What is financial risk? How does differ from business risk? How does the use of financial leverage result in increased financial risk?

Financial risk refers to the possibility of a company failing to meet its financial obligations, particularly related to the use of debt financing. It arises from the uncertainty associated with a firm's ability to generate sufficient cash flow to cover interest payments, principal repayments, and other financial liabilities. In accounting and finance for managers, understanding financial risk is essential as it directly influences decisions regarding capital structure, funding sources, and financial planning.

Financial risk is primarily concerned with how a company finances its operations—especially through borrowed funds. It becomes significant when a business relies heavily on debt to fund its activities, thus creating fixed financial commitments such as interest payments. The more a firm borrows, the higher the fixed obligations, leading to a higher degree of financial risk. This risk does not stem from the ___ _____ ________ _________ __________ ______ _________ ____ ________ __________ ________.
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