UNIVERSITY OF SOUTH AFRICA POST GRADUATE DIPLOMA: RISK MANAGEMENT ASSIGNMENT 04 STUDENT: STUDENT NUMBER: MODULE: OPERATIONAL RISK MANAGEMENT DUE DATE: UNIQUE NO.: 1 INDEX PAGE(S) Question 1 3 Question 2 4 Question 3 5 Question 4 6-7 Question 5 7-8 Question 6 9 Bibliography 10 2 QUESTION 1 SECTION A INCOME AND EXPENDITURE INCOME R Income (Sales - CoS) Other income Gross Income 1 6 400 000 5 000 000 11 400 000 Calculations 1 R16 000 x 2 trucks = R32 000 R32 000 x 20 days/mth = R640 000 R640 000 x 10mths = R6 400 000 less : EXPENSES Advertising Staff Training Insurance Building Rent Building Security Fleet Maintenance Interest on loan Vehicle Maintenance Staff Remuneration 2 3 4 5 6 7 8 9 -500 000 -455 000 -162 000 -240 000 -78 000 -624 000 -814 440 -85 000 -2 490 000 2 R65 000 x 7 staff = R455 000 3 [R5 500 x 2 trucks x 12mnths ] + [R2 500 x 12mnths] 4 R20 000/m x 12mths = R240 000 5 R6 500 x 12mnths =R78 000 6 R52 000 x 12mnths =R624 000 7 R67 870 x 12mnths = R814 440 8 10 000km x 2 trucks = 20 000km 20 000km x 10mths = 200 000km 200 000km / 20 000km service intervals =10 services Net Profit before tax 5 951 560 R8 500 x 10 services = R85 000 9 Tax Liability -3 192 000 R470 000 x 2 = R940 000 R350 000 x 2 = R700 000 R275 000 x 2 = R550 000 (11 400 000 x 28% = R1 792 000) R300 000 x 1 = R300 000 Net Profit after tax 2 759 560 After calculating the income and expenditure for the first year of the business, a net profit is made. Based on this it would appear that, from a financial perspective, it would be worth the risk for Mr Baloyi to start the business. The monthly income amount of R90 000 before tax, envisaged by him, is achieved and the annual investment of R1 million to grow and sustain the business can be done. It must also be mentioned that according to the Generally Accepted Accounting Practice, the R5 million loan amount would not be included in the income figure. When this is done it reduces the income figure and results in a lower net profit before tax of R951 560 (R5 951 560 – R5 000 000) and a net loss after tax of R840 440. [(R6,4m x 28%) – R951 560] 3 After revising these figures to meet GAAP financial reporting standards it provides an indication, that from a financial perspective, it will not be worth the risk for Mr. Baloyi to pursue this business venture. QUESTION 2 The four inherent operational risk factors for Mr Baloyi’s business is the following: 1. The availability of skilled and trained workers to operate the cement trucks. Currently there is a shortage of these workers in South Africa. Should Mr. Baloyi experience a staff shortage due to resignation, leave or death it will negatively impact on the operations of his business. He can mitigate this risk factor through either employing additional staff or by training existing employees to perform all the operations of the business. In this way Mr Baloyi does not need to stop operations should he experience staff shortages. 2. Availability of diesel fuel for the trucks to operate is another risk factor for Mr. Baloyi to consider. Should the country experience a shortage of diesel, the trucks will not be able to provide ready mixed cement to his clients. A possible mitigation to consider is purchasing or leasing vehicles that uses petrol instead of diesel. He could also consider outsourcing the cement delivery operations to another business that are more assured of diesel fuel supply when shortages do occur. 3. Another risk factor is the availability of cement due to strike action within the industry. Should a strike occur the availability of cement will stop, thus making it impossible for Mr. Baloyi to provide cement to his clients. Strike action, particularly protracted strikes, can have dire consequences for small to medium businesses. To mitigate this Mr Baloyi, should consider alternative cement suppliers which are not affected by local strike action. This could mean importing cement from overseas based cement companies. 4. One last risk factor to consider, is the cement trucks being involved in road accidents. These could range from small to potentially life threatening or ending accidents. The consequences of these accidents could result in legal actions which in turn results in high legal costs but also third party claims. Mr Baloyi should consider obtaining insurance for the trucks that include 3rd party cover. 4 Furthermore he should appoint a legal firm to deal with legal matters related to the business operations. 5 QUESTION 3 3.1 & 3.2 INHERENT RISK RATING RISKS Limited availability of skilled and trained staff to operate cement trucks Impact Likelihood 2 2 RESIDUAL SEVERITY Impact Likelihood 4 Train existing employees to perform all the operations of the business. 2 1 2 2 2 4 2 1 2 2 2 4 Purchasing or leasing vehicles that uses petrol instead of diesel. 2 Non availability of cement due to strike action 2 IMPACT RATING CONTROLS RESIDUAL RISK RATING Employ additional staff. Limited availability of diesel fuel Trucks involved in road accidents INHERENT SEVERITY 3 6 Outsourcing the cement delivery operations. 3 6 Importing cement from overseas based cement companies. Obtain business insurance to include 3rd party cover. 2 3 6 Appoint law firm to deal with business legal matters. LIKELIHOOD RATING Score Description Score Description 1 Low 1 Unlikely 2 Medium 2 Likely 3 High 3 Highly likely 6 QUESTION 4 HIGH IMPACT /LOW LIKELIHOOD HIGH IMPACT / HIGH LIKELIHOOD Possible Decision: Risk to be tracked closely and ensure efforts are made to mitigate it. Possible Decision: Risk likelihood to be verified and immediate mitigation to be done. Risks Limited availability of diesel fuel. I M P A C T Non availability of cement due to strike action. Trucks involved in road accidents LOW LIKELIHOOD / LOW IMPACT LOW IMPACT / HIGH LIKELIHOOD Possible Decision: Risk to be monitored and no action to be taken. Possible Decision: Risk to be monitored and mitigation to be considered Risks Limited availability of skilled and trained staff to operate cement trucks LIKELIHOOD Diagram 1: Four quadrants risk map 4.1 Based on diagram 1, when a risk has a high impact and high likelihood management will usually verify the likelihood of the risk and implement mitigations in order to reduce or eliminate the businesses exposure to this risk. When a risk has a high impact but a low likelihood of occurring, management may track the risk and ensure that efforts are made to mitigate the risk. When a risk has a low impact and a high likelihood of occurring, management may decide to monitor the risk and consider whether mitigations should be implemented. When a risk has a low impact and a low likelihood of occurring, management would normally monitor the risk and take no further action to mitigate it. 7 4.2 The risks identified have been plotted in the four quadrants risk map diagram. Risks such as trucks being involved in road accidents, the limited availability of diesel fuel and the non-availability of cement due to strike is considered to have a high impact on the operations of the business and a high likelihood of occurring. The core function of the business is to provide cement to clients using its trucks. If the trucks is not operational due to a shortage of diesel and /or no cement is available to deliver, the business will be negatively impacted. Furthermore should trucks also be involved in accidents and rendered inoperative, this also has dire consequences for the business. The risk of limited availability of skilled and trained staff to operate the trucks is considered to have a low impact on the business but it is highly likely to occur. Although the skilled staff is required to operate the trucks it should have a low impact on business operations as other people in the business can be trained to take over operating the truck should there be a shortage of staff. QUESTION 5 SECTION B An integral part of any risk management methodology / framework is risk reporting and there are benefits for both internal and external stakeholders that can be derived. For external stakeholders’ e.g. potential investors, it provides insight into how a business manages risk to ensure growth for its shareholders. For internal stakeholders it assists in making decisions around risk exposure, the management thereof but also opportunities that can be explored to further expand the business. A risk methodology also provides a standardised approach to managing risk within a business and leads to risk information in terms of risk indicators, risk and control assessments and risk events. By including the aforementioned risk information in risk reports it assists management to make informed decisions around dealing with high risk areas within a business. A caveat to this is that risk information should be presented in a manner that is clear and concise but most importantly, lead to action. 8 It is therefore important to understand generally what principles can be used to enhance risk reporting. Risk reports would generally contain numbers, values or figures. It is vital that these values be explained in the report as it provides context to the reader. E.g. A risk rating table contains numbers which is used to rate risks. Each number has a description to explain what the number means or represents. Although the risk report contains numbers it must translate into actions. Therefore risk reports should clearly indicate when action should be taken and by whom. E.g. is the risk severity matrix. This matrix contains threshold values that indicates what actions must be taken and by whom when a risk reaches a particular threshold. For risk reporting to be effective it needs to be reported timeously to the respective target audience. There are no strict guidelines as to when risk reporting should be done and it would be dependent on the needs of the business. E.g. Executive management of Government departments report on risk management on a quarterly basis to Audit Committees, however managers within these government departments report monthly on risk to executive management. As previously mentioned, action is required to mitigate risk. This action must be allocated to someone to execute. In doing this ownership for the management of risk is done and this should be included on the risk report. The report should indicate what does risk ownership mean and what responsibilities are attached thereto. E.g. A risk register would contain a heading or column for a risk owner. When the register is reviewed the relevant risk owner would be required to give feedback in terms of actions taken relating to a particular risk. The risk report should clearly explain where are areas on non-compliance within the business that could raise its risk profile. The report should therefore provide methods that it will follow to ensure that this does not happen. E.g. when purchases are made but it’s not in terms of the businesses current procurement policy. It is also essential that when reporting on risk, that risks which the business deems relevant for its purposes, be included in the risk report. This allows management to have a more focussed approach on managing the risks of the business. 9 Question 6 Setting a risk appetite for a business can be cumbersome and therefore top management’s role and responsibility in doing so is important. Top management role in setting a realistic risk appetite requires them to understand the objectives of the business. This will help management to understand where the business is headed and what it wants to achieve. If available, top management should also make use of risk information e.g. risk and control assessments, key indicators. This will assist them in understanding what risks the business faced previously and to what level current risks are being mitigated. Financial information e.g. management reports, financial statements should also be considered as this will provide an indication of the financial state the business is in. It must also be mentioned that these are not the only sources management can utilise to set a risk appetite. When setting the appetite top management must ensure that it is aligned with the objectives of the business and that the statement is clear and not ambiguous. Top management should also provide clear guidelines and definitions to avoid situations where the risk appetite cannot be misinterpreted. When the risk appetite is set, top management is responsible for ensuring that risk appetite is approved by the Board of Directors and it should communicate the risk appetite to all staff within the business. This should serve as a reference point that will govern activities taken by them while executing their duties in the business. 10 BIBLIOGRAPHY Blunden, T. and Thirlwell, J., 2013. Mastering Operational Risk. 2nd ed. United Kingdom: FT Publishing. Kaiser, T. (2006). An introduction to operational risk: a practitioner guide. London: Risk Books Graham, A., 2008. Integrated Risk Management: Implementation guide. 1st ed. Australia, viewed 19 September 2020, http://www.andrewbgraham.ca/uploads/1/2/5/1/12517834/textpdf.pdf Valsamakis, A., Vivian, R. and Du Toit, G., 2003. Risk Management. 2nd ed. Sandton: Heinemann Higher and Further Education (Pty) Ltd. Service, CL., 2015. Gripping GAAP. 16th ed. Durban: LexisNexis Reuvid, J. (ed.) (2007). Managing business risk: a practical guide to protecting your business. 4th ed. London: Kogan Page 11
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