Discussion-1
Assume that the management team has hired you to advise them on their overall risk profile and has asked you to prepare a SWOT analysis for their review and as input to the upcoming strategic planning session. What would you put into your analysis? Additionally, how does your analysis affect the risk management strategies that Kilgore might choose to utilize?
A SWOT analysis is the compilation of an organizations strength, weakness, opportunity, and threats. Implementing SWOT would let an organization develop complete awareness of all factors involved in decision making.
I would rather consider internal and external factors such as financial resource, physical resource (location, facility), human resource, access to trademarks and patents, current processes, market trends, demographics, relationship with partners, economic regulations for analysis. Based on the analysis result, the recommendations and strategies should be made. The external factors such as politics and economy also play an important role in achieving organizational goals. An unstable political system in the foreign market and economic collapse might affect the financial growth of a company.
What are the main financial risk management issues that Cathy and the rest of the management team at Kilgore need to focus on?
Cathy has identified a large number of issues at Kilgore. They are -
1. The potential profitability of the contract (between Kilgore and Japanese based manufacturing company) when embedded options were considered.
2. The potential for an inflation differential between Canada and the USA.
3. Products that can be used to limit the exchange rate risk
4. If the company should limit the full exposure
5. Identifying a person who takes up responsibilities and makes a decision
6. If the company should use exchange-traded products
7. On how to consider the embedded options in the contract
8. How to assess the effectiveness of hedging.
What factors need to be considered when integrating financial risk management into an enterprise risk management framework?
According to Cathy, there are two operational issues that should be considered when integrating financial risk management into an ERM framework such as - who would take up the responsibility of managing hedges and choosing counterparties, how a financial risk would account to a company's slowly developing commitment to an enterprise risk management framework.
Discussion
Assume that the management team has hired you to advise them on their overall risk profile and has asked you to prepare a SWOT analysis for their review and as input to the upcoming strategic planning session. What would you put into your analysis? Additionally, how does your analysis affect the risk management strategies that Kilgore might choose to utilize?
SWAT analysis is a technique that is conducted to identify, analyze and evaluate internal and external risks and with a little thought, it will help in discovering opportunities. The components include strengths, weakness, opportunities, and threats. Using this framework, address the management by providing strengths of the company, factors that are invisible in achieving the complete growth, identify the weak areas. Prepare the threats that can happen within the company and from outside in the form of vendors and contracts. Accordingly, the company has to prepare to mitigate the risks to achieve the targets.
What are the main financial risk management issues that Cathy and the rest of the management team at Kilgore need to focus on?
Cathy and the remaining team need to focus on following financial issues.
Cash flow management: Kilgore has gained profits in the last five years, but they are always short of cash. This is due to the fact that the company always looked at wafer-thin margins and generous terms required by automobile companies.
Profitability: Because of the current conversion rates between U.S and Canadian dollar, there is a probability to put Kilgore into financial losses. This is especially due to the rise of the Canadian dollar on par with USD.
What factors need to be considered when integrating financial risk management into an enterprise risk management framework?
Following factors are crucial to integrate financial risk management into ERM.
1. Business activities that can lead to risks.
2. Cash flows to run the business without halts.
3. International footprint i.e. in the case of Kilgore competition from Asian markets and US-based competitors.
4. Different contractual agreements
5. Currency and pricing the products.
Discussion -3
What are the prospects and consequences for Blue Wood if it carries on the way it has been?
Blue Wood is in a precarious situation at the moment with various risks threatening to materialize. Depending on which of them actually occurs, the future of the company is likely to continue being bleak, potentially bringing the company to an inevitable failure. If nothing changes, the company would eventually break its covenants with the bank resulting in stricter terms of loans, and failure to meet its loan obligations would lead to the bank stopping financing the company altogether. Such a drastic measure would surely stop all the company's operations, leading to its cessation.
Other risks that bring uncertainties in the company and pose a threat to its future include the lack of coordination between the two cocoa purchasers who act out independently. The practice has a number of risks such as over purchasing the product, which could disrupt the company's financial stability. All in all, continuing the operations at its current pace without making significant changes on those two fronts would likely result in a disaster within the company.
What are the main challenges in developing and implementing a risk management framework for Blue Wood? How does the ownership structure affect these challenges?
One of the challenges of developing and implementing risk management framework at Blue Wood is the lack of support or commitment of the top management. Fraser, Simkins, and Narvaez (2014) emphasizes on the CEO's lack of concern over the apparent risks, such as his confidence in the bank's continued financial support. The other challenges the CFO faced included identifying direction for the company which was agreeable to everyone, motivate the workers and gaining their support to successfully implement the ERM.
Discussion -4
• What are the prospects and consequences for Blue Wood if it carries on the way it has been?
Blue Wood Chocolates (BWC) does not have the proper sales performance even though it has growing market. They do not have the proper risk identification systems to identify the risk events and proper risk response plans to mitigate the impact. They do not have proper retained earnings which effect the cash flow. If the BWC follows the similar fashion, then it is very difficult for BWC to survive as a significant competitor in the market.
• What are the main challenges in developing and implementing a risk management framework for Blue Wood? How does the ownership structure affect these challenges?
The main important change for the BWC to keep alive in current market and then make the BWC as a financial stable company. The CFO Needs to increase the cash flow so that it will able to pay the amount to dividends. For this they have to increase the sales and CFO needs to make sales profit ratio stable. Also, there is communication gap between the departments to resolve the issues ownership structure will help to increase the accountability among the management from top to bottom.
• If the company is to develop a risk management framework, who should lead the process? Should a Chief Risk Officer (CRO) be appointed? If so, to whom should he/she report and have access to? How could smaller companies without the resources for a dedicated CRO deal with ERM? What is the role for the Board in such a process?
BWC is financially not stable and it might be in the position to hire new employee for ERM.ERM can be implemented if the organization has a positive cash flow. In my view at this point it is better to take care the CRO position someone who as more knowledge in finance and sales since BWC has high financial unstable and low sales. I suggest CFO can perform CRO responsibilities until the BWC can be with reasonable finance status.
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