What is the difference between a business risk and a financial risk in businesses?
Business risk is the risk which is associated with core business activities, for example, Demand creation, supply, operations, production, raw material procurement etc. If an organization fails to properly manage these activities then the probability of impact of these failures on revenue becomes too high and the business can loose some part of its sales. Due to lower revenue the profits of business gets negatively impacted, particularly in case where Fixed Cost is very high the magnitude will be very high.
while on the other side, financial risk is associated with the debt level of the business.
If the company has high level of debt in its capital structure then it has a liability to pay to lenders. Payment comprises of Interest and principal repayment. Higher is the debt level higher is risk of defaulting.
When starting up, many businesses take on some debt to finance growth. Financial risk refers to the chance that a business's cash flows are insufficient to pay off debt and other financial responsibilities. Exposure to financial risk relates to the amount of debt the business incurs and is independent of the business' operations. Taking on more debt increases the chance that the business will not be able to meet all of its financial obligations. The more debt a business incurs therefore, the greater its exposure to financial risk.
Business risk refers to the chance that revenues are insufficient to pay for a business' operations. Unlike financial risk, business risk is not related to the amount of debt a business incurs. There are two primary kinds of business risk: systematic risk and unsystematic risk.
Systematic risk measures the chance that the entire market or economy will experience losses or fail. Sources of systematic risk include recessions, economic crashes, interest rates, and natural disasters. Every business operating in the same market is equally exposed to this risk. Small business owners are therefore virtually unable to reduce their exposure to systematic risk.
Unsystematic risk measures the chance that a specific business or industry will experience losses or failures. Unlike systematic risk, which remains constant within a market, unsystematic risk can vary greatly. Unsystematic risk arises from the daily strategic, management and investment decisions a small business owner faces. Just as investors decrease their exposure to unsystematic risk by holding stock in a variety of companies and industries, small business owners sometimes decrease this risk by owning a variety of businesses and operating in diverse industries.