Factors that Affecting Business Risk of a Company –
The business risk of a firm is measured by the variability in the operating income of the firm. The definition of business risk describes the possibility of inadequate profits and even losses due for you to uncertainties, examples, changes in style, preferences of customers, strikes, increased levels of competition, change in authorities policy, obsolence and so forth. Larger variability in operating income denotes larger business risk. The firm’s business risk changes over time and it varies from firm to firm. Before starting any business venture, always know exactly that which you are getting into and be realistic.
Some factors affecting business risk of a firm are as follows:
- Variability in Demand
The operating income of the firm fluctuates widely if variability in demand for a firm’s product is larger. If the demand for a firm’s product is highly sensitive to economic conditions, the higher is the business risk. Thus, a firm with larger variability in demand is more exposed to business risk.
- Variability In Selling Price
A firm’s product does not sell at a constant price. If the business’s cost structure comprises mainly variable costs, it has a much lower business risk than one that has fixed costs. Thus, the larger the variability in selling price wider will be the fluctuations in operating income leading to higher business risk.
- The uncertainty of Input Costs
Cost of input keeps on changing over time, affecting the total cost of output. The total operating cost of the firm widely fluctuates if the uncertainty associated to input cost is larger. This exposes the firm to high business risk.
- Ability To Price Adjustment
When there is an increase in input costs, the selling price must also increase to maintain the stability in a firm’s operating income. However, the speed with which selling price is adjusted in response to the change in input costs, depends on price adjustment capacity of the firm. Thus, higher the firm’s ability to price adjustment, lower will be the business risk.
- Speed of Technological Changes
The firm should adapt to changing technology over the years. If the speed of technological changes is greater and the firm is not able to adapt to changing technology, demand for firm’s product will be adversely affected. The level of business risk associated to such firm is larger.
- Extent of Fixed Operating Costs
If a larger portion of the firm’s costs is fixed, the firm has to make larger sales to meet the fixed costs. At lower sales level such firm is not able to meet the fixed cost. There larger fixed cost exposes the firm to larger degree of business risk.