Managing Financial risks
Financial risks are those that a firm is not in the business of bearing and business risks are those that the firm must bear in order to operate its primary business. The distinction between business and financial risk clearly rests on a slippery slope. Not only does it vary from one firm to the next, but it also depends not on the quality of information the firm actually has, but rather on the firm’s perceived comparative advantage in digesting that information. Perceptions, of course, can be wrong. Businesses fail, after all, with an almost comforting degree of regularity. Without business failures, one might tend to suspect the market is not working quite right (2004). Accordingly, the preponderance of actual business failures clearly means that some firms thought they had a better handle on information than they did, whether that information concerns market demand for their products, their competitors, or their costs. Many of the tactical responses to financial risk, especially over short time horizons, involve the exploitation of arbitrage opportunities which create a comparative advantage for certain companies in a particular segment of the capital markets (2004).
These situations arise as a result of financial market segmentation in one form or another, and can be utilized by businesses to create a competitive advantage, for example by reducing corporate funding costs, or the costs of capital, in a manner not open to other firms. Most of the recently developed internal techniques for measuring financial risk recognize that market risk should not be considered as exposure to individual financial asset price changes, but rather as exposure to an integrated set of interrelated asset price changes. Any risk management strategy should be undertaken if and only if it increases the expected discounted value of a company’s cash flows or earnings. It is of critical importance, however, to distinguish between two classes of risk management policies. In the first class are those policies commonly denoted hedging which serve purely to reduce the long term volatility of a company’s cash flows or earnings thereby reducing the expected costs of financial distress (2004). The second class consists of policies designed to respond to financial risk by tactically and/or strategically exploiting asset price volatility to create competitive advantage. These instruments provide the building blocks that enable companies to use both standardized exchange-traded instruments and customized financial products obtained in over-the-counter markets, to manage the risks associated with currency, interest rate, and commodity price fluctuations far more flexibly, cheaply, and efficiently than is possible with on-balance sheet strategies. A corporation’s value is determined both by the quality of managerial decisions relating to its core business competencies, and also by financial risk, which impacts on the firm’s earnings but which lies outside the domain of managerial control (2004). To make sure that Heinz creates a value for itself, financial risks are used. Financial risks make use of financial instruments to ensure that too much exposure to risk will be managed. The effectiveness of financial risk can alter the financial performance of a firm and can disrupt the goal of any risk related undertaking.
The use of financial criteria
The emphasis on financial considerations in the business world is the cause of important omissions. The assessment of strategic decisions has sometimes suffered from this shortcoming, when certain financial criteria imposed subjectively have forced decisions to be studied from a purely financial viewpoint. These classic financial criteria for assessing investment decisions are extremely useful ( 2004). However, their limitations, from a strictly financial viewpoint, are also well known: the treatment of the risk and uncertainty of the flows associated with the growth decision; the time period to consider; the consistency of the results, depending on whether the investment’s net present value or rate of return is used; and, finally, the choice of the discount rate to be used. Some of these problems have been tackled by using the theory of financial options to evaluate investment decisions. We do not intend to discuss these issues here, which would take us away from our main purpose, but simply state the existence of these problems associated with the financial criteria used to assess investment decisions (2004).
Moreover, there are intrinsic problems related to the use of financial criteria in assessing investment decisions related with growth decisions. One of them is the consistency between all the components of an investment decision. A well-designed financial plan must reflect, first of all, the positioning that the company seeks to attain or already has in the market and should adequately combine the various policies required by a certain growth decision. Thus, it is important to ensure consistency between the different policies. Hence it is vital that people from different departments within the company evaluate such questions from a functional, integrative outlook. Some strategic decisions may enable the company to undertake new growth options in the future. However, the assessment of these growth options is not always reflected adequately in the classic financial criteria. To analyze these decisions, financial theory has developed a number of models that can be applied under certain conditions. The problem is that these models, even though they claim to be simple, are still complex (2004). The goal of maximizing corporate wealth also differs from the familiar notion of maximizing profit. Corporate wealth passed on to shareholders in the form of dividends may be consumed or reinvested in competing organizations. But corporate wealth retained and reinvested for the organization that generated it will add to the resources under management’s control. From the point of view of a shareholder who is indifferent to the particular source of his wealth, it may or may not represent the most efficient usage. Further qualifications concern the concept of maximization. Traditionally this concept connotes an ultimate value. It implies that management has attained the full potential of its resource base (2004). To attain maximum profits the firm needs to make use of risks and a criteria to match the risks. Financial criteria will be used exclusively by the firm. In the financial criteria three areas will be given attention and it includes investment stage, investment size and ownership. The financial criteria will be used to identify which financial risk would be used to achieve the organization’s goals.
The financial risk
The financial risk management plan intends to make sure that Heinz will make use of the proper risks beneficial to them. The financial risk management plan will guide the company in choosing the right risk without hampering the company’s goal of providing products that are renowned and favorite for most people. The company’s management and staff are expected to participate in the planning and implementation process. The company’s president is the one responsible for the financial risk management efforts. The financial risk management plan/process will focus on identifying a good investment for the company amidst the global economic problems. This plan will take a look at stable sectors. The financial risk management plan and process will consider the investment stage, investment size and ownership. Once a good investment is chosen the company will then determine the amount of investment and its probable effect to the company in the future. The financial risk management process and plan would be a success if it creates positive changers to the firm. A criterion would be used to check the performance of the financial risk management plan/process. The criteria will include: The impact of the risk management process; the number of positive changes the risk management process created; the number of negative changes; the increase or decrease of complains with regards to the implementation of the risk management process; and the status of the company after the risk management process. These criteria would determine whether the risk management plan/process made sure that it attained its goal and brought needed changes to the firm.
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