Distinguish Between Business risk and financial risk.
Business risk is the risk that a business faces in not being able to generate adequate income to cover operating expenses.
Financial risk is the risk that a business will not be able to generate enough cash flow and income to pay their debts and meet their other financial obligations.
| Business Risk | Financial Risk | ||
| i. | Business risk is the uncertainty of expected return on an asset if the company does not use debt. | i. | Financial risk is the uncertainty of return if the company takes debt. |
| ii. | It is calculated from the overall asset invested in the business. | ii. | It arises if the total debt of the firm is more in the capital structure. |
| iii. | It is related to the total profit if the business. | iii. | It is related to the financial profit of the business. |
| iv. | It is related to the investment policy of the firm. | iv. | It is related to both investment policy and capital structure of the firm. |
| v. | It relates to operating leverage. | v. | It relates to financial leverage. |
| vi. | Owners and creditors are concerned with this risk. | vi. | Owners of the business are concerned with this risk. |
| vii. | Owners, as well as creditors, can control this risk. | vi. | Only the owners of the business can control this risk. |
| viii. | This is an unavoidable risk. | viii. | This is an avoidable risk. |
| ix. | Capital structure is not considered in analyzing business risk. | ix. | Capital structure is considered in analyzing financial risk. |
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