Distinguish between business risk and financial risk Essay

Distinguish between business risk and financial risk - Essay Example Systematic risk refers to the risk posed by the conditions of the environment, i.e. the possibility that the economy within which a business operates will experience a downturn; while unsystematic risk refers to the possibility that the specific sector of the economy in which a business operates will fail. In order to protect against unsystematic risks, businesses try operating is a variety of sectors so that losses from one business can be offset by the profits from another. Since systematic risk pertains to the economy of a country, there is little that businesses can do to prevent against the dangers of this kind of risk. Several internal and external factors cause business risk. Internal business risk factors can be corrected by the business, however the external factors are beyond the organization’s control. Internal factors broadly include operating costs, business structure and business efficiency. In order to reduce operating costs, businesses should look toward cost cutting measures or to increasing revenues such that costs are covered. Similarly, business structure and management policies should be tailored such that they enhance efficiency. The external factors that cause business risk include the change in demand for the product, unpredicted changes in the state of economies worldwide etc. Another category of risk posed to a business is financial risk. Financial risk pertains to the financing structure of a business. It can pertain to risks associated with shares (in case of a public limited company) or with the debt structure of the business and occurs when a business fails to pay its creditors. This risk is business specific, since each business has its own financing structure and how it manages the structure depends on the business’s policies and strategies. Financial risks are of several types; market risk (risks associated with shares in the stock market),