Calculating business risk and financial risk
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The operation of a business at any level, in any department, involves risk. Therefore, it is crucial that every person in an organisation understands the various risks associated with their range of responsibilities and becomes involved as the company deals with these risks, together.
We get it, that's a pretty big cross to bear. For now, let's just tackle an area of confusion for many - business risk and financial risk.
Recognising what separates these risks will help any organisation better understand their business environment. Conversely, how the two risk domains work parallel to each other is especially relevant for maintaining business continuity.
Below, we will unpack the two, highlight some of the key differences and provide potential solutions to address them both.
What is Business Risk?
Anything that jeopardises your ability to generate enough revenue to meet operational expenses is known as a business risk. Utility expenditures, rent charges, wages/salaries and the cost of items supplied are all examples of operating expenses.
Business risk can be caused by variables such as demand changes, market competitiveness, raw material pricing etc. For quick reference, take a look at the top 5 types of business risks in 2021 here.
To make this exciting area even more fun, business risk happens to be divided into two other categories. Systematic and unsystematic.
Systematic risk is the result of a downturn that an entire industry or economy faces. It is caused by factors such as inflation, volatile interest rates and natural disasters - and there's not much that you can really do about it.
Unsystematic risk, however, is a result of poor management decisions, investments or strategic moves for example.
To reduce such risks, large organisations tend to diversify their portfolios, i.e. when one company is experiencing a downturn, it can be overcome by the favourable performance of another.
What is Financial Risk?
Anything that presents the possibility of losing money on an investment or business venture. Generally considered in terms of the odds of losing your money.
The most popular financial risk referred to is usually credit risk (the possibility that you are unable to generate enough cash flow to pay off the debt taken on).
Other super common financial risks include liquidity risk, asset-backed risk, foreign investment risk, equity risk, operational risk (there's a cross-over) and currency risk.
If you happen to work in the public sector, remember that government departments and agencies are not immune to financial risk. The most common here being when a government defaults on its bonds.
There are loads of factors contributing to financial risk; volatile interest rates, exchange rates, the company’s debt-to-equity ratio and many more. Very tough to navigate it all successfully 100% of the time.
The Difference Between Business Risk and Financial Risk
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When we say that business risk cannot be avoided, we mean 'completely', obviously. Sometimes the cause of a risk is external to the company. As for being completely debt free and avoiding 100% of financial risk, if you manage to do it, let the rest of us know how won't you?
For both of these key risk domains, there is certainly a lot you can do to start at least giving yourself the best chance possible to mitigate them.
Finding Solutions With 6clicks
And here it is. Start with a comprehensive risk review. Our mobile app puts a well-timed grenade under the tediously boring and not to mention damaging old-school methods of risk reviews. Also, we believe it is the only real way to get a solid review done that represents the true risk landscape of your business.
You can access risk libraries curated by industry experts, or simply drive risk awareness with our tailored newsfeed based on your risk profile with 6clicks Pulse.
Book a demo below with one of our friendly team members today to learn more.
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