The difference between business risk and financial risk
/What is Business Risk?
Business risk is the possibility that an organization's operations or competitive environment will cause it to generate financial results that are worse than expected. Business risk is influenced by many factors, including customer preferences, government regulations, the actions of competitors, and the state of the general economy.
What is Financial Risk?
Financial risk is the possibility that the use of debt to finance operations will have a negative impact on earnings.
Comparing Business Risk and Financial Risk
There are several differences that arise between business risk and financial risk. They are as follows:
Nature of the risk. Business risk involves operational and pricing decisions, while financial risk involves financing choices regarding how an organization is to be funded.
Reduction actions. Business risk can be reduced through the use of well-grounded decisions, while financial risk can be reduced by altering the financing mix to favor a larger proportion of equity over debt.
Impact on income types. Business risk alters income from operations, while financial risk alters net income.
Influence of interest rates. Business risk is not impacted when interest rates change, whereas financial risk will increase markedly as interest rates rise, and decline when rates fall.