Part of the manager's decision then is to assess the likelihood of these different outcomes. In this paper we have attempted to introduce and illustrate the concepts of business and financial risk. These simple ideas provide a useful vehicle for understanding some important business relationships. By identifying how some important sources of risk interrelate we can gain a fuller understanding of the consequences of different management decisions. The issue of expansion is before most agricultural producers today.
Expansion related decisions are likely to increase in importance rather than decrease.
Our simple take home message is that we need a healthy and informed respect for the role of debt in those decisions. We end by repeating the key points we began with. Expansion decisions must consider the combined effects of business risk and financial risk on growth and survival. Leverage can enhance growth, but it will also enhance variability in returns to owners of the business. Debt financed expansion designed to increase profitability through economies of size may actually destabilize returns enough to increase the risk of failure.