Question

Financial risk is an important concept for any healthcare manager. The manager must understand how the various aspects of risk impact the organization’s potential access to capital for much needed investments. For this discussion, explain what financial risk is. Also, discuss how businesses and investors view risk. Provide an example that an organization might face. Lastly, discuss the terms stand alone and portfolio risk. In your opinion, is one more impactful to the organization than another?

Answer 1

An organization is set up with the help of capital investments. The capital investments are made up of debt and equity. The financial risk of a company is concerned with the debt component. If the financial risk of a company is high then it means that the company may not be able to pay back its debts on time. This implies that the company will not be able to meet the debt obligations on time. Businesses view risk as an essential component in the financial structure of a company. The risk factor will help in leveraging the company's position. Investors however, feel that the lesser is the risk involved, the better it is. There can be a wide variety of investors who can be classified based on their risk-taking capacity. Some investors may be risk-averse while others may be risk-taking. For example: A company might want to take a loan to expand its business operations in a new location. This might be viewed by the company as an opportunity and a a good investment while the investors of the company may feel that it is an unnecessary risk.

Stand-alone risk is the risk that a specific activity of the company or a specific plant possesses. It is not diversifiable. On the other hand, the portfolio risk is the risk that is associated with a combination of investments. This is diversifiable and if the company plans properly then the risk can be shared and reduced. Stand-alone risk has more impact on the organization as it is non-diversifiable.