Entrepreneurship: Risk, Reward and Assessing Business Viability
Entrepreneurship means an entrepreneur taking on financial risk, most often putting their own capital and time at stake, in order to set up and run a business in pursuit of reward. Reward can be financial (trading profit, or a capital gain if the business is later sold) or non-financial (independence, personal satisfaction). Risk includes the capital invested, the opportunity cost of income given up from paid employment, and, for a sole trader or ordinary partnership, unlimited personal liability for the business's debts. Business viability is whether a proposed venture can realistically generate enough revenue to cover its costs and produce an acceptable return, and is tested before and during trading using quantitative tools such as break-even analysis and cash flow forecasting alongside qualitative judgement about the market and the entrepreneur's own skills.
Before you start
No specific prerequisites - this is a good place to start.
Method
- Separate the entrepreneur's possible rewards (trading profit, capital gain on sale, independence) from the risks they accept (capital lost, opportunity cost of a salary given up, unlimited liability if unincorporated).
- State the general risk-reward relationship: an entrepreneur normally has to accept a higher chance of loss to access a higher potential return, though relevant experience or a strong market position can reduce risk without reducing potential reward.
- Learn the quantitative tools used to test viability before trading starts: break-even analysis (fixed costs divided by contribution per unit) and a cash flow forecast (checking the business will not run out of cash even if it is eventually profitable on paper).
- Calculate margin of safety, actual or forecast sales minus the break-even quantity, as the buffer of extra output before the business starts making a loss.
- For a viability question, weigh the quantitative evidence given (the break-even point, margin of safety, cash flow) against qualitative factors named in the case, such as the entrepreneur's experience, competition, or how realistic the sales forecast is.
- Structure an evaluate answer as: calculate or interpret the figures given, use them to make one point in favour of viability, one point against or a limitation of the evidence, then a final judgement that refers back to the specific numbers in the case.
Worked example
Amara is deciding whether to launch a subscription meal-kit business. Fixed costs are forecast at 45,000 pounds per year. Each box sells for 25 pounds and costs 10 pounds in ingredients and packaging to make. Amara forecasts she can sell 4,000 boxes in year one. Calculate the break-even output and the margin of safety at the forecast sales level, and use these to comment on the viability of the business.
- Find the contribution per unit: selling price minus variable cost per unit, 25 - 10 = 15 pounds per box.
- Find the break-even output: fixed costs divided by contribution per unit, 45,000 / 15 = 3,000 boxes.
- Find the margin of safety: forecast sales minus break-even output, 4,000 - 3,000 = 1,000 boxes.
- Express the margin of safety as a percentage of forecast sales: 1,000 / 4,000 x 100 = 25%.
- Interpret the result: forecast sales are 25% above the break-even point, so a reasonable forecasting error would still leave the business profitable, which supports viability, though the judgement still depends on how reliable the 4,000-box sales forecast actually is.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define 'reward' in the context of entrepreneurship.Show answer
Answer: The financial or non-financial benefit an entrepreneur gains from taking business risk, for example trading profit, a capital gain on selling the business, or independence.
Q2State one risk faced by an entrepreneur other than losing the capital they invested.Show answer
Answer: The opportunity cost of the salary and job security they gave up by leaving paid employment (or, for a sole trader, unlimited personal liability for business debts).
Q3A business has fixed costs of 20,000 pounds, sells its product for 15 pounds and has a variable cost per unit of 9 pounds. Calculate the break-even output.Show answer
Answer: Contribution per unit = 15 - 9 = 6 pounds. Break-even = 20,000 / 6 = 3,333.3, so 3,334 units (rounded up to a whole unit).
Q4Priya invests 8,000 pounds of her own savings into a mobile coffee van, giving up a salaried job paying 24,000 pounds a year. Explain one risk Priya is taking on.Show answer
Answer: She risks losing the 8,000 pounds invested if the business fails, and she has also given up the certain 24,000 pounds annual salary (opportunity cost) while the van's income is uncertain.
Q5Explain why higher potential reward is often, but not always, associated with higher risk for an entrepreneur.Show answer
Answer: Backing an unproven idea in an untested market usually means a higher chance of failure alongside the chance of a higher return; but an entrepreneur with strong relevant experience or an already-proven demand can access high reward without taking on unusually high risk.
Q6Name two quantitative tools an entrepreneur can use to assess business viability before trading begins.Show answer
Answer: Break-even analysis and a cash flow forecast (accept also: a sales/revenue forecast).
Q7A product sells for 40 pounds and has a variable cost per unit of 24 pounds. Calculate the contribution per unit.Show answer
Answer: 40 - 24 = 16 pounds per unit.
Q8State what 'margin of safety' measures.Show answer
Answer: The amount by which actual or forecast sales exceed the break-even output, showing how far sales could fall before the business makes a loss.
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
Tariq is launching a personalised phone case business. Fixed costs are 12,000 pounds a year. Each case sells for 18 pounds and costs 6 pounds to produce. Tariq forecasts sales of 1,500 cases in year one. Analyse the viability of Tariq's business using break-even analysis.
Show mark scheme
Tick each line you got. Your score builds from the marks on the scheme.
Nothing ticked yet - 9 available
Nadia is deciding whether to open a small artisan bakery. She has saved 15,000 pounds and would need to borrow a further 10,000 pounds. Fixed costs are forecast at 38,000 pounds a year. Each loaf sells for 4 pounds and costs 1.50 pounds in ingredients. Nadia forecasts selling 12,000 loaves in year one, based on footfall counts she took outside the proposed site over four weeks. A new supermarket bakery counter opened two streets away last month. Evaluate whether Nadia should go ahead with the bakery.
Show mark scheme
Tick each line you got. Your score builds from the marks on the scheme.
Nothing ticked yet - 16 available
See real A Level Business past-paper questions, with official mark schemes →
Free printable worksheet
Want more practice on paper? Download the entrepreneurship: risk, reward and assessing business viability worksheet pack - 6 pages of exam-style questions with a full mark scheme. One email opens every download in this browser for 14 days - no account, no card. Print it for personal and classroom use.
Next topics
Not quite what you needed?
Tell us what is missing on entrepreneurship: risk, reward and assessing business viability, or which topic to write up next. Every request is read, and we reply to every one.
Build a full practice pack.
This topic is one of hundreds in the library - pick the ones a student needs and generate a printable PDF in minutes.