{"id":31168,"date":"2021-09-21T00:51:11","date_gmt":"2021-09-21T00:51:11","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=31168"},"modified":"2026-03-08T10:27:10","modified_gmt":"2026-03-08T10:27:10","slug":"operating-business-sales-and-financial-risks","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/operating-business-sales-and-financial-risks\/","title":{"rendered":"Operating, Business, Sales, 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\\nA. Operating risk.\\n\\nB. Financial risk.\\n\\nC. Sales risk.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. Financial risk is the risk associated with how a company finances its operations. It arises from the use of debt or leverage and reflects the possibility that a company may not be able to meet its financial obligations.\"\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 (2023 Level I CFA\u00ae Exam \u2013 Corporate Issuers\u2013Module 8)\",\n  \"description\": \"This video lesson covers measures of leverage, including definitions of business, operating, and financial risk. It explains how to calculate and interpret degrees of leverage, analyze financial leverage effects on net income and ROE, and compute breakeven and operating breakeven sales quantities for company performance evaluation.\",\n  \"uploadDate\": \"2022-03-03T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/UO4w5yNuWdw\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=UO4w5yNuWdw\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/UO4w5yNuWdw\",\n  \"duration\": \"PT26M59S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/UO4w5yNuWdw?si=MvmhqXA2mPiFdYPb\" 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 that \u201crisk refers to the uncertainty of a return and the potential for financial loss.\u201d Risk can arise from financing and operating activities and can be classified in several ways. Examples of risks are business, sales, and operating risks.<\/p>\n<h2><strong>Leverage<\/strong><\/h2>\n<p>The term \u2018leverage\u2019 describes the use of fixed costs in a company&#8217;s cost structure. 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 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 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 on equity or debt financing. Therefore, financial risk analysis takes the amount of leverage a company has into account.<\/p>\n<p>The higher the leverage a company has, the higher the attendant financial risk for 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 to 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 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 its operating risk.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\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 <strong>B<\/strong>.<\/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>","protected":false},"excerpt":{"rendered":"<p>Risk can be defined in several ways. However, one fairly simple definition is that \u201crisk refers to the uncertainty of a return and the potential for financial loss.\u201d Risk can arise from financing and operating activities and can be classified&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[25],"tags":[],"class_list":["post-31168","post","type-post","status-publish","format-standard","hentry","category-corporate-issuers","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>Business, Sales &amp; Financial Risks | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand how business risk is defined, when it&#039;s highest, and how sales risk and leverage impact operations. Core CFA Level 1 concepts made simple.\" \/>\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-issuers\/operating-business-sales-and-financial-risks\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Business, Sales &amp; Financial Risks | CFA Level 1\" \/>\n<meta property=\"og:description\" content=\"Understand how business risk is defined, when it&#039;s highest, and how sales risk and leverage impact operations. 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