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. Financial risk is the possibility that the use of debt to finance operations will have a negative impact on earnings. The following differences arise between these two types of risk:
- Business risk involves operational decisions, while financial risk involves financing choices regarding how an organization is to be funded.
- Business risk can be reduced through the use of well-grounded decisions, while financing risk can be reduced by altering the financing mix to favor equity over debt.
- Business risk alters income from operations, while financial risk alters net income.
- Business risk is not impacted when interest rates change, whereas financial risk will increase markedly as interest rates rise and decline when rates fall.