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 citations
o The nature of risk and its importance in financial management
Sample answer for Nature of Risk
Risk relates to the possibility that the actual return may differ from the expected return. Therefore, an appropriate
balance should be maintained between risk and return. Risk represents threats to the organisation, as such financial
risk 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. Each
must be balanced with the return or lower cost, which can be attained with the use of particular forms of debt
finance, 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 citations
o The different types of risk and their impact on organisation activities and decision-making (table on page
43 in manual)
o The impact of different types of risk on financial management processes and activities
Sample answer for the Types of Financial Risk
Financing Risks: affect the ability of an organisation to obtain ongoing financing. Energy and industrial gases
represent Massy’s second largest segment. As the company struggled with higher selling costs as well as one-off
costs associated with write-offs of legacy receivables, this sector has recorded a 4.0 % decline in 2019 (Trinidad
Express, 2020) . With the shutdown of the Petrotrin refinery in Trinidad, nitrogen sales significantly reduced, due to
decrease in demand from fewer process plant turnarounds and delayed start-up of the Caribbean Gas Chemical
Limited (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. The
management of Massy is responsible to measure and monitor its liquidity process. The process involves frequent
Created pg. 11
monitoring of cash flows, assessing expected cash inflows and ensuring the company has adequate committed lines
of credit to meet its obligations (Massygroup, 2019) .
Currency Risks: Massy operates internationally and is exposed to risk of loss from fluctuations in foreign exchange
rates arising from various currency exposures. Foreign exchange risk arises from future commercial transactions and
recognised financial assets and financial liabilities. The company manages this by monitoring currency positions and
holding foreign currency balances to ensure the net exposure in foreign assets and liabilities is kept at an acceptable
level (Massygroup, 2019) .
Credit Risks: Massy is exposed to credit risk which may arise from clients, customers and counterparties failing to
discharge 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 ensure
customers 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, 4
citations
o The evaluation of financial risk using suitable techniques and approaches to financial risk
management, such as
sensitivity analysis,
scenario analysis,
simulations, and
expected value to reduce exposure to financial risks
Reducing Exposure to Financial Risk
Sensitivity analysis reduces the exposure of financial risk by modelling the effects with a chosen variable. By
undertaking a sensitivity analysis, managers will be able to identify the margin of safety for each factor chosen. Using
this 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 the
firm’s profit margin will be examined, which may include cost of goods sold and salaries. Fixed and variable costs will
be isolated, and a range of possible outcomes can be considered to direct the financial decision of management
towards profit planning.
Incorporating scenario planning into Massy’s operations, provides a preview of potential risks and returns. By
generating probable future contexts based on the economy, possibilities that include individual scenarios, with
variables such as operating costs, inflation, product pricing and customer metrics, can be used to build “best case and
worse case scenarios”. This tool has the capability to calculate potential gains and losses and provide measurable
data, 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 proper
business decisions are made (Concluding paragraph) – 100 words. 2 citations
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