What is Business Risk?

Business risk is the possibility that an organization's operations or competitive environment will cause it to generate financial results that are worse than expected. The causes of business risk can arise from both within and outside a business; in both cases, a risk management strategy can be adopted to mitigate this risk.

What Causes Business Risk?

The following are all factors that can impact business risk:

The amount of competition or potential competition
The stability of an entity's market share
The risk of lawsuits and the ability to mitigate this loss
The amount of government regulation
The stability of product price points
The stability of raw material prices
The impact of a decline in general economic conditions

Business Risk Mitigation Techniques

An entity that has a high business risk should be operated in a more conservative manner in order to avoid the risk of failure. This means keeping the debt level as low as possible. If there is a need for additional funding and the business risk is high, management should prefer the use of equity financing.