Identify and discuss the strategies owners can use to reduce and control business risk through sharing.

Question

What will be an ideal response?

Answer 1

One very effective method to reduce and to control business risk is to share the risk with other entities. Risk can be directly shared without the intermediary of an insurance company, by forming joint ventures, by joining industry groups, and by obtaining government grants and guarantees.
Joint ventures are partnerships through which two or more businesses combine to undertake a specific economic activity. They are usually formed and taxed as partnerships. This allows for disproportionate allocation of revenues and expenses among the partner businesses. The ability to assign tax items to the partner for which they are most advantageous eases the problems of dissimilar businesses forming a partnership. Another advantage of joint ventures is that each partner can lose no more than its investment in the venture.
One of the primary reasons that there is at least one organized group for every conceivable industry is that joining in groups provides benefits of scale to members. The most common benefit is low-cost group insurance. The cost of insurance is partly a function of the risk that the insurance provider assumes. Insurance companies diversify risk by insuring large numbers of similar businesses.
The final source for sharing risk is governments. Governments do not have the profit-making requirements of businesses, but they do have the power to extract money from citizens. As a result, risk for a government is very different from risk for private business. Governments often subsidize very risky ventures that private companies would otherwise never attempt.