What is Financial Risk?
Your business's financial risk refers to its ability to repay creditors and still meet other financial obligations. In general, financial risk relates more to your business's debts than to overall financial health.
There are several types of financial risk that can affect a business in different ways.
Types of financial risk
- Credit risk if your loans go into default
- Liquidity risk if you cannot sell or purchase assets or securities quickly
- Asset-backed risk if securities fall in value
- Foreign investment risk if foreign economies face downturns
- Equity risk if stocks change in value
- Currency risk if interest rates or monetary values fluctuate
How to reduce financial risk
- Limit debts.
- Repay debts on time.
- Expand and diversify your customer base and investment portfolio.
- Continue to look for ways to decrease overall spending and increase savings.
Depending on your business and exposures, specific coverage options may be relevant, for example Mercantile (Lessors Risk Only) or Cover holders and risk takers.
What is Business Risk?
Business risk describes cash flow. It relates to your business's ability to pay regular operating expenses, not debt. There are two main kinds of business risk: systematic and unsystematic.
Systematic risk
Systematic (or systemic) risk describes economy-wide factors. An economic downturn or failure because of a recession, interest-rate changes, a natural disaster, war, or other broad events could cause your business to suffer.
Every business faces systematic risks, and you cannot eliminate them entirely, though you can take steps that increase or decrease your exposure.
Unsystematic risk
Unsystematic (or unsystemic) risk describes risks unique to your specific business. This type of risk varies greatly between businesses, and you can make decisions and take actions that increase or decrease it.
How to decrease business risks
- Make smart business choices that cushion your business against economic downturns.
- Manage your finances properly.
- Cut expenses when necessary.
- Diversify your portfolio.
- Own several businesses in various industries.
Why Should you Manage Financial and Business Risks?
The worth of your business depends in part on your risk factors. The more risks your business faces, the less it may be worth to potential buyers or lenders.
Improve your chances of succeeding and turning a profit when you reduce debt, strengthen your financial standing, and take prudent operational steps. For more information on the financial and business risks your company faces, talk to an agent who can help you plan and navigate those risks.
Frequently Asked Questions
How does financial risk differ from business risk?
Financial risk focuses on debts and the ability to meet creditor obligations; business risk focuses on cash flow and the ability to cover operating expenses.
Can I eliminate systematic risk?
No, systematic risk affects the entire economy and cannot be eliminated, but you can take steps to reduce your exposure.
What are common ways to reduce unsystematic risk?
Diversifying products, customers, and investments, and maintaining strong financial controls are common methods to lower unsystematic risk.