Financial Risk & Business Debt
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Financial risk relates to the business debt, which may be incurred by business operations, but business risk is independent of the debt of the business."
Could you please explain for me how the liquidity risk affects business risk and/or the financial risk?
Perhaps provide me an example too, so I understand this.
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Solution Summary
The expert explains how the liquidity risks affect business risks and the financial risks.
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Liquidity risk is the risk that the business's investments cannot be converted quickly enough to cover debt. For example, if a company keeps a large amount of its assets held as cash, it has a low liquidity risk because it can easily use that cash to pay bills. A different company may not keep as much cash, but may choose, instead, to invest in more inventory. If the inventory doesn't turn very quickly, then this puts the company at a higher liquidity risk because if they needed to pay a bill or have cash for another reason, it is more difficult for them to convert all that extra inventory into cash.
Business risk differs because it has more to do with the management of ...
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