Posted in Finance, Accounting and Economics Terms, Total Reads: 880
Definition: Business Risk
Business Risk can be defined as an uncertainty in cashflows which may pose risk of making less profits than expected by a company in a specific period. In some cases, uncertainty maybe so high that company may not even cover its operating expenses. Business Risk is very diverse in nature and can be broadly classified in two types:
Internal Business Risk (Due to endogenous variables)
- Arising due to the events taking place within the Business enterprise and can be controlled
External Business Risk (Due to exogenous variables)
- Arising due to the events taking place outside Business enterprise and can’t be controlled
If a company’s trade union is on strike for increase in pay-scale, then such situation is called as Internal Business Risk caused by Human factors
If there is sudden economic downturn leading to fall in stock prices of a certain company then company goes into losses. Such risk is called as External Business Risk which is caused by economic factors
To calculate Business Risk, tools like contribution margin ratio, operation leverage effect, financial leverage effect, total leverage effect etc. are used. For complex calculations, statistical tools are incorporated.
Sometimes Business Risk is also called as Company Risk.