Question

Explain the financial factors that can be used to determine the quantum of retention funding that can be absorbed by the enterprise.

Answer 1

Retention fund

Payment for a service or product that is withheld pending the completion of some specified condition. For example, when a manufacturing business purchases production machinery from a supplier, they might withhold some percentage of payment due as retention money until the machines are successfully installed and operational.

Retention Ratio

The retention ratio is the proportion of earnings kept back in the business as retained earnings. The retention ratio refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends. The retention ratio is also called the plowback ratio.

Best strategies for treating the risk:

Avoidance

Best case scenario, you can avoid risk repercussion altogether. But in forfeiting all activity that carries risk, you also forfeit all associated potential return and opportunity. It is up to you what type of risk activity you want to play with.

Reduction

Risk reduction implements small changes to reduce the weight of both risk and reward post-event. The reduction will require some process and plan manipulation, but it will save your company from a severe loss in the case of a high-risk manifestation.

Sharing

Risk sharing or transferring redistributes the burden of loss or gain over multiple parties. This could include company members, an outsourced entity or an insurance policy.

Retention

Risk retention involves assuming the loss or gain, entirely. This option is best for small risks where the losses can be easily absorbed and made up.