Introduction instead of 13 Store # 205 Supposed

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Introduction

After identify and
categorise several key risks facing Quickwich, my team and I proceed to the
risk quantification step. To determine the baseline company value, financial
data for Quickwich is provided by Randall R. Watson from accounting department.
The data has been gathered from a variety of sources and has not been
reconciled or verified against any independent data. I am asking to review the
data and justify whether it should be used in developing the baseline company
value.

Data Evaluation

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When determining the
data discrepancies, I evaluated the data by following some guidelines in ASOP
#23. Firstly, I determine the definition of each data element such as data
format used and data definition. After that, I tried to identify questionable
or inconsistent data such as missing data and outliers. Lastly, I further
checked whether dependency among variables is reasonable as below:

·        
Food and
Beverage Revenue is positively correlated with COGS.

·        
Wages is
positively correlated with # of Hourly Employees.

·        
Salaries are positively
correlated with # of Salaries Employees.

·        
Salaries are positively
correlated with Food and Beverage Revenue.

·        
Rental of each
store must be reasonable over these 6 years.

After reviewing all
data provided based on above approaches, below summarise some findings
regarding data discrepancies:

Data Heading

No. of Row

Remarks

Year

All rows

Data format is not tally with format noted in
“Notes” sheet.

Store #

39

Missing data

Store #

80-85

Supposed to be data of store 14 instead of 13

Store #

205

Supposed to be data of store 34 instead of 35

Food and Beverage Rev

70

Outlier

COGS

125

Outlier

Salaries

17

Outlier

Rent

163

Outlier

Shrinkage

84

Outlier

Credit Card Fees

40

Outlier

Insurance

90

Negative amount (Unreasonable data)

# of Hourly Employees

122

Outlier

# of Salaried Employees

67

Missing data

# of Salaried Employees

181

Outlier

Conclusions and Recommendations

After addressing above
data issues, I believed that this data will be more sufficient to be used in
developing the baseline company value. Instead of removing the missing data and
outliers, I recommend that we should review the financial report and resources
which are used to gather this data set. Not only validating the data accuracy,
we should further investigate the inconsistent data such as outlier and decide
whether it should be taken into account to the model. To be convenient in risk
analysis, I also suggest to input more data regarding strategic and operational
expenses as well such as marketing fees, legal fees and data that can used to
identify internal fraud.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Task 3: Risk Quantification – Shock of key Metric

Dear Cleopatra,

As your request, I
proceed to summarize the results of an individual risk scenario involving the
impact to company value associated with food poisoning from tainted food products
provided by the supplier to assist the board with the decision regarding whether
or not spending additional dollars on marketing is sufficient by itself to
mitigate this risk

Based on the output from
the valuation model for the baseline and shocked scenario, I have summarized
the results as below:

·        
Revenue reduces
by 5% ($16.8 million).

·        
COGS increase by
19% ($21.2 million).

·        
Wages reduce by
20% ($11.0 million).

·        
Salaries reduce
by 23% ($8.7 million).

·        
Insurance fees
increase by 20% ($4.0 million).

·        
Marketing fees
increase by 100% ($7.3 million).

·        
Legal fees
increase by 80% ($0.9 million).

·        
Equipment
expense reduces by 20% ($2.1 million).

·        
Supplies reduce
by 20% ($0.3 million).

·        
The impacts to
other expenses are small.

As summary above, the
implementation of spending additional money on marketing will increase the
revenue as expectation. However, increase in marketing expenses will lead to
increase in Cost of Goods Sold (COGS), decrease in wages and salaries, increase
in insurance and legal fees and decline in equipment expenses and supplies.

In the nutshell,
company value will drop by 36% ($27.8 million) by adopting above marketing
investment. As you can see, suggestion of mitigating risk regarding decline in
sales by spending extra money on marketing is not appropriate and efficient as
expected. Further clarification on reason of change in above elements is
required.

Please do not hesitate
to contact me for further clarification.

Best regards,

Tan Hong Wee

FAP Module 4 Candidate

 

 

 

Task 4: Risk Decision Making

Dear Cleopatra,

To assist Quickwich’s
ERM committee to define the risk appetite, Individual Risk Scenario Exposure
graph is provided with below risk appetite requirements:

·        
Hard limit: -15%
impact on any of the two measures examined

·        
Soft limit: -10%
impact on any of the two measures examined

The definitions of
above risks mentioned from the Risk Categorization and Definition (RCD) tool
are:

Inappropriate Strategy

– New stores opened on
or near college and university campus are not as profitable as anticipated.

Counterparty Risk

– Food’R’Us files for
bankruptcy causing a required change in our supplier of food products.

Tainted Meat Products

– Our customers at
several store locations are made ill from food poisoning caused by tainted meat
products provided to us by our supplier.

Increase to Minimum Wage

– Minimum wage is
increased across the country by 10%.

Based on above agreed hard
limit and soft limit of risk appetite requirements, below summarise the review of
risks from Individual Risk Scenario Exposure graph and recommendation of sufficient
mitigation strategy for each area. 

Inappropriate Strategy

– % Change in Gross
Profit and % Change in Company Value exceed soft limit (10%) but below hard
limit (15%).

– Suggest mitigating
the risk by investigating further and gathering further information such as
market survey before implementing the marketing strategy.

Counterparty Risk

– % Change in Gross
Profit exceeds soft limit (10%) but below hard limit (15%) while % Change in
Company Value exceeds hard limit (15%).

– Suggest to mitigate
the risk by engaging with several suppliers rather than single wholesale
supplier.

Tainted Meat Products

– % Change in Gross
Profit and % Change in Company Value exceed hard limit (15%).

– Suggest to mitigate
the risk by engaging with suppliers who have global recognition in food safety.

– Suggest to mitigate
the risk by engaging with several suppliers to diversify the risk.

Increase to Minimum Wage

– % Change in Gross
Profit and % Change in Company Value is below soft limit (10%).

– Since there is a possibility
of gain in gross profit, exploitation of further risk can be considered.

– Suggest to exploit
the risk by providing training to staff and employees to improve the quality of
service.

Please do not hesitate
to contact me for further clarification.

Best regards,

Tan Hong Wee

FAP Module 4 Candidate

Categories: Accounting

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