Finance Risks

One of the major causes of business risk is financial risk. Large variability in cash flow and liquidity introduces instability to the financial health of the business. 

While these can be caused by trading fluctuations, the financial structure of a business can also be a strong contributory factor. High gearing, for example, can place pressure on cash flow because of the need to service debt in a way that would not be necessary with a higher proportion of equity capital. So while debt can be a favourable means of financing when interest rates are low or when equity capital is difficult to raise, t increases financial risk because of the increased likelihood of trained cash flow and defaulting on debt repayment. 

Importance of Finance Risks

Financial risks are typically of most concerns to lenders and those that depend upon company’s cash flow such as suppliers who rely on prompt payment of payables.