What are the key differences between financial

risk and business risk to a company?

By J.B. Maverick | June 23, 2015 — 1:11 PM EDT

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Financial risk refers to a company's ability to manage its debt and financial leverage, while
A: business risk refers to the company's ability to generate sufficient revenue to cover its
operational expenses. An alternate way of viewing the difference is to see financial risk as the risk
that a company may default on its debt payments, and business risk as the risk that the company
will be unable to function as a profitable enterprise.

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Financial Risk
A company's financial risk is related to the company's use of financial leverage and debt financing
financing,, Visual risk communication
rather than the operational risk of making the company a profitable enterprise. Financial risk is try BowTieXP today
concerned with a company's ability to generate sufficient cash flow to be able to make interest www.cgerisk.com
payments on financing or meet other debt-related obligations. Obviously, a company with a
relatively higher level of debt financing carries a higher level of financial risk, since there is a greater
possibility of the company not being able to meet its financial obligations and becoming insolvent.
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Some of the factors that may affect a company's financial risk are interest rate changes and the
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overall percentage of its debt financing. Companies with greater amounts of equity financing are in
a better position to handle their debt burden. One of the primary financial risk ratios that analysts
and investors consider to determine a company's financial soundness is the debt/equity ratio
ratio,, which See all newsletters
measures the relative percentage of debt and equity financing.

Foreign currency exchange rate risk is a part of the overall financial risk for companies that do a HOT DEFINITIONS
substantial amount of business in foreign countries.
Nonfarm Payroll
Conflict Theory
Business Risk
Business risk refers to the basic viability of a business, the question of whether a company will be Inflation-Linked Savings Bonds (I Bonds)
able to make sufficient sales and generate sufficient revenues to cover its operational expenses and Peak Globalization
turn a profit. While financial risk is concerned with the costs of financing, business risk is concerned Phishing
with all the other expenses a business must cover to remain operational and functioning. These
Insurance
expenses include salaries, production costs
costs,, facility rent, and office and administrative expenses
expenses..

The level of a company's business risk is influenced by factors such as its cost of goods, profit
margins,, competition, and the overall level of demand for the products or services that it sells.
margins
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Business risk is often categorized into systematic risk and unsystematic risk. Systematic risk refers to
the general level of risk associated with any business enterprise, the basic risk resulting from
fluctuating economic, political and market conditions. Systematic risk is an inherent business risk
that companies usually have little control over, other than their ability to anticipate and react to
changing conditions.

Unsystematic risk,
risk, however, refers to the risks related to the specific business in which a company is
engaged. A company can reduce its level of unsystematic risk through good management decisions

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regarding costs, expenses, investments and marketing. Operating leverage and free cash flow are Trading Center
metrics that investors use to assess a company's operational efficiency and management of
financial resources.

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RELATED TERMS
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Financial Risk Market Risk
The possibility that shareholders will lose The possibility for an investor to experience
money when they invest ... losses due to factors ...

Business Risk Operational Risk

The possibility that a company will have lower A form of risk that summarizes the risks a
than anticipated ... company or firm undertakes ...

Company Risk Unsystematic Risk

The financial uncertainty faced by an investor Company or industry specific risk that is
who holds securities ... inherent in each investment. ...
 Search Investopedia Symbol

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