Analyse and evaluate the financial risks involved with establishing a new business - Essay Example

s, risk exposures have deeper impact on the organization’s standing, especially financial risks which undermine the new business resources required for jump-start the project. Financial risks refer to cash flow volatility, future investments, erosion of debt capacity or profitability level of the firm (Altman 1993). In the following essay, the researcher shall discuss how financial resources are critical for executing business plans, marketing budget and achieving organizational goals. In doing so the researcher shall describe and conclude that different types of financial risks may lead to business failure in terms of disruption in operations, decrease in working capital and exposure to environment risks.

To begin with, one needs to understand that financial risks are not separate from business or management risks. For a new business, effective resource management is critical for its survival. Financial resources have even more importance for a start-up business because it helps secure employees, suppliers, service providers and attract customers (Altman 1993). Consequently, the type of financing a new business secures, defines its scope and risk challenges. For a new business, various types of financing ranging from banks, venture capitalists, owners personal assets etc.

are available. Suppose a new business adopts bootstrap financing for its operations (Welsch 2003). This is a popular financing technique for new firms to finance short term funding requirements without having to commit to external organizations for the long term. These include short term borrowing from friends or family, micro financing, credit card, quasi-equity arrangements, cooperative assets, lease or client based funding etc. However, according to Neeley (Welsch 2003), bootstrap financing is a low cost source of financing but poses high risks to the business because it is a short term funding method, which can be discontinued at any time, resulting in disruption of cash flows to the