Business Risk Vs. Financial Risk

Poor management is a business risk which can be avoided by changing the board of directors. Unfavora...

1. Business Risk Vs. Financial Risk
Poor management is a business risk which can be avoided by changing the board of directors.
Unfavorable business conditions may force the organization to avail loans for business expansion.
These problems arise due to wrong interpretation of the credit worthiness of the client.
Where are these risks reflected?
How to minimize these risks?
Are these risks independent of the debt that the business owes?
Business Risk: No, it cannot be controlled completely as it is inherent in the operations of the
business.
Financial Risk: It can be minimized by maintaining an adequate cash flow, taking strategic financial
decisions and undertaking hedging using financial instruments.
Financial Risk: It can be calculated using contribution margin, operating leverage effect, financial
leverage effect, and total leverage effect ratios.
How are these risks calculated?
What are the different types of business and financial risks?
Business risk is experienced by small, medium as well as large firms and it is governed by
generation of cash to run the operations of the firm on a daily basis. A simple example can be given
to explain this fact. If the economic growth slows down, then naturally, the business will grow at
very slow pace or may even come to a standstill.. Entering into an entirely new business, buying
stake in a company, reducing the stake in a company, introducing new products in the market, etc.
Also, it increases when a certain organization decides to use debt from financial institutions for
business expansion along with equity financing.
What are business and financial risks?
Financial Risk: It is reflected in the variability of net cash flows of the equity owners.
Business and financial risks are two important terms which every entrepreneur and management or
finance student should know about. are the pivotal factors which increase the business risk of an
organization. Such a risk varies with the nature and type of investment. Financial Risk: Financial
risk is related to the structuring of the finances of an organization.
Business Risk: Business risk is the small or large risks involved in the operations of the company.
Business Risk: It implies the uncertainty of operating income or Earning Before Interest and Taxes
(EBIT).
Financial Risk: Yes, it can be controlled completely by limiting the amount raised through debts.

2. Business Risk: It is reflected in the variability of net operating income or net cash flows.
Financial Risk: Any increase in the interest rates can affect your cash flows. Managing business risk
can be learned only after gaining sufficient experience.
Financial Risk: Credit risk, market risk, liquidity risk and interest rate risk.
When we talk about financial risk, it becomes imperative to discuss the structure of interest rates.
are the important aspects that are related to the business risk. The changes in the interest rates and
foreign exchange rates can add to the financial risk. Hence, in order to emerge as a successful
business leader, you will have to deal with these risks in an effective manner.
Financial Risk: It implies the uncertainty of earnings per share and the risk of insolvency due to
utilization of funds from the fixed-cost sources.
Business Risk: It can be calculated by, dividing net income by total income, or returns to investors by
total assets.
Let us understand the difference between business and financial risks with the help of the following
FAQs.
Business Risk: It can be minimized by incorporating right strategies to combat the internal and
external factors which contribute to the risk.
Competition with peer companies is also one of the major business risks faced by entrepreneurs. A
lack of study of international markets can significantly increase the financial risk. Competition also
causes a fall in the market share of the company due to the entry of new products. The main risk
which all kinds of businesses face is bad economy of a nation. The ever changing foreign exchange
rates also add to the financial risk of a company. It is also associated with the issues regarding
returns on assets of the company.
Both business and financial risks are interlinked to each other. It can force businesses to lower the
rates of their products which can result into reduced revenues and net profits. On the other hand, a
huge financial risk may become detrimental to the growth of the business in the competitive
business environment. While business risk deals more with the strategic decisions related to the
smooth and profitable functioning of an organization, financial risk is related to its monetary aspects
and debt. Excellent risk management abilities are a must for any business to succeed.
Can these risks be controlled completely?
What are the factors contributing to these risks?
Business Risk: Strategic risk, reputational risk, operational risks, compliance risk, etc.
Business Risk: Yes
Financial Risk: No
What does the variability of these risks imply?
Business Risk: The variability in demand for its products, variability in the input cost, operating

3. leverage, variability of sales price, etc. Financial risks in the international business are much more
than those involved in domestic business. If you are the owner of a finance company and have
financed the projects of an overseas client, then you may face problem in recovering debts