Assignment 1: Discussion—Assessment of Risks
To assess risk implies assuming what the business is exposed to, how likely it is that a certain event will happen, and if it happens what impact or consequences can have. The return of any investment necessarily depends on future variables as such it is impossible to predict with absolute precision the possible gains or losses that are going to be obtained.According to Khera, risk can range between over-reliance on a single customer, to the merger of two competing companies in business. You can safeguard your business and increase its success rate by having an effective risk management policy in place. By identifying the risks before they occur, you will have the time and space to prepare and to put solutions in place if needed.
Strategic risks are defined by business design choices and how these interact with external factors. But other risks can be lessened from the outset through the basic design of the business. For example, Southwest Airlines has a model that attracts customers in good times and in bad because it is simple, and cost and operationally effective. According to Matthews,Southwest Airlines stock is average with little-to-no-growth potential. The largest risks to Southwest’s stock price are union negotiations breaking down, oil prices increasing and decreasing market share due to competition. Southwest has drastically changed its strategy from short-haul, low-cost travel to mid-priced expansion, both domestically and internationally. The stock is considered average among its peer group and has too many risks deterring it from its growth potential.
Walmart has traced their success to the ideals that emphasized in its vision statement which says to be the best retailer in the hearts and minds of customers and workers thus the company stands to attain a higher position in the retail industry. Although there are more companies like Amazon that are offering good deals to their customers and with their competition Walmart’s profit could be affected in the long run.
How the risks and the approaches to anticipate these risks differ for each company
More financial risks are involved in exporting, it requires much modification of products to fit into the varying culture of the foreign countries obtaining reliable information on foreign markets is unquestionably more difficult leads to diversification of exporting firms lowers per unit costs creates the potential for company expansion.
- Risk premium, to encourage investors to invest funds into risky projects the returns from those ventures need to be higher in comparison to the returns from less risky investments,i.e., treasury bonds this is because many investors avoid risks thus a risk premium is a discount rate which is added to the risk-free rate of borrowing
- Certainty equivalent, when evaluating ventures, future cash flows are approximated with the aid of probability measures such as predicting methods and such techniques do not provide an actual view of future occurrences,andto avoid uncertainty there is need to convert anticipated future cash flows into actual cash flows
- Factors like sales influence sensitivity analysis, a venture’s return on investment, investments, tax rate and cost of sales thus sensitivity analysis evaluates the degree to which the venture’s cash flows vary about variations in one of these factors
- Payback period, the duration is taken for a venture to pay back the amount of money invested inan issue of apprehension to the investor since an investor sets a time limit within which he/she expects to get the returns
Khera, R. (n.d.) The importance of business risk management: developing a risk management plan. Retrieved from https://www.morebusiness.com/risk-managment/
Mathews, B. (n.d.) The biggest risks of investing in Southwest stock (LUV). Retrieved from https://www.investopedia.com/articles/markets/121615/biggest-risks-investing-southwest-stock-luv.asp