SBA - CH15

Risk

condition of danger or harm that may affect life and business.

Crisis

the effect of risk; a moment of suffering, difficulty, and disruption

MARKET RISK

investment value might be decreasing because of market factors.

INTEREST RATE RISK

changes in interest rate will affect the investment value

PURCHASING RISK

purchasing power will play an important role. Inflation and prices has greater impact on the purchasing value.

BUSINESS RISK

due to business operation deficiences, risk can be triggered if cannot handled or managed well.

FINANCIAL RISK

debt structure should be given solution to promote financial leverage. Fixed interest rate affects the earnings per share and shareholder's equity.

Arsène-Jules-Étienne Juvénal Dupuit

COST BENEFIT ANALYSIS developed in 1840s by, a French engineer and economist

COST BENEFIT ANALYSIS

is the planning and budgeting to measure the financial benefits vis-a-vis the cost measures both quantitative and qualitative impacts

TRUE

CBA quantifies all options or alternatives. T/F

NATURAL DISASTER

an imminent danger that affects the lives of people and business. It is a catastrophe affecting the environment

Manmade Crisis

the condition of man's carelessness resulting in trouble within the organization.

Strike

is stoppage of work led by the employees while asking for demands that are related to work conditions and benefits.

Sabotage

is destruction and obstruction of someone's work over the interest of other party or individuals

CHANGE

THE STATE OF MAKING A DIFFERENCE

CHANGE MANAGEMENT

SERIES OF ACTIONS THROUGH CHANGING AND IMPROVING WAYS, GOALS, AND PROCESSES

POLICY

REFLECTS THE DECISION OF OWNERS AND DEPARTMENT MANAGERS

REGULATION

MANDATE BY AUTHORITY AND GOVERNMENT

Mitigating

the act of decreasing the efFect avoid risks because life has choices.

Risk evaluation

which involves identifying risks, assessing their impact, and developing appropriate strategies, is essential before implementing any risk mitigation measures.

Risk identification

means identifying the risks according to type and classified as internal or external.

Impact assessment

estimating the results or consequence that may occur once risk will happen

Developing strategies

is making risk mitigation plan.

risk mitigation plan

is designed to control, eliminate, and lessen the consequence of risks.

RISK ACCEPTANCE

understanding of risks. Knowing the possible impact of risks, its nature, and consequences.

RISK AVOIDANCE

not accepting impossible tasks, programs, or projects with larger risks is risk avoidance.

RISK MITIGATION

controlling risks using the available resources of an organization.

RISK REDUCTION

reducing the impact and consequences of risks.

RISK TRANSFER / SHARING

transferring own risks to another party.

Risk Management

IT INVOLVES IDENTIFYING, ANALYZING, AND RESPONDING TO RISK FACTORS IN A BUSINESS. IT HELPS CONTROL POTENTIAL FUTURE OUTCOMES BY ACTING PROACTIVELY RATHER THAN REACTIVELY.

TRUE

With a proactive structure, a business experiences fewer surprises and handles challenges more effectively. T/F

Avoidance

• eliminate a risk by getting rid of its cause.

Mitigation

• Decreasing the projected financial value by lowering the possibility of the occurrence. (Transfer or Reduction)

Acceptance

In some cases, a business may be forced to accept a risk. This option is possible if a business entity develops contingencies (self-insurance by setting up fund) to mitigate the impact of the risk, should it occur

Risk analysis

is a qualitative problem-solving approach that uses various tools of assessment to work out and rank risks for the purpose of assessing and resolving them

1. Identify existing risks
2. Assess the risks
3. Develop an appropriate response
4. Develop preventive mechanisms

What is risk analysis process?

business life cycle

is the progression of a business in phases over time and is most commonly divided into five stages

P1 Launch
P2 Growth
P3 Shakeout
P4 Maturity
P5 Decline

What is business life cycle ?

CORPORATE FUNDING LIFE CYCLE

In the funding life cycle, the same five stages are used, but the focus is on the level of business risk, which shows how risky it is to lend or invest.

Sales
Profit
Cash Flow

BUSINESS LIFE CYCLE METRICS inlcudes:

Sales
Business Risk
Debt Financing Capability

FUNDING LIFE CYCLE METRICS includes:

Business life cycle :Funding life cycle

measures performance. _measures risk and financial credibility

Edward Altman

ALTMAN'S Z-SCORE MODEL was developed in 1968 as a measure of financial stability by

ALTMAN'S Z-SCORE MODEL

A numerical measurement that is used to predict the chances of bankruptcy in the next two years Uses multiple balance sheet values and corporate income

Original Model

Released in 1968 Designed for public manufacturing companies with assets in excess of $1 million

Model A

Released in 1983 Designed for smaller private manufacturing companies Uses Book Value of Equity instead of Market Value

Model B

Released in 1983 Designed for non-publicly traded companies Excludes Sales/Total Assets because companies may have very low or unusual sales relative to assets

Working capital

is the difference between the current assets of a company and its current liabilities.

FALSE: Positive

A negative working capital means that a company can meet its short-term financial obligations, and still make funds available to invest and grow. T/F

True

A negative working capital means that a company will struggle to meet its short term financial obligations because there are inadequate current assets. T/F

FALSE: using borrow funds

if a company reports LOW retained earnings to total assets ratio, it means that the company is financing its expenditure using funds from its retained earnings. T/F

TRUE

A HIGH retained earnings to total assets ratio shows than a company uses its retained earnings to fund capital expenditure. T/F

EBIT

a measure of a company's profitability, refers to the ability of a company to generate profits solely from its operations.

Market Value

also known as market capitalization, is the value of a company's equity.

FALSE: high investor confidence

A HIGH market value of equity to total liabilities ratio can be interpreted to mean low investor confidence in the company's financial strength. T/F

True

A low or falling sales to total assets ratio means that the management will need to use more resources to generate enough sales, which will reduce the company's profitability. T/F

greater than 2.99: safe zone

if the Z value is greater than 2.99, then the firm is said to be in the "_" and has a negligible probability of filing bankruptcy.

2.99 and 1.81; grey zone

If the Z value is between, then the firm is said to be in the "" and has a moderate probability for bankruptcy.

• 0.25

The value of the Altman Z score is generally around ____for firms that have the HIGHEST probability of going bankrupt.

• 4.48

for firms having the LEAST probability of facing bankruptcy, the value of the Altman Z score value is as high as _.

below 1.8

Altman Z score _ denotes that the firm is under the chance of getting into bankruptcy

above 3

Altman Z score =_are deemed to be less likely to go bankrupt.

greater than 2.6

if the Z value is _, then the firm is said to be in the "safe zone"

2.6 and 1.1

If the Z value is between , then the firm is said to be in the "grey zone"

below 1.1

If the Z value is _ then it is said to be in the "distress zone" and has a VERY HIGH probability of reaching the stage of bankruptcy