Differentiate between financial and non-financial risk? Give example
Financial risk refers to the possibility of loss or negative impact on financial positions, investments, or assets due to various factors such as market volatility, economic downturns, credit defaults, or liquidity issues. It directly affects the financial health and stability of an individual, company, or institution.
Example: A company investing a large portion of its capital in a highly risky venture with uncertain returns. If the venture fails, it can lead to significant financial losses and jeopardize the company's financial stability.
Non-financial risk, on the other hand, encompasses a broader range of risks that can affect an organization's operations, reputation, and various non-financial aspects. These risks are not directly associated with monetary losses but can still have a significant impact on an entity's overall well-being.
Example: A manufacturing company facing environmental risks due to its production processes. The company may face reputational damage, lawsuits, regulatory fines, or restrictions if its operations cause pollution or harm to the environment. While these risks may not directly impact the company's finances, they can have adverse consequences on its operations and public image.