Business risk scenario notes (AA & AAA) PDF

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RISK Reliance on few key customers

IMPACT TO BUSINESS In a competitive market, it may be difficult to retain customers without cutting prices, which will place further pressure on profit margins. If any customer becomes insolvent the company will lose a major proportion of their revenue.

Reliance on single supplier

Disputes with the key customers can disappoint them leading to loss of revenue. If all of company’s raw materials/inventories is supplied by one supplier. This level of reliance is extremely risky, as any disruption to the supplier’s operations could result in curtailment of supply, leading to problems of stock outs and halted production. If the supplier denies to sell goods on credit the company will face cashflow issues.

International operations

There is risk of non-compliance with local laws and regulations which could affect business operations. Political and economic instability introduces possible unpredictability into operations, making it difficult to plan and budget for the company’s activities.

Regulatory issues

Foreign exchange risk is also high when the companies are trading in foreign countries leading to increased expenses and impacting the profitability. If new regulations come into force within a few months of the year-end. It would appear that the company do not comply with these regulations, and this creates a significant compliance risk for company which could lead to investigation by the regulatory authority, and non-compliance may result in forced cessation of production, fines, penalties and bad publicity.

Additional ongoing costs involved in complying with the new regulations, for example, monitoring costs, as well as the costs of the necessary capital expenditure may impact the profitability & liquidity position of the company. Large amounts have to be expended long before any Cash flow and liquidity issues arising from spending amounts in revenue is generated, in some cases the time lag may be many years before any cash inflow is derived relation to ongoing research and from expenditure on research activities so if the development project is unsuccessful it can lead to huge losses and

High-technology and competitive industry

Imported goods

cashflow issues to the company. If the company sells into a high-technology industry, it is likely that company will need to adapt quickly to changing demands in the marketplace, but it may not have the resources to do this. Company operates in a very competitive market. With many suppliers chasing the same customer base, there will be extreme pressure to cut prices in order to remain competitive. If the client company is involved in business with individuals or company from overseas. This exposes the company to exchange rate volatility and consequentially cash flow fluctuations. If the company chooses not to mitigate this risk by using forward exchange contracts, then exchange gains and losses can also cause volatility in profits. transportation issues Heavy reliance on imports means that transportation costs will be high and this will put pressure on company’s margins.

Reliance on imports is risky as supply could be disrupted due to aviation problems, such as the grounding of aircraft after volcanic eruptions or terrorist activities, the likelihood of a stock out. Unless client keeps a reasonable level of goods in inventory, production would have to be halted if supply were interrupted, creating idle time and inefficiencies, and causing loss of customer goodwill Claim relating to environmental damage

The reputational damage for the company could be significant. Consumers are likely to react unfavourably to the allegations that the company’s activities are harming the environment. This could result in cancellation of business contracts by customers with the company and lower demand in the future, impacting on revenue and cash flows.

Diversification and rapid growth

Management may struggle to deal with the increased number of operations which they need to monitor and control, or they may focus so much on ensuring the success of the new business segments that existing activities are neglected There will be additional costs associated with the diversification which puts pressure on cash and on the margins of the business.

Change in key management (directors)

The loss of several directors/ key management persons during the year is a business risk as it means that the company may lose important experience and skills Many key business relationships of the client may have been due to the influence of the key personnel as they leave the company, it may also impact any such business relationships.

Licensing of products

Court case and bad publicity

There will be significant regulatory risk relates to the regulated nature of the industry in which the company operates. If any of company’s products fail to be licensed for development and sale, it would mean that costs already incurred are wasted The cash outflow in relation to research and development amounted to significant amount of revenue, and the failure to obtain the necessary licences is a major threat to the company’s business objectives The court case against the company will create reputational damage. Publicity over people suffering will undoubtedly lead to bad publicity, affecting market share especially if competitors take advantage of the situation. Bad publicity will lead to increased scrutiny of the company’s activities making it more vulnerable leading further problems for the firm.

Agreement for the use of brand name

If the company has been spent amount on an agreement which allows the company to use another company’s brand name. This represents a significant outflow of cash where the benefits may take time to materialise or may not materialise to the extent of the level of investment. If there is any damage to the reputation of the acquired brand name, this may have an effect on the client company, resulting in a much lower return on investment than anticipated.

Luxury products

The company offers a luxury product aimed at an exclusive market. The demand for luxury products/services will be sensitive to economic problems such as recession. This in itself creates a business risk, if the entities’ activities are not diversified, and any decline in demand will immediately impact on profitability and cash flows.

Business expansion

In case if the company is planning further expansion with capital expenditure financed by a bank loan. The additional finance being taken out from the company’s lending facility will increase gearing and incur additional interest charges of, which will be a significant part of the projected profit before tax for the year. The increased debt and finance charges could impact on existing loan covenants and the additional interest payments will have cash flow as well as profit implications.

It is questionable whether the company has a sound policy on expansion and it is doubtful whether an appropriate return on these investments will be possible. There is a risk that further unsuitable investments will be made as a result of poor strategic decisions on providing goods or services....