how business risk is created?
Answers
Answer:
Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail.
Anything that threatens a company's ability to meet its target or achieve its financial goals is called business risk. These risks come from a variety of sources, so it's not always the company head or a manager who's to blame. Instead, the risks may come from other sources within the firm or they may be external—from regulations to the overall economy.
While a company may not be able to shelter itself from risk completely, there are ways it can help protect itself from the effects of business risk, primarily by adopting a risk management strategy.
Explanation:
Business risk is associated with the overall operation of a business entity. These are things that impair its ability to provide investors and stakeholders with adequate returns. For example, a business manager may make certain decisions that affect its profits or he may not anticipate certain events in the future, causing the business to incur losses or fail.
Business risk is influenced by a number of different factors including:
Consumer preferences, demand, and sales volumes
Per-unit price and input costs
Competition
The overall economic climate
Government regulations
The company is also exposed to financial risk, liquidity risk, systematic risk, exchange-rate risk, and country-specific risk. These make it increasingly important to minimize business risk.
A company with a higher amount of business risk should choose a capital structure with a lower debt ratio to ensure it can meet its financial obligations at all times. When revenues drop, the company may not be able to service its debt, which may lead to bankruptcy. On the other hand, when revenues increase, it experiences larger profits and is able to keep up with its obligations.
To calculate risk, analysts use four simple ratios: contribution margin, operation leverage effect, financial leverage effect, and total leverage effect. For more complex calculations, analysts can incorporate statistical methods. Business risk usually occurs in one of four ways: strategic risk, compliance risk, operational risk, and reputational risk.