Financial Risk Management
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Financial Risk Management
Financial Risk Management Policies of the Company
The annual report of Electronics Line 3000 PLC includes a comprehensive risk report which provides an explanation of the risks faced by the company during the course of operations. The risk report included in the annual report only presents the risks relevant to the company but does not indicate the risk management policies implemented by the company to minimise risks. Although these risk management policies are not indicated in the risk report but an analysis of the whole report reveals that the organisations implements various strategies whether intentionally or unintentionally which result in risk minimisation for the company (Electronics Line 3000 PLC 2008).
Apart from the risk report the management has outlined various financial risk management strategies in the notes to the financial statements. The probable financial risks and their remedies are presented in the annual report explaining the risk management strategies related to interest rate risk, credit risk foreign currency risk and liquidity risk. There are several operational risks relevant to the company and the very first risk identified in the risk report is related to dependence on sub-contractors. The report indicates that if relationships with any of the subcontractors is terminated it may result in production delays until alternatives are found and the market share of the company could be affected adversely. The annual report indicates that subcontractors are utilised in production as well as research and development. The company utilises 70 percent of its manufacturing ability while the remaining 30 percent is subcontracted which implies that if a relationship with the subcontractor is terminated the company can utilise the full production capacity until an alternative subcontractor is found (Electronics Line 3000 PLC 2008).
The research and development team comprises of 60 individuals and the company also utilises subcontractors for this purpose but only as a complement and in the absence of subcontractors the research and development work can be carried out wholly by the company. The risk report also indicates that there is a risk due to dependence on service providers, integrators and installer of systems who are also the key customers of the company. This risk is minimised to an extent through diversification and establishing new and contemporary distribution channels. Another risk is too much dependence on a single supplier for raw material and this is reduced by implementing two alternative techniques where contracts are made with a large number of contractors and holding large inventories of raw materials which have a high lead time (Electronics Line 3000 PLC 2008).
The company is also subject to an exchange rate risk as some balances of the company are associated with various currencies. Another important factor to consider in this regard is the exposure to fluctuations in exchange rates between the U.S dollar and other currencies such as the Euro and British Pound. The company management mitigates the first risk by completing transactions with various parties in different currencies. The exchange rate fluctuation risk is minimised by continuous monitoring of exchange rates and taking appropriate actions regarding credit and cash positions. The organisation is also exposed to risks related to theft or compromise of intellectual property and the company mitigates this risk by filing for protection of intellectual property and acquiring patents for various innovations and products. The company also faces risks related to product liabilities and warranties and this risk is mitigated to an extent by the warranty policy of the company (Electronics Line 3000 PLC 2008).
There is a potential product and market risk for the company if the company fails to design solutions and products according to market needs. The company minimises this risk by implementing both traditional and non traditional marketing techniques. The company specifically focuses on strategic customers to further mitigate this risk. As the company operates in various companies it is also prone to risks associated with international business such as receivables collection, changes in regulation or policies, tax rate differences and other socio-political and economic factors. There is not much the company can do in this regard as this risk is caused by external factors (Electronics Line 3000 PLC 2008).
The company may also require additional finances from time to time for the smooth operations of the business and unavailability of funds and additional financing poses a potential risk for the company and there are not indications of company policies to minimise or alleviate this risk in the annual report. There are several industry related risks the company faces which include price changes in raw material, delays in supply of raw materials and competition in the industry to develop new and innovative products. Price of raw material is an external factor and is an uncontrollable risk and the company cannot mitigate this risk by implementing any policies. The risk of stoppage or delays in supply of raw materials is minimised by selecting a range of suppliers by the company and keeping high levels of inventory stocks of raw material which have a high lead time. The research and development carried out in the company helps in developing innovative and new products to minimise the risk relevant to competition in the industry (Electronics Line 3000 PLC 2008).
The organisation also faces several country specific risks with respect to Israel including reliance on tax benefits and government programs, grants from chief scientist, military services in the country and any labour strikes. The company management attempts to mitigate this risk by managing operations in line with the rules, regulations and policies of the country. The company is also subject to global risks relevant to capital and credit markets and this risk is mitigated through monitoring of cash and credit positions on a regular basis (Electronics Line 3000 PLC 2008).
Financial Risks Relevant to the Company
Critical Evaluation
The analysis of outside sources with respect to the risks faced by the company indicates that there are several types of risks a company faces due to a variety of reasons. The last section explained financial risks relevant to various aspects of an organisation such as credit risk, operational risk, liquidity risk, legal and regulatory risk, market or industry risk, foreign exchange risk and country risk. These are some of the most significant risks faced by organisations along with many other types of risks which may be associated with specific organisations. The analysis of these risks indicates that there are various techniques and strategies for mitigating and minimising these risks.
The analysis of financial risk management policies implemented in Electronics Line 3000 PLC in context of academic models of risk management and popular risk management policies indicates that there are several gaps in the risk management policies of the company. The annual report of the company indicates that albeit the company has identified several financial risks associated with different aspects of the business, there is not an appropriate level of risk management planning and implementation.
The company is exposed to several uncontrollable risks such as changes in regulations, new tax regimes, changes in consumer behaviour and pattern of demands. On the other hand, there are several controllable or diversifiable risks as well and the company can implement more effective strategies for coping with these risks. The management of the company only monitors the credit and cash positions of the company in order to mitigate currency exchange rate risk and global risk while a more effective strategy would be to utilise financial derivatives in order to cope not only with these types of risks but also any risks associated with changes in interest rates. The company can implement more effective plans to mitigate liquidity risk as well because it operates in various parts of the world the level of liquidity risk is quite high. In order to mitigate liquidity risk the company implements a recurring liquidity planning tool which enables the company to keep a balance between assets and investments through utilisation of tools such as bank loans and overdrafts. In order to mitigate liquidity risk much more effectively, the company management should ensure that there are sufficient liquid assets to cover for any shortage of working capital from outside sources.
The company uses an effective credit risk management policy whereby customers with high credit risk are required to provide bank guarantees while other receivables in many countries are insured through foreign trade risk insurance. The credit risk management policy can be made much more effective by implementing cash discounts and credit terms for various customers where cash discounts can be provided to customers who are willing to pay before the due date and credit terms can be agreed before actual sales transactions.
Apart from credit, market and liquidity risks the company does not implement a required level of operational risk management. There are several operational risks the organisation faces especially when its operations are spread over a large geographical market including various countries. The company management should plan for operational risks in various areas relevant to processes, human resources, systems, suppliers and customers along with plans for mitigating external risk factors. Thus it can be concluded that the company uses various financial risk management strategies but there are several gaps in the current policies and the company can increase the effectiveness and efficiency of risk management through further risk planning and management.
The annual report of Electronics Line 3000 PLC includes a comprehensive risk report which provides an explanation of the risks faced by the company during the course of operations. The risk report included in the annual report only presents the risks relevant to the company but does not indicate the risk management policies implemented by the company to minimise risks. Although these risk management policies are not indicated in the risk report but an analysis of the whole report reveals that the organisations implements various strategies whether intentionally or unintentionally which result in risk minimisation for the company (Electronics Line 3000 PLC 2008).
Apart from the risk report the management has outlined various financial risk management strategies in the notes to the financial statements. The probable financial risks and their remedies are presented in the annual report explaining the risk management strategies related to interest rate risk, credit risk foreign currency risk and liquidity risk. There are several operational risks relevant to the company and the very first risk identified in the risk report is related to dependence on sub-contractors. The report indicates that if relationships with any of the subcontractors is terminated it may result in production delays until alternatives are found and the market share of the company could be affected adversely. The annual report indicates that subcontractors are utilised in production as well as research and development. The company utilises 70 percent of its manufacturing ability while the remaining 30 percent is subcontracted which implies that if a relationship with the subcontractor is terminated the company can utilise the full production capacity until an alternative subcontractor is found (Electronics Line 3000 PLC 2008).
The research and development team comprises of 60 individuals and the company also utilises subcontractors for this purpose but only as a complement and in the absence of subcontractors the research and development work can be carried out wholly by the company. The risk report also indicates that there is a risk due to dependence on service providers, integrators and installer of systems who are also the key customers of the company. This risk is minimised to an extent through diversification and establishing new and contemporary distribution channels. Another risk is too much dependence on a single supplier for raw material and this is reduced by implementing two alternative techniques where contracts are made with a large number of contractors and holding large inventories of raw materials which have a high lead time (Electronics Line 3000 PLC 2008).
The company is also subject to an exchange rate risk as some balances of the company are associated with various currencies. Another important factor to consider in this regard is the exposure to fluctuations in exchange rates between the U.S dollar and other currencies such as the Euro and British Pound. The company management mitigates the first risk by completing transactions with various parties in different currencies. The exchange rate fluctuation risk is minimised by continuous monitoring of exchange rates and taking appropriate actions regarding credit and cash positions. The organisation is also exposed to risks related to theft or compromise of intellectual property and the company mitigates this risk by filing for protection of intellectual property and acquiring patents for various innovations and products. The company also faces risks related to product liabilities and warranties and this risk is mitigated to an extent by the warranty policy of the company (Electronics Line 3000 PLC 2008).
There is a potential product and market risk for the company if the company fails to design solutions and products according to market needs. The company minimises this risk by implementing both traditional and non traditional marketing techniques. The company specifically focuses on strategic customers to further mitigate this risk. As the company operates in various companies it is also prone to risks associated with international business such as receivables collection, changes in regulation or policies, tax rate differences and other socio-political and economic factors. There is not much the company can do in this regard as this risk is caused by external factors (Electronics Line 3000 PLC 2008).
The company may also require additional finances from time to time for the smooth operations of the business and unavailability of funds and additional financing poses a potential risk for the company and there are not indications of company policies to minimise or alleviate this risk in the annual report. There are several industry related risks the company faces which include price changes in raw material, delays in supply of raw materials and competition in the industry to develop new and innovative products. Price of raw material is an external factor and is an uncontrollable risk and the company cannot mitigate this risk by implementing any policies. The risk of stoppage or delays in supply of raw materials is minimised by selecting a range of suppliers by the company and keeping high levels of inventory stocks of raw material which have a high lead time. The research and development carried out in the company helps in developing innovative and new products to minimise the risk relevant to competition in the industry (Electronics Line 3000 PLC 2008).
The organisation also faces several country specific risks with respect to Israel including reliance on tax benefits and government programs, grants from chief scientist, military services in the country and any labour strikes. The company management attempts to mitigate this risk by managing operations in line with the rules, regulations and policies of the country. The company is also subject to global risks relevant to capital and credit markets and this risk is mitigated through monitoring of cash and credit positions on a regular basis (Electronics Line 3000 PLC 2008).
Financial Risks Relevant to the Company
Critical Evaluation
The analysis of outside sources with respect to the risks faced by the company indicates that there are several types of risks a company faces due to a variety of reasons. The last section explained financial risks relevant to various aspects of an organisation such as credit risk, operational risk, liquidity risk, legal and regulatory risk, market or industry risk, foreign exchange risk and country risk. These are some of the most significant risks faced by organisations along with many other types of risks which may be associated with specific organisations. The analysis of these risks indicates that there are various techniques and strategies for mitigating and minimising these risks.
The analysis of financial risk management policies implemented in Electronics Line 3000 PLC in context of academic models of risk management and popular risk management policies indicates that there are several gaps in the risk management policies of the company. The annual report of the company indicates that albeit the company has identified several financial risks associated with different aspects of the business, there is not an appropriate level of risk management planning and implementation.
The company is exposed to several uncontrollable risks such as changes in regulations, new tax regimes, changes in consumer behaviour and pattern of demands. On the other hand, there are several controllable or diversifiable risks as well and the company can implement more effective strategies for coping with these risks. The management of the company only monitors the credit and cash positions of the company in order to mitigate currency exchange rate risk and global risk while a more effective strategy would be to utilise financial derivatives in order to cope not only with these types of risks but also any risks associated with changes in interest rates. The company can implement more effective plans to mitigate liquidity risk as well because it operates in various parts of the world the level of liquidity risk is quite high. In order to mitigate liquidity risk the company implements a recurring liquidity planning tool which enables the company to keep a balance between assets and investments through utilisation of tools such as bank loans and overdrafts. In order to mitigate liquidity risk much more effectively, the company management should ensure that there are sufficient liquid assets to cover for any shortage of working capital from outside sources.
The company uses an effective credit risk management policy whereby customers with high credit risk are required to provide bank guarantees while other receivables in many countries are insured through foreign trade risk insurance. The credit risk management policy can be made much more effective by implementing cash discounts and credit terms for various customers where cash discounts can be provided to customers who are willing to pay before the due date and credit terms can be agreed before actual sales transactions.
Apart from credit, market and liquidity risks the company does not implement a required level of operational risk management. There are several operational risks the organisation faces especially when its operations are spread over a large geographical market including various countries. The company management should plan for operational risks in various areas relevant to processes, human resources, systems, suppliers and customers along with plans for mitigating external risk factors. Thus it can be concluded that the company uses various financial risk management strategies but there are several gaps in the current policies and the company can increase the effectiveness and efficiency of risk management through further risk planning and management.
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