Question

Distinguish between business and financial risks.

Answer 1

The aim of business is to earn revenue and generate profits. So, business risk means that the company may not be able to earn revenue due to any reason like slowdown in market or competition or internal issues.

Financial risk is related to the company not being able to repay its debt. The company raises debt to invest in business. The company has to pay interest on the debt. If the company is not able to repay that debt and default on interest and principal, it is a financial risk. This may be caused due to very high amount of debt in the capital structure.

There may be case that the company is earning revenue but the debt amount is so high that it is not able to repay debt. So, the company has to manage both business and financial risk.