Business Risk — slides
Financial Literacy Club
Understanding Businesses · Lesson 10
Business Risk
Competition, debt, concentration, and other things that go wrong.
12-minute lesson · learnwithflc.org
Business Risk · 1 / 19
Financial Literacy Club
Understanding Businesses · Lesson 10
Business Risk
Competition, debt, concentration, and other things that go wrong.
12-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Identify common risks a business faces
- Explain how debt (leverage) magnifies results
- Recognize concentration risk
Warm-up
What's the biggest thing that could go wrong for your favorite local business?
Think, then write your answer.
The big idea
Business Risk
Competition, debt, concentration, and other things that go wrong.
Understanding Businesses · Lesson 10
Every business faces risks. Good analysis doesn't pretend they don't exist — it names them and asks how bad they could get.
Understanding Businesses · Lesson 10
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.
Vocabulary
Leverage
Using borrowed money. Debt magnifies results: profits look bigger in good times, but fixed interest payments can crush a business when sales fall.
Vocabulary
Concentration risk
Depending heavily on one customer, supplier, or product. If that one relationship ends, a big part of the business goes with it.
Understanding Businesses · Lesson 10
Where to find them
Public companies must describe their major risks in a "Risk Factors" section of their annual report (Form 10-K), filed with the SEC.
See it
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.
Real 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.
Activity · small groups · 10 min
Risk Radar
- Case: a bakery gets 60% of its sales from one café, owes a large bank loan, and buys all its flour from a single supplier.
- Groups list every risk they can find and rate each one: likely/unlikely and minor/serious.
- Groups propose one fix for the two most serious risks.
- Share and compare risk ratings.
Check for understanding · 1 of 3
A bakery gets 70% of its sales from one grocery chain.
What's the biggest risk?
- AConcentration: losing that one customer would wipe out most sales.
- BToo many customers
- CIts margins are guaranteed
- DThere is no risk
A. Concentration: losing that one customer would wipe out most sales.
Depending on one customer gives that customer power over prices — and one lost contract can sink the business.
Check for understanding · 2 of 3
Borrowing money magnifies both good and bad results for a business.
- True
- False
True
Debt's fixed payments boost returns in good years and become a heavy burden when sales drop.
Check for understanding · 3 of 3
Where do public U.S. companies describe their major risks?
- AIn the "Risk Factors" section of their annual report
- BOnly in advertising
- CThey're not required to
- DOn product packaging
A. In the "Risk Factors" section of their annual report
The Form 10-K filed with the SEC includes a Risk Factors section.
Remember
Key takeaways
- 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.
Discuss
Talk it over
- Which risk would worry you most if you owned a small business? Why?
- How could a company reduce dependence on one big customer?
Exit ticket
What does leverage do to a business's results?
Answer on your exit ticket before you leave.
Nice work today.
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