Business risk refers to the probability of a business not being able to sell its products and services at a price which is sufficiently remunerative. The world of business risk is less amenable to quantification, compared to financial risk. Business risk often lies in the domain of the strategists where as financial risk lies in the purview of the treasurer/chief risk officer/chief financial officer. While business risk is less quantifiable, efforts should not be spared to understand it properly. A framework provided by John Mullins and Randy Komisar (Read their book “Getting to Plan B” Harvard Business Press, 2009 for more details) is very useful in this regard. According to Mullins and Komisar, five ingredients make up a business model:
§ Revenue model – Which customers will buy the company’s product and at what price?
§ Gross margin model – What proportion of the revenue will be captured by the company after deducting the cost of goods and services (COGs).
§ Operating model – Besides COGs, what are the other costs incurred by the company?
§ Working capital model – How much working capital is needed to run the business?
§ Investment – What are the upfront commitments which must be made to build and run the business?
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