Question

discussion forum :- please describe the role risk has played in a recent personal or professional financial decision you have made.

1st person :- One of my responsibilities in my previous role, was calculate risk and return on investment. i recently worked on a project where I was asked to look at what format should our new products go into. With this project I had to learn the process of both options, build a financial model to show what sales, cost and timing would look like. The analysis included cost curves to show scale up over volume, forecast over years projected and operations impact (including capacity planning).   This was all compiled to show break-even points and compare long-term vs short-term gains.

The risk I had to weigh and show in the project included payback in volume and years comparing both product formats, the technical risk of doing either format, and market adaption risk. While one format had long term better payback, it was important to understand what format the market preferred. If we went with the most cost- effective product but couldn’t sell it, then we would never achieve the payback we needed. With all things in play, we had to make sure that technical aspects could be accomplished, or the product would not be manufacturable and none of the other considerations mattered.  

critically analysis and response to first person :- 120-150 words think like you are the university student

Answer 1

The defining risk to the new projects always depends upon the management perception. But if you are in a role to develop a financial model for a particular new product then you need to consider all the following risk factors before deriving financials -

1. Market Risk - You need to first get the valid professional report for the existence of the market for the upcoming item and make their suggestions incorporated into the business model. CHanging up marketing strategies (Market Penetration, Divestment, Differentiation, Monopoly etc) upon the situations and the same factor need to consider in business model  

2. Liquidity Risk - Once after releasing a new product into the market if the same is not having a good response from customers then organisations liquidity position will disturb, so need to have an alternate plan in that situation.

3. Operational Risk - You need to consider operational risk from all the points i.e. availability of raw material, availability of support functions, manpower support, legal regulatory compliance etc.

4. Credit Risk - Selecting of customers is important in the market to avoid liquidity risk, according to the policy if organisation we need to consider the factor that affects sales due to eliminating credit risk.

After considering above factors and dependingupon the nature of industry and product we involved need to take decision and if required we can go with product mix approach to catchup larger audience group.