The-Concept-Of-Risk-And-Reward

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Exam code:J204

The implications of risk and reward

Risks	Rewards
Business failure can lead to job losses, bankruptcy, financial ruin for owners and the need to seek a new way to earn an income	Business success may be defined by the level of profits earned, the rate of growth or the recognition and personal satisfaction entrepreneurs enjoy
Financial loss can be caused by poor financial management, economic downturns, or unexpected events such as natural disasters	Profit enables businesses to reinvest in growth opportunities and provides stability Owners can also take profit out of the business as a financial reward
Loss of security can be the result of entrepreneurs giving up paid employment, their established lifestyle or risking their assets to start up a business It can cause anxiety and may force entrepreneurs to make safer, less profitable business decisions	Independence results from setting up and running ones own enterprise, making making all of the decisions If the business becomes successful, entrepreneurs are likely to feel a sense of personal satisfaction

GreenTech Ltd, a manufacturer of solar panels in South Wales, was established in 2018 by twins Rhian and Jos Jones, who spotted the potential to manufacture small, easy-to-install panels for domestic use

Rhian and Jos had worked for a major engineering company since graduation, but were made redundant when it relocated its operations to Germany following the Brexit vote
Despite their family’s concern that they had never set up a business before, they decided to invest their redundancy compensation to set up the business
They chose to form a private limited company that initially operated from Rhian’s garage, working 14-hour days, initially and managing all business tasks themselves

GreenTech Ltd quickly secured a contract to supply a major green housing construction company

Risks	Rewards
A large production unit on the outskirts of Cardiff was purchased and equipped with production machinery	By the end of 2019, the business had made a profit of almost £8m, making Rhian and Jos millionaires
Fourteen production operatives, a finance manager and a small team of sales representatives were recruited	The company won a series of industry awards for their innovative technology and their achievements as young entrepreneurs
To fund this investment, a 10-year bank loan of £1.4 million was secured, and both Rhian and Jos invested a further £320,000 of their own capital into the business	Rhian was able to take a six-month sabbatical from the business to take part in a charity expedition to Kenya

In early 2020, housebuilding came to an abrupt halt with the arrival of the global Covid pandemic
- Greentech’s customers postponed solar panel orders, and its workers were prohibited from attending work

Risks	Rewards
The business received limited financial support from the government, allowing it to continue to pay workers Output and sales plummeted, and it was unable to make loan repayments	Sales quickly picked up after lockdown restrictions were lifted, as a major competitor had closed down during the pandemic GreenTech Ltd was in a good position to capture its former rival’s market share
Negotiation with the bank saved the business from closure Rhian and Jos pledged their personal assets as security to restructure the business’s borrowing.	Rhian and Jos rewarded themselves with bonuses of more than £2 million each Jos made the decision to work part-time when an experienced managing director was appointed to take on most of her role

Sales reached a peak in early 2022 when the government announced incentives to build green housing
- A further twelve production staff were recruited to allow for 24-hour production, and the factory doubled in size
In late 2022, though, a further disaster struck when interest rates rose rapidly, causing housebuilding to come to a standstill once more as sales of new homes plummeted
- GreenTech’s main customer collapsed, owing hundreds of thousands of pounds, and several smaller customers cancelled their solar panel orders.
Greentech quickly found itself in financial trouble. With mounting debts, Rhian and Jos made the difficult decision to liquidate the company
- All thirty staff were made redundant
- Rhian and Jos were forced to sell their homes to fulfil the terms of the bank loan and were left with significant personal debts

Despite the challenges Rhian and Jos faced, they continued to take risks
- They took financial risks, including:
  - Investing their own capital to establish and grow the business
  - They used their personal assets – their houses – to ensure business survival
- They risked the security of paid employment, and their lifestyles undoubtedly changed as they needed to work 14-hour days initially
- They risked their personal reputations, setting up the business despite the concerns of their family
Although the business ultimately failed, Rhian and Jos enjoyed some significant rewards, including:
- They received significant financial rewards as a result of the business making healthy profits
- They won industry awards, which would have given them personal satisfaction
- The siblings were able to enjoy flexibility – Rhian was able to take part in a charity expedition and Jos chose to work part-time