Taking Risk for Business Growth
Business risk is the exposure a company or organization has to factor(s) that will lower its profits or lead it to fail. Anything that threatens a company’s ability to achieve its financial goals is considered a business risk. There are many factors that can converge to create business risk. Sometimes it is a company’s top leadership or management that creates situations where a business may be exposed to a greater degree of risk. However, sometimes the cause of risk is external to a company. Because of this, it is impossible for a company to completely shelter itself from risk. However, there are ways to mitigate the overall risks associated with operating a business; most companies accomplish this through adopting a risk management strategy.
When a company experience a high degree of business risk, it may impair its ability to provide investors and stakeholders with adequate returns.
A company with a higher amount of business risk may decide to adopt a capital structure with a lower debt ratio to ensure that it can meet its financial obligations at all times. With a low debt ratio, when revenues drop the company may not be able to service its debt (and this may lead to bankruptcy). On the other hand, when revenues increase, a company with a low debt ratio experiences larger profits and is able to keep up with its obligations.
To calculate 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.
Business risk usually occurs in one of four ways: strategic risk, compliance risk, operational risk, and reputational risk. Basic prerequisite for successful management and development of all businesses is a favorable business environment. It is represented by the environment, in which economic competition is supported and protected by state, which creates clear and stable conditions and ensures their compliance by all market participants, while minimizing administrative barriers towards entrepreneurs.
The issue of business risks of small and medium enterprises (SME) represents now current area of theoretical research and practical applications. Financial crisis and gradual recovery of economies in the European Economic Community brought deterioration of the business environment. Presumably, business risks have been increased due to turbulences in the economic system.
Small and medium enterprises operate in more challenging economic environment, respectively, many of them struggling with their own survival. It is evident that all these risks are transformed to the financial management of enterprises. In this course, current trends in the area of business risks of small and medium-sized enterprises (SME) is examined.
Upon completion of this course, you should be able to;
- Explain what Entrepreneurship means and how you can be become one
- Highlight the types of entrepreneurship
- Understand Business risk
- Risk management for startups/SMEs
- And many more.