Business Risk

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DEFINITION of 'Business Risk'

The possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations. A company with a higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times.

BREAKING DOWN 'Business Risk'

Investors in a company are exposed not only to business risk, but also to financial risk, liquidity risk, systematic risk, exchange-rate risk and country-specific risk. To calculate business risk, analysts use four simple ratios: contribution margin, operation leverage effect, financial leverage effect and total leverage effect. For more complex calculations, analysts can incorporate statistical methods.

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RELATED FAQS
  1. What are the key differences between financial risk and business risk to a company?

    Financial risk refers to a company's ability to manage its debt and financial leverage, while business risk refers to the ... Read Full Answer >>
  2. What risks does a business owner face under a business structure with unlimited liability?

    The risks that a business owner faces under a business structure with unlimited liability are literally unlimited, but they ... Read Full Answer >>
  3. What are some examples of risk management techniques?

    Business risk comes in a variety of tangible and intangible forms over the course of the business life cycle. Some risks ... Read Full Answer >>
  4. How can I manage the three possible sources of business risk?

    Ultimately, the best way to manage the three possible sources of business risk is to maintain an adequate level of capital. ... Read Full Answer >>
  5. How does operating leverage affect business risk?

    In finance, companies assess their business risk by capturing a variety of factors that may result in lower-than-anticipated ... Read Full Answer >>
  6. How can companies reduce internal and external business risk?

    A company can reduce negative exposure to business risk by identifying internal risks and external risks. Internal risks ... Read Full Answer >>
  7. What are the components of the risk premium for investments?

    The risk premium is the excess return above the risk-free rate that investors require as compensation for the higher uncertainty ... Read Full Answer >>
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