Business Risk

Today’s post is by Randy Russon, founder of TOPCFOS

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So, what is business risk? defines business risk as, “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.”

This is an interesting definition of business risk. So, what does this paragraph mean when it talks about “the probability of loss inherent in an organization’s operations?” I believe a big factor inherent within every organization is the human factor. This all starts with the CEO. The CEO sets the tone for the entire organization. Is the CEO good at delegation? Is the CEO well organized? The entire organization will reflect whoever is at the top. The chance for business failure is much less when you have a highly qualified CEO at the helm. A good example of this is Frederick W. Smith, Founder and CEO of FedEx.

With 300,000 employees worldwide, do you think that Mr. Smith is good at delegation? Is he well organized? I would say that the answer to both of these questions is yes. Because of Mr. Smith’s ability as a leader, he has learned to combine the talents of many people to create an organization that is the envy of the business world. Going back to the definition of business risk above, it talks about environment, which is competition and adverse economic conditions. Sometimes in business, the market is so saturated with competitors that it makes it very difficult to turn a profit. Too many competitors drives prices down to a point where no one makes any money. Then, with adverse economic conditions, it’s hard when there’s a depression and you have very few customers. This is why only the strong will survive during difficult times. The last part of the paragraph above talks about financial risk.

Financial risk is when you borrow money to run your business. The greater the debt, the greater the risk of failure. Lenders have very strict rules about paying money back on time. What are your financials telling you about your business? Involving a great CFO to help you interpret the meaning behind your financials can be a big help. And, if you do want to utilize debt financing for your firm a good CFO can help you determine how much money you will really need. At the same time, be cautious about using debt financing, because this increases business risk.

We hope you’ve enjoyed our Blog today. Please remember, TOP CFOS offers the finest CFO services to companies anywhere in the world and would love to be a part of your team. Feel free to reach out to us anytime. Your feedback is most welcome, and we invite you to share this post with friends and associates. Our contact information can easily be found here on our website, so give us a call today! Our next post will come from the Leadership category on our website and is entitled Good Communication. And, thank you for joining us!