Difference between Business Risk and Financial Risk

Difference between Business Risk and Financial Risk

The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Financial risk is the chance that a firm would fail to meet its payment obligations. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, and the overall economic climate and government regulations. When a firm wants to improve its financial leverage by allowing debt to enter into their capital structure, they suffer from financial risk.

Difference between business risk and financial risk are described below –

Financial risk –

(a) Financial risk refers to the chance a business’s cash flows are not enough to pay creditors and fulfill other financial responsibilities.

(b) The more debt a business owes, the more likely it is to default on its financial obligations.

(c) Financial risk is the risk of not being able to pay off the debt that the company has taken to get financial leverage.

(d) A financial risk would be there until equity financing is increased drastically.

(e) Financial risk can be measured by financial leverage multiplier.

Business risk –

(a) Business risk refers to the chance a business’s cash flows are not enough to cover its operating expenses like the cost of goods sold, rent and wages.

(b) Unlike financial risk, business risk is independent of the amount of debt a business owes.

(c) Business risk is the risk of not being able to make the operations profitable so that the company can meet its expenses easily.

(d) Business risk will be there as long as the company operates.

(e) Business risk can be measured by the variability in EBIT (as per situation).

These are the difference between business risk and financial risk.

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