Entrepreneurship and Small Business (ESB) Certification Practice Exam

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Study for the Entrepreneurship and Small Business (ESB) Certification Exam. Explore key topics with flashcards and multiple-choice questions, featuring hints and explanations. Prepare effectively for success!

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Which risk is associated with variable costs in a business?

Predictable profit margins
Higher fixed overhead costs
Increased expenses during low sales
Stability in overall budgeting

The correct answer is: Increased expenses during low sales

Variable costs fluctuate based on production levels or sales volume, impacting a company's expenses directly. When sales are low, businesses may not only sell fewer products but also incur higher relative costs per unit, affecting overall profitability. This can lead to increased expenses even when revenue is insufficient to cover costs, creating a risk to financial stability. Unlike fixed costs, which remain constant regardless of sales volume, variable costs do not offer the same predictability, thus contributing to the financial uncertainty during periods of low sales. Understanding this relationship is essential for financial forecasting and budgeting, ensuring that businesses can adapt to changing sales environments.