1.1.2 Risk and reward — Edexcel GCSE Business revision notes

The impact of risk and reward on business activity

Every business decision involves weighing a possible reward against a possible risk. That trade-off is the whole of this sub-topic, and it explains why people start businesses at all despite most of the news being about the ones that fail.

The specification names three of each, and they pair up neatly.

Figure: The three risks and the three rewards

Risk	What it means	Reward	What it means
Business failure	The business does not attract enough customers or run out of cash, and closes	Business success	The business grows, becomes established and may expand
Financial loss	The owner loses the money they put in, and may owe more	Profit	The owner keeps what is left after costs, rather than earning a fixed wage
Lack of security	No guaranteed income, no sick pay or paid holiday, and long hours	Independence	Being your own boss, choosing what to do and when

Each risk has a matching reward, which is why the two are studied together — the same decision produces both.

Two things follow from that pairing.

Risk and reward usually move together. A decision with a large potential reward normally carries a large risk, and a safe decision usually offers a modest return. An entrepreneur choosing between opening a second shop and staying as they are is choosing how much of each they want.

Risk can be reduced, but not removed. Market research, a business plan, and starting small all lower the chance of failure — but no amount of preparation makes a new business certain to succeed, because it depends on customers whose behaviour cannot be controlled.

Worked example

An entrepreneur leaves a salaried job to start a business. Explain one risk and one reward of this decision.

Identify what they are giving up: a guaranteed monthly wage, sick pay and paid holiday.
That is a lack of security — income now depends entirely on whether the business sells anything.
Identify what they gain if it works: they keep the profit rather than receiving a fixed salary.
And they gain independence — they decide what the business does.
Link the two, because these questions reward showing they are two sides of one decision.

Answer: The risk is a lack of security: they give up a guaranteed wage, sick pay and holiday, and may make a financial loss. The reward is profit and independence — if the business succeeds they keep what is earned and make their own decisions. It is the same decision producing both.

Common mistake

Profit is a reward, not a certainty. An answer saying an entrepreneur starts a business "to make profit" is only half right — they take on the risk of loss in order to have the chance of profit.

Risk: the possibility that a business decision leads to a loss — business failure, financial loss, or a lack of security
Reward: the possible gain from a business decision — profit, independence, or personal satisfaction from running a business

Before you practise

Risks of business activity: business failure, financial loss, lack of security.
Rewards of business activity: business success, profit, independence.
Each risk pairs with a reward, because the same decision produces both.
Larger potential rewards usually come with larger risks.
Risk can be reduced by research and planning, but never removed entirely.

Now practise it

Reading is the easy half. Answer questions on 1.1.2 Risk and reward and find out which parts you actually know.

Written questions Multiple choice