FINANCIAL RISK

Financial risk refers to an investor’s uncertain rate of return because an organization may be unable to meet its financial obligations. These obligations generally consist of interest and principal payments on borrowed funds. Investments in organizations that are heavily in debt tend to subject their owners to greater uncertainty of return because of financial risk. Unlike other forms of risk that can result from numerous sources, financial risk is caused by a single factor; incurring fixed financial obligations. These obligations may result from a desire to acquire more assets or from a need to obtain funds to meet current spending requirements. These obligations generally result from debt, although leases can be equally burdensome and produce financial risk. The more money an organization owes relative to its size and the higher the rate of interest and principal obligations will become a problem for the organization. Financial risk is that simple. It applies equally to businesses and government organizations.