Differentiate between business and financial risks and give examples of each exam
Risk Definition:
Unexpected fluctuation/changes in earnings, prices of assets
Risk can be of positive, negative, neutral impact/outcome for the parties concerned
Examples of Risk:
Loss in real estate business caused by sub prime mortgage crisis
Increase in sale of military equipment caused by conflicts around the world
Major Sources of Risk:
The following are some of the major sources of risk:
Production
Marketing
Financial
Business
Human
Legal
Note: There can be many more classifications of risk depending on what is being looked at.
Differentiate between business and financial risks and give examples of each exam:
Business Risk:
Caused as a result of business decisions, business environment
Impacts fir operations and sales as a result of decisions made by management
Example:
Company profit is lower because of economic condition
Effective preventive mechanism:
Choose a plan that has lower debt ratio so that company can meet financial obligation at all times
Financial Risk:
Loss in financial terms caused by various reasons resulting in decrease in value of the company
The end result of financial risk is filing for bankruptcy and company going out of business
Example:
Banks closure as a result of sub prime mortgage crisis
Effective preventive mechanism:
Use risk management tools to effectively manage the financial risk of the company
