Business Planning Lecture 12 Ch Payman Shafiee

THE NATURE OF RISK & RISK ASSESSMENT Types of risk Visibility of risks dimensions of risk operationalindustryfinancialpolitical Slides by Payman Shafiee

The dimensions of risk The level of risk associated with a particular business or project will depend upon the following: The value of resources devoted to the project. The proportion of total business resources represented by those resources. The length of time for which the resources will be devoted to the project. The inherent risk of the project. The cost of exiting the project. The recoverable costs were the project to fail.

Visibility of risks Foreseeable and unforeseen risk A business’s ability to manage unforeseen risks will largely depend on the calibre and experience of management and the nature of the event. *Advantage of writing a business plan: as a result of having developed a comprehensive business plan, when unforeseen events occur, managers have the time and the resources available to tackle them.

Types of risk Operational: Operational risks are internal to the business and relate to its ability to achieve its chosen strategy and include the following: Key staff resign or are poached by a competitor. Unforeseen problems occur in the production process. Machinery breaks down or is incompatible with the raw materials. Stocks become damaged. Fire, theft and floods. Information technology problems occur. The product is so successful that the business cannot meet demand. The actions of a rogue employee result in large liabilities for the business. operational industryfinancialpolitical

Types of risk Industry : Industry risks are caused by external developments in the industry and may develop as a result of actions by the business itself. They include the following: A new firm enters the market. A key supplier closes and prevents the supply of crucial raw materials. Demand for the product falls or fails to materialise. A competitor aggressively cuts prices. A new technology is developed making existing products obsolete. Two competitors merge providing them with a major cost advantage. operational industry financialpolitical

Types of risk Financial : Potential financial risks include the following: A stock market collapse prevents a crucial fundraising equity issue or a merger with a competitor. Interest rates increase dramatically, raising the cost of servicing the business’s debts. There is a significant devaluation, which increases the costs of raw materials purchased from abroad. High demand for the product leads to overtrading and a lack of available working capital to fund the business’s activities. operationalindustry financial political

Types of risk Political : Political risks include not only governmental risks but also those resulting from the actions of trade unions, lobbyists and activists. They include the following: Sanctions imposed on a country prevent access to customers or raw materials. Taxation rates are changed or taxation policy is altered. Grants, loans and subsidies are altered. Trade unions organise industrial action, preventing production from continuing. Pressure from lobbyists requires a change in the business practices of the business. The business suffers organised vandalism by radical protesters. operationalindustry financial political

RISK ASSESSMENT Identifying risks: The first task of risk assessment is to try to identify as many potential risks for a business as possible.  The results of the swot (strengths, weaknesses, opportunities, threats) analysis, in particular the weaknesses and the threats, will provide an initial overview of the risks facing the business.  The results of conducting pest (political, economic, social, technological) analysis may well highlight political and financial risks.  A brainstorming exercise, examining each of the four risk categories (Operational, Industry, Financial and Political) should be performed.

RISK ASSESSMENT Simulation techniques: Various techniques, including Monte Carlo simulations, can be used to perform extensive, automated testing of a business model. In simple terms, the technique involves entering a randomly generated set of inputs into the model to obtain a set of possible outputs. Probabilities are attached to each of the outputs to allow you to estimate the probability that an outcome from the business, such as net present value, lies in a particular range. Slides by Payman Shafiee

RISK ASSESSMENT Simulation example

RISK ASSESSMENT Worst case: The top five most damaging potential risks to the business should be used to develop a worst case scenario, and the strategy and tactics of the business should be examined against that scenario. The business model should also be used to examine the worst case, and the financial results should be studied closely to ensure that any banking covenants or borrowing limits would not be exceeded. Slides by Payman Shafiee

STRATEGIES FOR MANAGING RISK Few examples: A business could choose to rent all plant and machinery rather than investing in its own equipment. to form a partnership or joint venture with a supplier or distributor to share some of the financial and operational risks of the project. to lease office space, and rather than employing a large number of full-time staff, contract staff could be used while demand in the market is tested. Some types of operational risk, such as fire, theft and floods, can be insured against. Insurance can also be used to counter the risk of legal claims that the business may have to make, or to defend itself against claims made by third parties

CONTINUING RISK ASSESSMENT The environment in which the business operates continually changes. Regular risk assessment reviews should be undertaken to identify any new areas of risk that have developed in the market. Slides by Payman Shafiee

Presenting the business plan and obtaining approval OBJECTIVES The objective is to get the support of all stakeholders, who may include colleagues and senior managers, investors and lenders. Chapter 2 covers what should be contained in a business’s plan and explains the structure of the business plan document. FOUNDATION WORK relevant team members and decision makers should be involved and, if possible, asked for inputs... Why? This extends a sense of ownership of the business plan to the people who will take part in the decision to approve the plan A co-operative approach is more likely to overcome objections and allows good use to be made of the experience and knowledge of a range of people...Why? Bear in mind that in an organisation there are many vested interests and personal agendas. Some people may feel threatened by a business plan because funding may be taken away from their projects

EXECUTIVE SUMMARY AND PRESENTATION SLIDES A brief two-page executive summary may be all a board of directors will look at. Depending on the audience, this would normally include the following: A short introduction, normally taken from the vision and mission. The objectives of the business. Why you intend to do it, that is, the rationale for the rest of the business. The current state of the business. Strategy and sources of competitive advantage. What you intend to do, that is, aspects of the marketing mix. Target market segments. Demand and market share forecast. How you intend to do it, that is, outline of operations, required resources. Summary balance sheet and profit and loss account (income statement) figures. Key ratios. Required funding. The valuation. Implementation time line.

THE COURSE IS OVER ONLY WHEN YOU KNOW YOU HAVE LEARNED THE MATERIAL. TO ACCOMMODATE THIS GOAL PLEASE COMPLETE YOUR FINAL PROJECT WITH PASSION AND PATIENCE; CONTACT ME WITH ANY QUESTIONS YOU MIGHT HAVE Lectures end here ! Wishing you all the best in life Keep in touch Payman but...