10 PagesAPA formatted references Financial markets are the forums in which buyers and sellers of financial assets such as stocks and bonds, and commodities such as grains, oil and gold, meet. Because...

BUSINESS RISK & FINANCIAL RISK 1

Introduction
In this assignment we will discuss what does business and financial risk means and how
they can affect any organization. We will also discuss various risk management techniques used
by the organization to avoid such risks or minimize its impact. Although business risk and
finance risk sounds similar but they are not, business risk is different from finance risk.
(Guzman, D, 2013)
Business risk is mostly associated with the strategic decisions which are required so that
the organization can work smoothly and profitably whereas finance risk is associated with the
monetary aspects of an organization such as its capital structure etc. In order to excel the market
every entrepreneur must manage both these risks very well by using various risk management
techniques. (Charlie S, 2013)
Business risk can be defined as the risk that the core business activities of a business are
not appropriate such as inefficient supply chain management system, inaccurate pricing of
products which will bring down the demand of the product, ineffective production processes etc.
These risks directly impact the business as they are involved in day to day working of an
organization. On the other hand Finance risk can be defined as the risk which is mainly
associated with the capital structure of the company, if the company is carrying to much debt
than in such case liability of repayment and interest costs are also high which makes the
organization vulnerable to credit risk. (Stephen C. Gabriel)
Thus now we can easily understand the major difference between the finance risk and
business risk, business risk is the risk associated with the operations of an organization whereas
finance risk is the risk associated with the financial aspect of an organization. (Stephen C.
Gabriel)
BUSINESS RISK & FINANCIAL RISK 2

Business risks and management technique
As discussed above business risks can be defined as all those risks which affects the
operations of business and that is why they are known as operational risks. Operation risks
include various risks which must be catered in order to make the operation of organization
effective and profitable. Let us take few examples of operational risks which company faces in
order to understand it better, first operational risk we are taking up is risk involved in supply
chain management. Supply chain management means the designing, planning, execution,
control, and monitoring of various supply chain activities with the primary objective of creating
value, building a highly competitive infrastructure for the company, improving the logistics
system and matching the demand with supply. (Lambert D 2008)
The major challenges faced by companies while managing their supply chains are
customer service, cost control, risk management, supplier relationship management etc. we have
discussed few of them here to understand these risk better and find out the techniques to manage
them. (Lambert D 2008)
1. Customer Service: An effective supply chain management requires the right
product to be delivered in the right condition and quantity at the right place and time and at the
right price. This requires an effective management of supply chains to cater this problem.
2. Cost Control: The rising freight prices, greater number of customers worldwide,
up gradation of technology, rising commodity prices and labor rates are putting the supply chain
operating costs under pressure. Multiple metrics are available to control such costs. The
management must decide a few of them that keep the costs under control.
BUSINESS RISK & FINANCIAL RISK 3

3. Risk Management: Supply chains must be assessed and redesigned after fixed
intervals of time to cater to the market changes. Also, the risks involved in supply chains should
be identified and measured.
4. Supplier/partner relationship management: Methods for measuring and
communicating performance results and expectations can be different in various organizations or
even in same organization having different departments. Trust can be built if mutually agreed
upon standards are followed and scope for improvement is there.
5. Talent: Training and development of fresh talents has become important in
today’s scenario where experience managers may retire. Supply chain managers need to
understand the competitive skills required for their respective roles.
Apart from these risks there are various other risks which affect the working of an
organization such as poor working capital management, inventory management risks etc. Let us
have a brief look on these as well so that it will help in understanding business risks and drafting
risk management technique.
Long operating and cash cycle are both example of poor working capital management.
Operating cycle means time required by an organization to recover its cash invested in the
business. Operating cycle is composed of following constituents such as inventory conversion
cycle, debtor conversion cycle, creditor conversion cycle. Long operating cycle is caused due to
following factors, production process of an organization takes long time to complete and also the
time taken by the company to convert its debtors is high and time for conversion of its creditors
is low. If an organization wants to reduce the length of its operating cycle then in such case it
should reduce inventory conversion period and debtors’ conversion period and increase its
creditor conversion period. (Ross 2006)
BUSINESS RISK & FINANCIAL RISK 4

long cash cycle is an example of inadequate working capital management or may be the
nature of industry is such that the cash cycle is normally long for example heavy goods industries
such as manufacturing of ships, aircrafts etc. (Ross 2006)
Industries with long cash cycles usually raise the funds by the means of equity and not
debt because it would be difficult for the companies to repay the interest on the amount borrowed
when the cash cycle is very long in nature. Another reason for long cash cycle could be high
debtor conversion period which is a signal of inappropriate working of an organization. (Ross
2006)
Business risk management techniques
There are various other business risks which must be managed in order to maintain
smooth and profitable business operations. There are various common tools used by the
management to manage business risks such as building strategies both business level and
corporate level, providing the managers knowledge to use business judgment rule etc. we have
discussed few of these tools down here.
Business...