1. What is business risk, and how is it measured? 2. What is financial risk, and how is it...

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1. What is business risk, and how is it measured?
Business risk is the equity risk arising from the nature of the firm’s operating activity, and is directly related to the systematic risk of the firm’s assets. The business risk is influenced by many factors such as sales volume, inventory cost, per unit price, government regulations and overall economic conditions. The company which has high business risk need to choose a capital structure which have low debt ratio. It helps to meet its financial obligations.
The business risk is measured by the factors that can cause the business to fail in some way. The firm first identifies the potential risks such as inflation, market fluctuations, government rules and regulations, project delays, rising fuel costs that affect the costs, and unemployment. Next firms estimate how these risks affect the profitability of the company. Then firms create a cash flow statement to find out how much cash is readily available and analyze to identify how firm prepared to combat a risk. Measure each risk by create a formula based on the components, such as net income less expenses, or the probability of an event multiplied by the cost of the event. Provide a percentage of importance for each business risk based on priority levels. If the profitability potential is more than the risk, then the firm proceeds with the project. If not the project is ignored.
2. What is financial risk, and how is it measured?
Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. Financial risk represents that the company will not have adequate cash to meet its financial obligations. Companies which are issuing more debt instruments may have high financial risk. It’s also refers as extra risk to shareholders when they used debt. The company can control the financial risk by control the company’s leverage.
There are different financial ratios that are helpful to measure the financial risk of a company such as liquidity ratios, debt ratios etc. for example debt to capital ratio helps to measure the proportion of debt used, given the total capital structure of the firm. Horizontal analysis and vertical analysis are also helpful to measure the financial risk of a firm.
3. What is operating leverage?
Operating leverage is a measure to find out how revenue growth translates into growth in operating income. It measures the fixed costs versus variable costs of a firm. The greater proportion of fixed costs costs and lower proportion of variable costs indicates that the company has greater the operating leverage. Those with lower fixed costs and higher variable costs are said to have less operating leverage. Companied with higher operating leverage ratios are poised to reap more benefits from marketing, economic pickups or other situations that increase sales. Also high operating leverage companies are more vulnerable to decrease in revenues due to macroeconomic events or poor decisions etc.
Operating leverage = [quantity*(price – variable cost per unit) / quantity*(price – variable cost per unit) – fixed operating costs.

4. What is a cash budget, how is it calculated, and how might it be used when a firm is negotiating a loan from a bank?
Cash budget is the process of forecasting the cash inflows and cash outflows in a particular period of time to meet future cash obligations. Cash budgets can prepare daily, weekly or monthly basis. These cash budget provide much information rather than cash flow statements. For example, cash budgets can distinguish between cash collection from credit customer and cash collection from cash customer.
The main components that are necessary for preparing...

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1. What is business risk, and how is it measured?
Business risk is the equity risk arising from the nature of the firm’s operating activity, and is directly related to the systematic risk of the firm’s assets. The business risk is influenced by many factors such as sales volume, inventory cost, per unit price, government regulations and overall economic conditions. The company which has high business risk need to choose a capital structure which have low debt ratio. It helps to meet its financial obligations.
The business risk is measured by the factors that can cause the business to fail in some way. The firm first identifies the potential risks such as inflation, market fluctuations, government rules and regulations, project delays, rising fuel costs that affect the costs, and unemployment. Next firms estimate how these risks affect the profitability of the company. Then firms create a cash flow statement to find out how much cash is readily available and analyze to identify how firm prepared to combat a risk. Measure each risk by create a formula based on the components, such as net income less expenses, or the probability of an event multiplied by the cost of the event. Provide a percentage of importance for each business risk based on priority levels. If the profitability potential is more than the risk, then the firm proceeds with the project. If not the project is ignored. 
2. What is financial risk, and how is it measured?
Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. Financial risk represents that the company will not have adequate cash to meet its financial obligations. Companies which are issuing more debt instruments may have high financial risk. It’s also refers as extra risk to shareholders when they used debt. The company can control the financial risk by control the company’s leverage.
There are different financial ratios that are helpful to measure the financial risk of a company such as liquidity ratios, debt ratios etc. for example debt to capital ratio helps to measure the proportion of debt used, given the total capital structure of the firm. Horizontal analysis and vertical analysis are also helpful to measure the financial risk of a firm.
3. What is operating leverage?
Operating leverage is a measure to find out how revenue growth translates into growth in operating income. It measures the fixed costs versus variable costs of a firm. The greater proportion of fixed costs costs and lower proportion of variable costs indicates that the company has greater the operating leverage. Those with lower fixed costs and higher variable costs are said to have less operating leverage. Companied with higher operating leverage ratios are poised to reap more benefits from marketing, economic pickups or other situations that increase sales. Also high operating leverage companies are more vulnerable to decrease in revenues due to macroeconomic events or poor decisions etc. 
Operating leverage = [quantity*(price – variable cost per unit) / quantity*(price – variable cost per unit) – fixed operating costs.
 
4. What is a cash budget, how is it calculated, and how might it be used when a firm is negotiating a loan from a bank?
Cash budget is the process of forecasting the cash inflows and cash outflows in a particular period of time to meet future cash obligations. Cash budgets can prepare daily, weekly or monthly basis. These cash budget provide much information rather than cash flow statements. For example, cash budgets can distinguish between cash collection from credit customer and cash collection from cash customer.

1. What is business risk, and how is it measured? 2. What is financial risk, and how is it measured? 3. What is operating leverage? 4. What is a cash budget, how is it calculated, and how might it be...

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