I need help on Evaluate different types of financial risk that might arise within Starbucks.For each type ofriskyouarerequiredtodiscuss
Evaluate different types of financial risk that might arise within Starbucks.For each type of risk you are required to discuss the potential impact on Starbuck’s activities and decision-making.
Please use the guide and include at least 10 citation.This question should be answered in three main parts (Please ensure you link your answer to your company)First part – Assess the nature of risk – 100 words, 2 citationso The nature of risk and its importance in financial managementSample answer for Nature of RiskRisk relates to the possibility that the actual return may differ from the expected return. Therefore, an appropriatebalance should be maintained between risk and return. Risk represents threats to the organisation, as such financialrisk management is ranked high on the corporate agenda.Using debt finance give rise to different risks such as liquidation risk, interest-rate risk and refinancing risk. Eachmust be balanced with the return or lower cost, which can be attained with the use of particular forms of debtfinance, such as lower cost of borrowing at variable interest rates and using debt with a short-term maturity.Second part – Types of financial risk – 300 words, 8 citationso The different types of risk and their impact on organisation activities and decision-making (table on page43 in manual)o The impact of different types of risk on financial management processes and activitiesSample answer for the Types of Financial RiskFinancing Risks: affect the ability of an organisation to obtain ongoing financing. Energy and industrial gasesrepresent Massy’s second largest segment. As the company struggled with higher selling costs as well as one-offcosts associated with write-offs of legacy receivables, this sector has recorded a 4.0 % decline in 2019 (TrinidadExpress, 2020) . With the shutdown of the Petrotrin refinery in Trinidad, nitrogen sales significantly reduced, due todecrease in demand from fewer process plant turnarounds and delayed start-up of the Caribbean Gas ChemicalLimited (CGCL) project, which is 10% owned by Massy (Massygroup, 2019) .Liquidity Risks: relate to the uncertainty of a firm’s ability to meet its short term financial liabilities. Themanagement of Massy is responsible to measure and monitor its liquidity process. The process involves frequent
Created pg. 11monitoring of cash flows, assessing expected cash inflows and ensuring the company has adequate committed linesof credit to meet its obligations (Massygroup, 2019) .Currency Risks: Massy operates internationally and is exposed to risk of loss from fluctuations in foreign exchangerates arising from various currency exposures. Foreign exchange risk arises from future commercial transactions andrecognised financial assets and financial liabilities. The company manages this by monitoring currency positions andholding foreign currency balances to ensure the net exposure in foreign assets and liabilities is kept at an acceptablelevel (Massygroup, 2019) .Credit Risks: Massy is exposed to credit risk which may arise from clients, customers and counterparties failing todischarge their contractual obligations. Exposures arise mainly from the company’s receivables on sales, interest-bearing investments and cash held on deposit at various financial institutions. The company has a policy to ensurecustomers who are trading on credit terms, subjected to verification. This procedure consists of a structured credit-control system that analyse customers’ creditworthiness before credit terms are set (Massygroup, 2019) .Third part – Recommend and justify appropriate action to reduce exposure to financial risks – 200 words, 4citations
o The evaluation of financial risk using suitable techniques and approaches to financial riskmanagement, such as sensitivity analysis, scenario analysis, simulations, and expected value to reduce exposure to financial risks
Reducing Exposure to Financial RiskSensitivity analysis reduces the exposure of financial risk by modelling the effects with a chosen variable. Byundertaking a sensitivity analysis, managers will be able to identify the margin of safety for each factor chosen. Usingthis technique, management of Massy may ask “what will be the effect of the company’s working capital(independent variable) on its net profit margin (dependant variable)?” Key variables that will have an impact on thefirm’s profit margin will be examined, which may include cost of goods sold and salaries. Fixed and variable costs willbe isolated, and a range of possible outcomes can be considered to direct the financial decision of managementtowards profit planning.Incorporating scenario planning into Massy’s operations, provides a preview of potential risks and returns. Bygenerating probable future contexts based on the economy, possibilities that include individual scenarios, withvariables such as operating costs, inflation, product pricing and customer metrics, can be used to build “best case andworse case scenarios”. This tool has the capability to calculate potential gains and losses and provide measurabledata, that can be used to maximize the outcome (Signatureanalytics, 2020) .
Fourth part – Link between assessing the financial risk, mitigating against the risk and ensuring that the properbusiness decisions are made (Concluding paragraph) – 100 words. 2 citations
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