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Module 10 of 11 12 min

Business Risk

Competition, debt, concentration, and other things that go wrong.

Course lessons

Step 1

The lesson

Every business faces risks. Good analysis doesn't pretend they don't exist — it names them and asks how bad they could get.

Some risks come from outside: recessions, new laws, technology changes, and competitors. Others come from inside: too much debt, dependence on one customer or one person, or weak cash planning.

Key term

Leverage

Using borrowed money. Debt magnifies results: profits look bigger in good times, but fixed interest payments can crush a business when sales fall.

Key term

Concentration risk

Depending heavily on one customer, supplier, or product. If that one relationship ends, a big part of the business goes with it.

Step 2

See it

Common business risks

Competition from rivals. Heavy debt. Depending on one customer or supplier. Depending on one key person. Regulation changes. Technology making the product obsolete. Economic downturns.

  1. Competition

    Rivals copy the product or cut prices.

  2. Debt

    Fixed payments continue even when sales fall.

  3. Concentration

    Too much depends on one customer, supplier, or product.

  4. Key people

    The business struggles if one person leaves.

  5. Regulation

    New laws change what's allowed or what it costs.

  6. Technology

    A new invention makes the product less needed.

Step 3

Real-world example

One customer, 60% of sales

Parts Plus, a hypothetical manufacturer, makes $10 million a year. $6 million of that comes from one car company.

  • That customer has huge negotiating power — it can demand lower prices, knowing Parts Plus can't afford to lose it.
  • If the car company switches suppliers, Parts Plus loses 60% of its revenue overnight, but its fixed costs don't shrink.
  • Add a large loan with fixed payments, and one lost contract could put the whole company at risk.

Step 4

Knowledge check

Answer each question, then check your answer to see the explanation. Retake it as many times as you like.

Question 1 of 3

ScenarioA bakery gets 70% of its sales from one grocery chain.What's the biggest risk?

Choose an answer.

Step 5

Summary

Businesses face outside risks like competition, regulation, technology, and recessions, and inside risks like debt, concentration, and key-person dependence. Leverage magnifies results in both directions. Public companies list their risks in their annual reports.

Step 6

What you should remember

  • Name the risks honestly — every business has them.
  • Debt magnifies good and bad results.
  • Concentration = too much riding on one customer, supplier, or product.
  • Read the Risk Factors in a company's 10-K.

Finished the lesson?

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