Business risk and financial risk are the two important terms which every student of management and finance should know. While business risk deals more with the strategic decisions of a company, financial risk is related to the monetary aspects and debt. So, to understand business risk vs financial risk in detail, refer to the useful information given in the next few paragraphs. Risk management process will give you more information.
What is Business Risk?
In this discussion on business vs financial risk, let us first know everything about business risk. Business risk is the small or large risk in the operations of the company. Such a risk is more related to the decisions related to the smooth and profitable functioning of an organization. Entering into an entirely new business, buying stake in a company, reducing the stake in a company, introducing new products in the market are the important aspects related to the business risk. The business risk is also associated with the issues regarding getting returns on assets of the company. The variability in demand for its products, variability in the input cost, operating leverage, variability of sales price are the vital factors which determine the business risk of an organization. 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.
The main risk which all kinds of businesses face is that of the under performance of the economy of a nation. If the economic growth slows down, then naturally, the business will grow at very slow pace or may even come to a standstill. The risk that a firm will go bankrupt because of lack of payment of debts is also a big business risk. Competition with peer companies is also one of the major business risks faced by entrepreneurs. Competition can force business houses lower the rates of their products which can result into reduced revenues and net profits. Competition also causes a fall in the market share of the company due to the entry of new products. Poor management is a business risk which can be avoided by changing the board of directors. Enterprise risk management can be learned only after gaining sufficient experience.
What is Financial Risk?
Now, in our discussion on business risk vs financial risk, it is the time to know more about financial risk. Financial risk is related to the structuring of the finances of an organization. Financial risk will vary with the nature and type of investment. This financial risk increases greatly when a certain organization decides to use debt from financial institutions for business expansion along with equity financing. When we talk about financial risk, it becomes imperative to discuss the structure of interest rates. Any rise in the interest rates of your business can affect your cash flows. The ever changing foreign exchange rates also add to the financial risk for a company. Financial risks in international business are much more than those involved in domestic business. A lack of study of international markets can significantly increase this financial risk. A simple example can be given to explain this fact. 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. These problems arise due to wrong interpretation of the credit worthiness of the client. Good risk management abilities are a must to take your business to the top.
Hopefully, this debate on business risk vs financial risk will certainly help you understand these concepts well. You will be able to emerge as a successful business leader only if you can deal with these risks in an effective manner. So, here's where I sigh off, wishing you all the best for your business plans.
By Charlie S