Risk and reward — Edexcel GCSE Business
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Risk and reward explained
Starting a business involves balancing potential risks against desired rewards.
Read the full explanation
For example, an entrepreneur opening a bakery faces significant risks, including business failure if revenues cannot cover costs. This leads to direct financial loss, especially if personal savings were invested. Furthermore, leaving a salaried job creates a lack of security, as income becomes unpredictable. However, these risks are taken in pursuit of compelling rewards. Achieving business success allows the bakery to build a loyal customer base. The primary financial reward is profit, the surplus remaining after deducting all costs. Finally, running a business offers independence, giving the owner complete control over decision-making and working hours.
Your focus
- Identify the three main risks associated with business activity.
- Describe the financial and non-financial rewards of running a business.
- Evaluate the balance between risk and reward for an entrepreneur in a given scenario.
Risk and reward flashcards
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Risk
Risk and reward exam tips
Marking Points
- Identify business failure as a primary risk where a business is forced to close due to insolvency or poor cash flow.
- Explain financial loss in terms of losing invested capital or personal assets if the business does not generate sufficient revenue.
- Describe lack of security as the absence of a guaranteed regular income, sick pay, or holiday pay compared to traditional employment.
- Define profit as the financial reward calculated by subtracting total costs from total revenue.
- Explain independence as the non-financial reward of being one's own boss and having autonomy over business decisions.
Examiner Tips
- 💡When evaluating a business decision, always weigh a specific risk (like financial loss) against a potential reward (like increased profit).
- 💡Use the context of the case study to explain why a lack of security might be particularly daunting for the specific entrepreneur mentioned.
- 💡Clearly distinguish between business success (such as market share or survival) and profit (financial gain) when discussing rewards.
Common Mistakes
- Confusing profit with revenue; correction: revenue is the total money brought in, whereas profit is the reward left over after deducting all costs.
- Assuming all rewards are financial; correction: independence and personal satisfaction from business success are crucial non-financial rewards.
- Stating that limited liability eliminates financial loss; correction: limited liability only protects personal assets, but the entrepreneur can still lose their invested capital.