Question

Discuss the major risks that a business may face, and at least one peril that might give rise to a loss for each.

Answer 1

Major risk that business face are-

1. Operational risk

This risk arises when company does not make effective us of their assets. When asset are not utilized at optimum level sales reduces and cost increase which would lead to losses. Eg- Fixed asset capacity utilized for production is only 50% thus sales generated is also half of actual potential ( Provided product had to 100% demand )

2. Financial risk

Financial risk arises due to capital structure of the company. That is due to debt and equity. Whenever company has high debt there is high equity risk. If company goes into liquidation debt holders must be paid off first before equity. Irrespective of fact if company makes profit or Loss, interest must be paid by company to debt holder. Thus more debt in company leads to high financial risk.

3. Other risks-  

Currency risk- whenever company deals in foreign currency it would be subject to currency fluctuation risk. This can be hedged using forward contract.

Legal risk- New government rules unfavourable to the company can lead to legal risk. Eg- if government bans all plastic material then plastic industry is said to be damaged due to legal risk.

Political risk, market risk, economic risk, IT risk, etc.