What type of risk is indicated when ABC Company cannot cover the amount of its payroll due to insufficient funds?

What type of risk is indicated when ABC Company cannot cover the amount of its payroll due to insufficient funds?

• A. Operational Risk
• B. Credit Risk
• C. Fraud Risk
• D. Systemic Risk

Answer: (B)

The situation where ABC Company is unable to cover its payroll due to insufficient funds is a clear representation of credit risk. Credit risk pertains to the inability of a borrower or account holder to fulfill their financial obligations, which, in this case, is highlighted by the failure to make payroll payments. This type of risk is directly linked to the financial health of the company and its cash flow management. Insufficient funds indicate that the company does not have adequate liquidity to meet its short-term obligations, which is a fundamental aspect of credit risk. Such an inability could result from various factors like poor sales performance, unexpected expenses, or mismanagement of cash resources, all falling under the umbrella of credit risk. In contrast, operational risk would involve failures in internal processes or systems rather than the external financial obligations of the company. Fraud risk concerns unauthorized actions that lead to financial loss, while systemic risk refers to the potential collapse of an entire financial system or market, neither of which directly aligns with the scenario of payroll funding issues.

The situation where ABC Company is unable to cover its payroll due to insufficient funds is a clear representation of credit risk. Credit risk pertains to the inability of a borrower or account holder to fulfill their financial obligations, which, in this case, is highlighted by the failure to make payroll payments.

This type of risk is directly linked to the financial health of the company and its cash flow management. Insufficient funds indicate that the company does not have adequate liquidity to meet its short-term obligations, which is a fundamental aspect of credit risk. Such an inability could result from various factors like poor sales performance, unexpected expenses, or mismanagement of cash resources, all falling under the umbrella of credit risk.

In contrast, operational risk would involve failures in internal processes or systems rather than the external financial obligations of the company. Fraud risk concerns unauthorized actions that lead to financial loss, while systemic risk refers to the potential collapse of an entire financial system or market, neither of which directly aligns with the scenario of payroll funding issues.