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In: Finance

Evaluate its main sources of potential financial risk in a manufacturing company using suitable techniques. For...

Evaluate its main sources of potential financial risk in a manufacturing company using suitable techniques. For each risk area you are required to recommend and justify appropriate action to reduce the exposure.

Note Minimum word count 700 words

Solutions

Expert Solution

Financial risk is concerned with a company's ability to manage its debt. Financial risk is the risk that company would default on its debt payments. Financial risk is related with a company's use of financial leverage or debt financing.

A company with a higher level of debt financing carries a higher level of financial risk because of the greater possibility that company may not be able to manage its debt and become Insolvent. Companies with more equity funding are in a better way to manage debt. Financial risk is concerned with cost of financing.

In case of manufacturing companies, they are highly funded by using debt. Compared to any other segment, manufacturing segment uses more debt therefore there are higher chances in case of manufacturing company of a potential financial risk. one potential financial risk is that company may not able to service its debt in time and another financial risk is that company may not be able to repay its debt capital in time. Business risk is followed by financial risk. Business risk is when the company is not able to generate enough cash flows to fund its operations whereas financial risk is when company is not able to fund its debt servicing that is interest. The company which is facing business risk is more prone to get affected by financial risk if business risk prolongs.


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