There are technically two kinds of people, the risk taker and the risk averse. The risk taker, the real man behind the working world as we see it now, is ready and able to undertake any project that comes to him provided there is a return foreseeable in the future. Many of these are new opportunities and ideas that need funding to start off. Sometimes they prefer to take part in the management to ensure that the venture is taking the route set out in the business plan.

The risk averse, the people who prefer to sit on their money and wait for something that can give them a hundred percent assurance for security of their funds at all levels. Such persons, including businesses prefer keeping a low profile and wait for things to happen automatically. Such businesses can only survive as small scale corner stores and the likes, moving anywhere forward would mean introducing the element of risk into the business. An increased investment in personal business may mean expansion to foster growth, which also entails a higher level of risk. This risk can be dissected into several areas, the more prominent of which are the tendency to lose or have reduced control over the operations of the business, and also possibly incur unexpected cash outflows.

Companies offer various returns to investors, which include a variety of people from the business sector. They offer the opportunity to share in the ownership, and a return on their investments. The return itself is based on the level of risk that the investors are willing to take; many contribute in the form of long-term and short-term debt realizing lower risk and lower returns; others, who contribute toward the capital, bear the highest level of risk and therefore receive the highest rate of return. The rate of dividends varies with the level of earnings during the financial year and future plans of the management for the growth of the company.

Risk is an imperative of business, whether you like it or not. It is a risk when you trust someone, namely your customers, and in the same way your suppliers (and creditors) have to trust you. In the beginning of course some collateral is required to establish business relations. Later this replaced by a certain level of trust which also allows for negotiations for credit terms that favour the business. The terms again reflect the creditors’ willingness to participate in the risk of the company. The risk that the creditors look toward is the level of working capital retained to pay off running cash expenses, including creditors, the number of debtor days, and the stock holding days.

The short-term risk is translated into increased lack of confidence for long-term investors as well. Short-term funds guarantee that the company has the capacity to expend on continually as required, which leaves profits to be distributed between long-term investors in the company. Any short-term funding requirement would obviously reduce year end returns for all investors.