{"id":2199,"date":"2019-09-12T13:33:00","date_gmt":"2019-09-12T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2199"},"modified":"2026-03-04T17:02:53","modified_gmt":"2026-03-04T17:02:53","slug":"leverage-business-risk-sales-risk-operating-risk-financial-risk","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/","title":{"rendered":"Business, Sales, Operating Risk, and Financial Risks"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"The risk that is associated with how a company finances its operations is most likely known as:\",\n    \"text\": \"The risk that is associated with how a company finances its operations is most likely known as:\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. Financial risk refers to the risk associated with how a company finances its operations, particularly through the use of debt and financial leverage.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Operating risk.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Financial risk.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Sales risk.\"\n      }\n    ]\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Measures of Leverage (2021 Level I CFA\u00ae Exam \u2013 Reading 34)\",\n  \"description\": \"This video lesson covers measures of leverage in corporate finance. It explains operating, financial, and total leverage, including how they impact risk, net income, and return on equity. The lesson also demonstrates how to calculate break-even sales and units, and shows how leverage magnifies shareholder returns through practical examples and formulas.\",\n  \"uploadDate\": \"2018-10-24T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/isO1EhUqTn0\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=isO1EhUqTn0\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/isO1EhUqTn0\",\n  \"duration\": \"PT15M58S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/isO1EhUqTn0?si=5ITdRO06CILHRb8Y\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>Risk can be defined in several ways. However, one fairly simple definition is, \u201crisk refers to the uncertainty of a return and the potential for financial loss.\u201d Risk can arise from both financing and operating activities and can be classified in several ways. Some examples of risks are business risk, sales risk, and operating risk.<\/p>\n<h2><strong>Leverage<\/strong><\/h2>\n<p>The term \u2018leverage\u2019 describes the use of fixed costs in the cost structure of a company. It increases the volatility of a company\u2019s earnings and cash flows as well as the risk of lending to or owning the company. Companies that use more fixed costs relative to variable costs in their cost structures will have a greater variation in net income as their revenues fluctuate.<\/p>\n<p>The greater the leverage of a company, the more the risk it has and the higher the discount rate which should be used in its valuation.<\/p>\n<p>Highly leveraged companies also have a much greater chance of suffering serious losses during a downturn. Consequently, they are more prone to financial distress and bankruptcy.<\/p>\n<h2><strong>Financial Risk<\/strong><\/h2>\n<p>Financial risk is the risk associated with how a company finances its operations, i.e., whether it relies either on equity or debt financing. Financial risk analysis, therefore, takes the amount of leverage that a company has into account.<\/p>\n<p>The higher the amount of leverage a company has, the higher the financial risk to its stockholders.<\/p>\n<h3><strong>Business Risk<\/strong><\/h3>\n<p>Business risk is the risk that is inherent in a company\u2019s operations or operating earnings. It may also be considered the risk of a company\u2019s assets when no debt is used.<\/p>\n<p>Business risk reflects a company\u2019s sales risk as well as its operating risk. Companies operating in the same line of business will generally have similar business risks.<\/p>\n<h3><strong>Sales Risk<\/strong><\/h3>\n<p>The uncertainty associated with the price and quantity of goods and services is referred to as sales risk. It is affected by the demand for a company\u2019s product as well as the price per unit of the product.<\/p>\n<h3><strong>Operating Risk<\/strong><\/h3>\n<p>Operating risk is the risk that is attributed to a company\u2019s operating cost structure, specifically concerning the use of fixed costs. The greater the level of a company\u2019s fixed operating costs, relative to its variable operating costs, the greater is its operating risk.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>The risk that is associated with how a company finances its operations is <em>most likely<\/em> known as:<\/p>\n<p>A. Operating risk<\/p>\n<p>B. Financial risk<\/p>\n<p>C. Sales risk<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is B.<\/p>\n<p>\u2018Financial risk\u2019 is the term used to describe the risk associated with how a company <strong>finances<\/strong> its operations.<\/p>\n<\/blockquote>\n<p><em>Reading 34 LOS 34a:<\/em><\/p>\n<p><em>Define and explain leverage, business risk, sales risk, operating risk, and financial risk and classify a risk<\/em><\/p>\n<div class=\"notes_inv\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/learning-sessions-curriculum-corporate-finance\/\"><em>Corporate Finance &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Risk can be defined in several ways. However, one fairly simple definition is, \u201crisk refers to the uncertainty of a return and the potential for financial loss.\u201d Risk can arise from both financing and operating activities and can be classified&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[],"class_list":["post-2199","post","type-post","status-publish","format-standard","hentry","category-corporate-finance","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Sales, Operating &amp; Financial Risk | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand the key risks in business, including sales risk, operating risk, and financial risk, and how they impact leverage and performance.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Sales, Operating &amp; Financial Risk | CFA Level 1\" \/>\n<meta property=\"og:description\" content=\"Understand the key risks in business, including sales risk, operating risk, and financial risk, and how they impact leverage and performance.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-12T13:33:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-03-04T17:02:53+00:00\" \/>\n<meta name=\"author\" content=\"Simon\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Simon\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\"},\"author\":{\"name\":\"Simon\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\"},\"headline\":\"Business, Sales, Operating Risk, and Financial Risks\",\"datePublished\":\"2019-09-12T13:33:00+00:00\",\"dateModified\":\"2026-03-04T17:02:53+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\"},\"wordCount\":466,\"articleSection\":[\"Corporate Finance\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\",\"name\":\"Sales, Operating & Financial Risk | CFA Level 1\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-09-12T13:33:00+00:00\",\"dateModified\":\"2026-03-04T17:02:53+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\"},\"description\":\"Understand the key risks in business, including sales risk, operating risk, and financial risk, and how they impact leverage and performance.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Business, Sales, Operating Risk, and Financial Risks\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\",\"name\":\"Simon\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png\",\"contentUrl\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png\",\"caption\":\"Simon\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/isO1EhUqTn0\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"959\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2019-09-12T13:33:00+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Sales, Operating & Financial Risk | CFA Level 1","description":"Understand the key risks in business, including sales risk, operating risk, and financial risk, and how they impact leverage and performance.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/","og_locale":"en_US","og_type":"article","og_title":"Sales, Operating & Financial Risk | CFA Level 1","og_description":"Understand the key risks in business, including sales risk, operating risk, and financial risk, and how they impact leverage and performance.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-09-12T13:33:00+00:00","article_modified_time":"2026-03-04T17:02:53+00:00","author":"Simon","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Simon","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/"},"author":{"name":"Simon","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"headline":"Business, Sales, Operating Risk, and Financial Risks","datePublished":"2019-09-12T13:33:00+00:00","dateModified":"2026-03-04T17:02:53+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/"},"wordCount":466,"articleSection":["Corporate Finance"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/","name":"Sales, Operating & Financial Risk | CFA Level 1","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-09-12T13:33:00+00:00","dateModified":"2026-03-04T17:02:53+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"description":"Understand the key risks in business, including sales risk, operating risk, and financial risk, and how they impact leverage and performance.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/leverage-business-risk-sales-risk-operating-risk-financial-risk\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Business, Sales, Operating Risk, and Financial Risks"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687","name":"Simon","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","caption":"Simon"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/isO1EhUqTn0","og_video_type":"text\/html","og_video_duration":"959","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2019-09-12T13:33:00+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/2199","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=2199"}],"version-history":[{"count":30,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/2199\/revisions"}],"predecessor-version":[{"id":59367,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/2199\/revisions\/59367"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=2199"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=2199"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=2199"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}