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Business Risk

Business risk refers to the possibility of inadequate profits or losses for a business due to uncertainties from factors inside and outside a business's control. These risks can take various forms and influence different parts of a business, such as production, marketing, and asset loss. Business risks are generally classified as internal risks that arise from within the organization, and external risks that arise from outside the organization. The main types of business risk include strategic risk, financial risk, operational risk, compliance risk, and other risks depending on the industry.

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299 views4 pages

Business Risk

Business risk refers to the possibility of inadequate profits or losses for a business due to uncertainties from factors inside and outside a business's control. These risks can take various forms and influence different parts of a business, such as production, marketing, and asset loss. Business risks are generally classified as internal risks that arise from within the organization, and external risks that arise from outside the organization. The main types of business risk include strategic risk, financial risk, operational risk, compliance risk, and other risks depending on the industry.

Uploaded by

rotsacreijav66666
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS RISK

The term business risk refers to the possibility of inadequate profits or even losses
due to uncertainties e.g., changes in tastes, preferences of consumers, strikes,
increased competition, change in government policy, obsolence etc .Every
business organization contains various risk elements while doing the
business. Business risks implies uncertainty in profits or danger of loss and the
events that could pose a risk due to some unforeseen events in future, which
causes business to fail

For example, an owner of a business may face different risks like in
production,risks due to irregular supply of raw materials, machinery breakdown,
labor unrest, etc. In marketing, risks may arise due to different market price
fluctuations, changing trends and fashions, error in sales forecasting, etc. In
addition, there may be loss of assets of the firm due to fire, flood, earthquakes,
riots or war and political unrest which may cause unwanted interruptions in the
business operations. Thus business risks may take place in different forms
depending upon the nature and size of the business.
Business risks can be classified by the influence by two major risks: internal
risks (risks arising from the events taking place within the organization)
and external risks (risks arising from the events taking place outside the
organization).
Internal risks arise from factors (endogenous variables, which can be controlled)
such as human factors (talent management, strikes), technological factors
(emerging technologies), physical factors (failure of machines, fire or theft),
operational factors (access to credit, cost cutting, advertisement). External risks
arise from factors (exogenous variables, which cannot be controlled) such as
economic factors (market risks, pricing pressure), natural factors (floods,
earthquakes), political factors (compliance and regulations of government)
The Business risk is classified into different 5 main types


1. Strategic Risk: They are the risks associated with the operations of that
particular industry.These kind of risks arise from
1. Business Environment: Buyers and sellers interacting to buy and sell
goods and services, changes in supply and demand, competitive
structures and introduction of new technologies.
2. Transaction: Assets relocation of mergers and acquisitions, spin-offs,
alliances and joint ventures.
3. Investor Relations: Strategy for communicating with individuals who
have invested in the business.

2. Financial Risk: These are the risks associated with the financial structure
and transactions of the particular industry.

3. Operational Risk: These are the risks associated with the operational and
administrative procedures of the particular industry which are very
common in today's generation.

4. Compliance Risk(Legal Risk): These are risks associated with the need to
comply with the rules and regulations of the government.

5. Other risks: There would be different risks like natural disaster(floods) and
others depend upon the nature and scale of the industry.


ANOTHER TERM FOR 'BUSINESS RISK'

The possibility that a company will have lower than anticipated profits, or that it
will experience a loss rather than a profit. Business risk is influenced by numerous
factors, including sales volume, per-unit price, input costs, competition, overall
economic climate and government regulations. A company with a higher business
risk should choose a capital structure that has a lower debt ratio to ensure that it
can meet its financial obligations at all times.





INVESTOPEDIA EXPLAINS 'BUSINESS RISK'

Investors in a company are exposed not only to business risk, but also to financial
risk, liquidity risk, systematic risk, exchange-rate risk and country-specific risk. To
calculate business risk, analysts use four simple ratios: contribution margin,
operation leverage effect, financial leverage effect and total leverage effect. For
more complex calculations, analysts can incorporate statistical methods.







Difference about business risk and financial risk


Financial risk refers to the chance a business's cash flows are not enough to pay
creditors and fulfill other financial responsibilities. The level of financial risk,
therefore, relates less to the business's operations themselves and more to the
amount of debt a business incurs to finance those operations. The more debt a
business owes, the more likely it is to default on its financial obligations. Taking
on higher levels of debt or financial liability therefore increases a business's level
of financial risk.


Business risk refers to the chance a business's cash flows are not enough to cover
its operating expenses like cost of goods sold, rent and wages. Unlike financial
risk, business risk is independent of the amount of debt a business owes. There
are two types of business risk: systematic risk and unsystematic risk.

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