Ch12

KURT. B. DEL ROSARIO AC22

CHAPTER 12 PRACTICAL GUIDELINES IN REDUCING AND MANAGING BUSINESS RISKS REVIEW QUESTIONS Questions 1. Explain the difference in attitude to risk between the European and US Companies? -

According to the late 90's study of a well-known International Accounting firm which have studied on the attitudes of the European and United States Companies, According to their study, European companies tends to focus on avoiding and hedging risk while most of the companies in United States tends to accept risks and they managed it because they perceived risk as an opportunity and accepting risk is also necessary for their goal support. With these differences, we can say that most of the companies in United States are risk taker, they accept risks and they managed this because they believe that if risks are properly managed it could give them a competitive advantage. On the other hand, European companies are conservative when it comes to risk they perceived risk as something that can ruin the business. In result, they avoid risks and hedge it.

2. What are the advantages of defining the categories into which risks fall? -

The advantages of defining the categories into which risk they fall is it allows more structured analysis, in a sense that since there are categorization of risk you can immediately identify what are the possible risk that are available with this categories. For example, the category is Financial, you can immediately identify the investment risks. By defining categories it will be easy to identify those risk and also this avoids the chances of are risk being overlooked. In addition, having categories is risk is much better because without category it could be difficult to identify other risks and with this you may forget to identify some possible risk.

3. Explain how the following types of risk catalyst might trigger risks a) Technology- New innovations in technology such as new hardware, software, or system configuration can trigger risks. In this digital age, every company is not only competing through their products they also compete with their software and processes that they use. If one company is using a more innovative software than the other and it will give them an advantage, while on the other might have disadvantage. Having technologies that are not updated could trigger risk such as low sales and longer inventory conversion period. Therefore, every company must watch out for technology risk and they should be continuously improving their processes and systems so that they will remain as top business contender. b) Organizational change- Risk can be triggered by Organizational change such as when there us a change in management structures or reporting lines. new strategies and commercial agreements such as mergers, agency or distribution agreements. If there is a change in the management structures this might positively or negatively affect the profitability of the company, For example, The CEO has been replaced by a board member. and the newly elected CEO has change the distribution policies and has also change the branding and design of its product with this changes this might affect profitability it can be

KURT. B. DEL ROSARIO AC22 good if the customers will be enticed with the new changes and they will buy it, It will be bad for the company, If the customers are not pleased with the new changes. With this, they may not buy it. therefore, If the company do not want to ruin their established firm they should first identify and analyze the effects of their decisions to prevent negative impacts from happening, c) Processes- New products that are offered to the markets triggers risk, Once a product is being introduce there is a risk that the customer will accept it or not. For example, the story of Steve Jobs when he first established the Apple Computers, Steve Jobs being visionary has concepts that are futuristic and when he first introduce his first Apple Product many potential investor rejects his product. However, when he totally introduce it to the market, there were huge number of people who are willing to buy the innovative product of Apple because this is something new and also an improvement to the computers they use before. Therefore, new processes that are introduce to the market can trigger risk. The company should coordinate with various department of the firm before introducing a new product to prevent negative risks. d) People- Hiring new employees, Firing or retirement of an employee, or low human resource management can bring risks to the company, this might be good or bad, because employees are helping to bring out the best in the company especially experts in their own fields. For example, in a manufacturing firm hiring new laborer will cause risks for example, maybe be the laborer is unskilled yet, therefore he needs trainings before working, and Training cost can also add to the expenses of the company, and also having untrained workers could lead to waste products especially in the first days. Or on the other side, it can be possible to hire laborers who are skilled and can really help in production which has positive impact. Therefore, the company should really secure that they have the best of the best when it terms to man power to prevent negative risks. e) External Factors- Changes in regulations and political, social, economic developments can trigger risks. It might be good or bad for the company. For example, with the outbreak of the Corona Virus many establishments have closed, they have no profits for almost a month and also they might had experience many losses especially those companies who have increased their production capacity months before the lockdown are more prone to this risk. Therefore, the company should be aware of various external factors so that they can create policies and decisions that will help them to reduce the impact of those type of risk mentioned above. 4. The typical areas of financial risk includeso the following except a) Poor brand management b) Treasury Risk c) Accounting decisions and practices. d) Fraud

KURT. B. DEL ROSARIO AC22 Answer: (a)- Poor Brand Management 5. What are the stages in managing their enterprise wide risk? The stages in managing the enterprise wide risks are;  First, assess and analyze the risk resulting from a decision by systematically identifying and quantifying them,  Second, consider how to mitigate or avoid them.  Third, Take actions to manage control and monitor the risks.

-

6. What are the factors that should be considered when setting and reviewing financial strategy? -

The factors that should be considered when setting and reviewing financial strategies are Profitability, Cash Flows, Long term shareholder value and also the risks. They should consider this because their decisions might positively or negatively impact their profitability, shareholders wealth, and future cash flows. Therefore it is essential that they will use financial tools to help them in deciding because one wrong decision can ruin the company.

7. What are some of the financial tools that can be applied in making strategic financial decisions affecting profitability? The financial tools that can be uaed in Improving Profitability are;  Variance Analysis- This is a tool used in interpreting the difference between the actual and planned performance, thistool is also used to assess past decisions made by the entity, and also to assess current situations, and with the results of the variance analysis they can create new policies to improve profitability.  Assessment of Market Entry and Exit Barriers- By assessing Market Entry and Exit Barriers could help to improve profitability for example, It is very difficult to enter into a certain type of market due to high capital requirements and established brand identity, the company who has the established brand identity should make sure that they have the best of their products and they should continuously improve their product so that there will on top of the business. Assessment of Market entry and exit barriers could help in makling more strategic decisions on profitability of the business if there is a difficulty to enter into the market the better for those who have already entered into the market because they can grab the opportunity to have many customers. 



Break-Even analysis- The break-even point identifies the total amount of sales the business needs before profit can be earned. When analyzed closely, the break-even analysis also helps the business to identify excessive fixed costs. Since the break-even point is directly related to the fixed costs, reducing and controlling these costs aids the business in achieving a lower break-even point for quicker profitability. Controlling Cost- Controlling cost can positively affect profitability, by controlling cost ot will minimize expenses and therefore boost profitability. However, the company should not sacrifice the quality with the cost. The company should find the best resources/quality o materials or products at a lower cost.

8. Enumerate and explain at least (7) practical technique to improve profitability?

KURT. B. DEL ROSARIO AC22



Focus decision making on the most profitable areas- The company should focus ts decision making on the product that gives more profits to them. Concentrating to this will help them to increase their profits like they should increase more advertisements to promote their profitable products. They should invest more here, For example, if we can notice in the showbiz industry, the industry is focusing to those actors who have a lot of fans because they believe that having a bigger fan based of that actor will help to boost profits.



Decide how to treat the least profitable products- To improve profitability, if the product is unprofitable. the company should decide on how to treat them. In example, they can redesign or improve the product. Improving the product can lead to profitability or also they can discontinued their operations with those products if they had experiences losses with this. Make sure new products enhance overall profitability- the company should make sure that their new products will enhance profitability like advertising them more frequently, giving promos, so that the customers will know and get enticed to buy the product, Manage development and product decisions- In order for a company to continuously improve its product research and developments are needed. But the company should also consider the amount that they are willing to allocate to the R&D Department because too many expenses could affect profitability. Moreover, the company should consider costs in doing product decisions because if the production spent high costs in doing the products it can also affect profitability. Set the buying policy- the company should also consider to set the buying policy that is beneficial to the profitability of the company. They should avoid many expenditures like they should consider their preferred suppliers and the cost included with it. For example, the company is situated in the City of Naga, and they are purchasing their supplies at Sorsogon City, due to the distance, there will be various expenses that will be incurred. It is better for the company to set a buying policy on where to buy that could reduce the cost. In this example, it will be better if the company will purchase its supplies near Naga city. Consider how to create greater value from existing customers and products to enhance profitability- In improving profitability, the company should consider the customers. In order to gain customer value, they can provide discounts and promos with their customers; they can also improve customer value by improving the product so that the customers will buy more.

 







Consider how to increase profitability by managing people- With great leadership and employee benefits and proper trainings, the employees and workers will be determined to work properly and with the operations of the firm could be smooth and help the company to boost profits.