In this McKinsey Explainer, we look at what business risk is, how it can be better managed, and why it's an essential part of today's global economy.
1. Financial risk Financial risk is any situation or factor that jeopardizes a business’s finances and operations. Depending on the sector and a startup’s capital structure, financial risk could be caused by: Too much debt High interest rates on loans Insufficient cash flow from sales Poo...
First, a definition of risk management:Risk managementis the process of identifying potential risks and developing strategies to both address and minimize their effects. In the business world, risks can be categorized as any event that may negatively impact your organization, such as credit card fra...
Thus, a risk management program should be intertwined with organizational strategy. To link them, risk management leaders must first define the organization'srisk appetite-- i.e., the amount of risk it is willing to accept to realize its business objectives. Some risks will fit within the risk...
Factors Contributing to Business Risk Several factors can contribute to business risk. Here are some of the most common ones: Market Volatility:Fluctuations in market conditions, such as changing customer preferences, economic downturns, or new competitors entering the market, can pose significant risks...
2.Speculative Risk Speculative risk involves both the possibility of a loss and a gain. It is generally not insurable because the outcome is uncertain, and the risk is associated with activities like investing in the stock market, starting a business, or gambling. Speculative risks are not typic...
Strategic risk is associated with poor business decisions, ineffective strategies or inadequate responses to technological changes or shifts in customer behavior. Project risks related to market competition, including mergers and acquisitions, entry into new markets or the launch of new products, are cons...
The market risk premium is influenced by various factors, such as economic conditions, investor sentiment, and geopolitical events. It plays a significant role in asset pricing and is used to assess the potential return of an investment relative to the risk-free rate of return. Understanding the...
Examples of riskless investments and securities include certificates of deposits (CDs), government money market accounts, and U.S. Treasury bills. The 30-day U.S. Treasury bill is generally viewed as the baseline, risk-free security for financial modeling. It is backed by the full faith and ...
We find asymmetries both cross-sectionally and over time: when banks face difficulties to raise funding, the interbank lending affects market-based bank interconnectedness. Moreover, banks with investments in securities related to troubled classes have a higher credit risk interconnectedness. Overall, ...