrepreneur?

• Yes: she organised the resources and she still carries the financial risk personally
• No: whoever makes the decisions is the entrepreneur
• No, because an entrepreneur must do all three roles personally, every day
• No: once a business has employees the owner becomes an employee too

Adding value

To tip the odds toward reward, a business tries to add value: making customers willing to pay more than the bought-in cost of what they are buying. The usual methods: - Convenience, branding, quality, design, and a USP (unique selling point). It is also a calculation: added value = selling price - the cost of the bought-in materials. A sandwich made from 90p of ingredients and sold for £3.20 has £2.30 of value added, and that is what has to cover the rent, the wages and the profit. For top marks, name the specific method, not just the phrase "adding value".

Match each way of adding value to an example

How much value was added?

A coffee shop buys the beans, milk and cup for a latte for 55 pence in total, and sells the latte for 3 pounds 25. How much value has it added, in pence?

Priya's choice

Priya turns down a permanent job with a guaranteed salary in order to keep running her market stall. Which risk is she accepting, and what reward is she hoping for?

• She accepts a lack of security, hoping for independence and profit
• She accepts business failure, hoping for self-satisfaction only
• She accepts financial loss, hoping to avoid ever paying tax
• She accepts no risk at all, because she already owns the stall

Weigh it up

An entrepreneur is deciding whether to open a healthy fast-food van. Reason through the trade-off.

• What is the main reward they are hoping for?
• They are putting their savings into the van. What is the main risk to that money?
• How should they add value to stand out?

Justify the decision

Jamal has a secure job but wants to leave it to open a bakery. He has £15,000 of savings to invest. Justify whether he should take the risk.

• Give one reward he might gain, and say why it would matter to him
• Give one risk he takes on, and say what the consequence would actually be
• Say how he could ADD VALUE to improve his chances, naming a specific method
• Reach a judgement, and say what your answer depends on

Enterprise summary

Starting a business carries _____, such as financial loss, balanced against _____, such as profit. Profit = revenue _____ costs. Making a product more attractive, for example through branding, is called adding _____, and it can be measured as the selling price minus the cost of the bought-in materials.