Necesidad de educar en valores en la escuela

Risk is the threat that an event or action will adversely affect an entity‟s ability to achieve its objectives and or execute its strategies successfully. Types

138

of risk include: strategic risks, operating risks, financial risks, informational risks, physical risks, business risks.

Definition of Business Risk Definition 1

The probability of loss inherent in an organization‟s operations and environment (such as competition and adverse economic conditions) that may impair its ability to provide returns on investment. Business risk plus the financial risk arising from use of debt (borrowed capital and/or trade credit) equal total corporate risk.

Definition 2

The possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input cost, competition, overall economic climate and government regulations. A company with higher business risk should choose a capital structure that has a lower debt ratio to ensure that it can meet its financial obligations at all times. Investors in a company are exposed not only to business risk, but also to financial risk, liquidity risk, systematic risk, and exchange – rate risk.

Definition 3

Business risk usually involves all of the risks attributed to the business‟s strategic decisions, with the exception of the company‟s financial decisions.

Such risk could include the decision to introduce a new product or service into the market or a potential partnership with another company. In estimations of business risk, internal efficiency and production quotas are commonly measured to determine whether or not a key business decision is worth the risk. There are several factors that can affect the business risk level of a company. The fluctuations in demand for a certain product or service can certainly affect business risk as this will have a direct impact on a company‟s profits. In addition, every time a competing company introduces a similar product to the market, it has the potential to drive down costs and sales, both of which can affect a company‟s earnings. Changes in business risk can also be attributed to external factors like government actions and changes in consumer preferences as well as internal factors like the company‟s ratio of fixed to variable expenditure.

Definition 4

A business risk is a circumstance or factor that may have a negative impact on the operation or profitability of a given company. It can be the result of internal conditions or some external factors that may be evident in the wider business community. When it comes to outside factors that can create an

139

element of risk, one of the most predominant is that of a change in demand for the goods and services produced by the company. If the change is a positive one, and the demand for the offerings of the company increase, the amount of risk is decreased a great deal. When consumer demand for the offerings decrease, however, either due to loss of business to competitors or a change in general economic conditions, the amount of risk involved to investors will increase significantly. When a company‟s risk factor is considered to be increased due to outside factors that are beyond the control of the company to correct, chances of attracting new investor are severely limited.

Internal factors may also result in the development of significant risk for the investor. Often, these are factors that can be identified and corrected. If flagging sales can be attributed to an ineffectual marketing effort or a sales force that is not performing up to expectations, making changes in the marketing approach or restructuring the sales effort will often result in minimizing the perception of risk on the part of potential investors. The same is true if a company‟s manufacturing facilities are to operating at optimum efficiency.

Revamping the operational structure of the plants and facilities will decrease the element of business risk and result in higher profits at the same level of production and sales, which will in turn make the company more attractive to potential investors.

In general, any investors will consider the relationship of a company‟s securities and the business risk associated with the company before choosing to invest in the future of the corporation. While there is an element of risk associated with any corporate operation, proper management will result in creating a balance between assets and securities that will be attractive to individuals and entities that consider investing funds into the operation.

Business risk is the variation in net earnings arising out of the major or kind of enterprises which the firms is engaged in. These are variations brought about by diseases, weather, policy, unforeseen circumstances, and government.

Every business organization contains various risk elements while doing the business. Business risks implies uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes business to fail. For example, an owner of a business may face different risks like in production, risks due to irregular supply of raw materials, machinery breakdown, labour unrest, etc. In marketing, risks may arise due to different market price fluctuations, changing trends and fashions, error in sales forecasting, etc. In addition, there may be loss of assets of the firm due to fire, flood, earthquakes, riots or war and political unrest which may cause unwanted interruptions in the business operations. Thus, business risks may take place in different forms depending upon the nature and size of the business.

Business risks can be classified by the influence by two (2) major risks:

internal risks (risks arising from the events taking place within the organization) and external risks (risks arising from the events taking place outside the

140

organization). Internal risks such as factors (endogenous variables which can be controlled) such as human factors, technological factors (emerging technologies), physical factors (failure of machines), fire or theft, operational factors (access to credit, cost cutting, advertisement). External risks arise from factors (exogenous variables, which cannot be controlled) such as economic factors (market risks, pricing pressure), natural factors (floods, earthquakes).

Political factors (compliance and regulations of government).

Definition of Financial Risk Definition 1

Financial risks are the risks associated with the financial structure and transactions of the industry.

Definition 2

Financial risk is an umbrella term for multiple types of risk associated with financing including financial transactions that include loans in risk of default.

A company‟s financial risk is predominantly targeted at its shareholders and those who own or buy the company‟s stock as this type of risk is based on how a company‟s finances are structured, and traditionally focuses on corporate debt. Companies that rely heavily on business financing are often considered risky. One of the most common things that can affect a company‟s financial risk is the quality of the financial system within its country of operation. If a company is based in a country that has a poorly financial system or devalued currency. Its financial risk will usually be relative high as the company‟s holding could easily be eliminated. Financial leverage is a company‟s debt to equity ratio. The more a company relies on debt to finance the business, the higher the financial leverage is and therefore, the company is a higher financial risk.

Types of Financial Risks (1) Credit Risk

Credit risk, also called default risk, is the risk associated with a borrower going into default, not making payment as promised.

Investor looses include lost principal and interest, decreased cash flow and increased collection costs. An investor can also assume credit risk through direct or indirect use of leverage.

(2) Foreign Investment Risk

Risk of rapid and extreme changes in value due to smaller markets, differing accounting, reporting or auditing standards, nationalization, expropriation or confiscatory taxation, economic conflict, political or diplomatic changes.

141

Valuation, liquidity and regulatory issues may also add to foreign investment risk.

(3) Liquidity Risk

This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss or make the required profit. There are two (2) types of liquidity risk:-

(a) Asset Liquidity: An asset cannot be sold due to lack of liquidity in the market, essentially a sub-set of market risk.

(b) Funding Liquidity: Risk that liabilities cannot be met when they fall due, can only be met at an uneconomic price.

(4) Market Risk

This is the risk that the value of an investment portfolio or a trading portfolio, will decrease due to the change in market risk factors. The four (4) standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices (Equity Risk, Interest Rate Risk, Currency Risk, Commodity Risk).

(5) Operational Risk

These are the risks associated with the operational and administrative procedures of the particular industry.