Differences Between Financial Risk and Business Risk

Starting your own business can be risky. Numerous factors can affect your success and your business's value. Financial risk and business risk are two common types of risks you face as a business owner. Know the differences between financial and business risk as you plan for success.

What is Financial Risk?

Your business's financial risk refers to your ability to repay creditors and still meet your other financial obligations. In general, financial risk relates more to your business's debts than overall financial health.

There are several 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
Reduce financial risk when you:

  • 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.
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 kinds of business risk.

Systematic Risk

Systematic or systemic risk describes the economy in general. An economic downturn or failure because of a recession, economic crash, interest rate drop, natural disaster, war or other factor could cause your business to suffer.

Every business faces systematic risks, and you can't eliminate them. However, you can increase or decrease your systematic risk.

Unsystematic Risk

Unsystematic or unsystemic risk describes your specific business's chances of experiencing a downturn or failure. This type of risk varies greatly between businesses, and you can make decisions and take actions that increase or decrease your unsystematic risk.

Decrease your overall business risks when you:  

  • 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 is worth. Improve your chances of succeeding and turning a profit when you decrease your reduce debt, improve your financial standing and take other wise steps.

For more information on the financial risks and business risks your business faces, talk to your financial advisor. He or she will help you plan for and successfully navigate the risks your business faces.
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