What Are External Financial Risk Factors in Business?

Written by catherine capozzi
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What Are External Financial Risk Factors in Business?
Businesses predict external financial risks in hopes of saving or making money. (Andrew Bret Wallis/Pixland/Getty Images)

Your company's team might manage inventory and the supply chain better than any in the industry, but controlling internal financial factors is only one part of the equation. Pre-empting external risks that could jeopardise the health of the company is the other half. Unfortunately, some external factors are outside of anyone's control. Despite the inevitability of some of these problems, identifying the risks and pre-empting them could save businesses copious amounts of money.

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Designing a cutting-edge, highly valued product typically causes two things: Earn large profits and subsequently, entice several competitors to enter your industry and steal your customer base with an identical good. Competition has the power to cripple a corporate powerhouse. For example, Russ Banham explains in the book, "The Ford Century" that the founder of Ford Motor Company infamously stated, "Any customer can have a car painted any colour that he wants so long as it is black." His obstinacy created a financial risk when other companies introduced vehicles in other colours. The competition took some of Ford's market share and, consequently, caused a significant financial loss for the motor company.

Economic Downturn

Few companies are immune to the financial loss incurred from a significant economic downturn. Even if the business is not traded on the stock market, a plunge in the DOW can cause a hit to the bottom line. Economic conditions including unemployment and lowered retail sales compels many investors to grow reticent with offering capital such as business loans. Similarly, many consumers become unwilling to spend as much disposable income if they fear losing their job.

When companies pre-empt the possibility of this financial risk, they can offer and develop products at a lower price. Or, they may heavily advertise products that tend to be high-sellers during recessions, such as canned goods and generic products. Some companies attract consumers by offering extensive warranties on durable goods to alleviate concerns about the expensive purchase. Car companies, for instance, might extend the warranty by six months and offer higher trade-in rebates to attract hesitant buyers.

Consumer Preferences

As consumers desire new and different products, companies must adapt and change their product line. The preference of consumers evolves due to changes in technology, changes in style and culture. Businesses face financial risks when they do not adapt to these evolving preferences. For instance, Polaroid and Kodak both extended their product lines to include digital cameras instead of offering only film-based cameras. Target and Marshalls offer trench coats and knee-high boots in the fall and clear out summer's swimsuit selection. Bakeries give brides the choice of cupcakes to accommodate the growing trend of miniature baked goods. Though businesses may be hesitant to veer away from their traditional products, an unwillingness to adapt to evolving consumer preferences could cause the company to go out of business.

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