5.3.2 Risk calculation
Very few operations are entirely without risk! To be successful, an organisation must assess future risks and either prepare for them or work out how to avoid them. Once identified, the financial effect of a risk can be quantified by using a ‘what if’ calculation. In Task 37, you calculated what would happen if the currency devalued, causing components to cost 10 per cent more. This has quantified the risk of currency devaluation. Hannah can now look at this cost and work out whether she should buy currency to ensure her component costs. The bank will help her with the calculation, and quote the cost of currency.
Task 39: Risk calculation
- How many risks does Hannah face? List as many as you can.
- Identify those that are similar to the ones you feel you may face.
You might have thought of:
- currency devaluation/rate fluctuation
- increase in transport costs
- increase in electricity costs
- downturn in oil industry leading to lower orders
- increase in national wages.
There are probably many more. Each of these can be estimated and a ‘what if’ calculation done to work out the effect. Once the effect is known, the likelihood of the risk can be assessed and action decided on.