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business risk is the risk for which the business may not generate enough profit or make loss. The risk is like taste of consumers changed, govt policies, operational uncertainties.
and the financial risk is that the risk of not generating enough cash flow to meet the creditors demand.
Business risk is the risk that the firm fails to achieve its objectives , and the probability it will has problems on its operations(for example a firm attain a loss of100000 $) ,because of the chang in the selling price, change in demand of the product, change in inputs price, and operating leverage (depending on Fixed costs on Company cost structure )
financial risi is the risk that the firm will be unable to pay debts Liabilities as they come due , and the failure to service these debts (interest)
Business Risk and Financial Risk
Business risk refers to the risk associated with the firm’s operations. It is an unavoidable risk
because of the environment in which the firm has to operate and the business risk is represented
by the variability of earnings before interest and tax (EBIT). The variability in turn is influenced by
revenues and expenses. Revenues and expenses are affected by demand of firm’s products,
variations in prices and proportion of fixed cost in total cost.
Whereas, Financial risk refers to the additional risk placed on firm’s shareholders as a result
of debt use in financing. Companies that issue more debt instruments would have higher
financial risk than companies financed mostly by equity. Financial risk can be measured by
ratios such as firm’s financial leverage multiplier, total debt to assets ratio etc.
Business risk is that what happens if you may not recover your investment. On the other hand Financial risk is something about cash flows is not enough to fulfill your operation requirement which in result delaying to pay suppliers money.
