IntroductionAfter identify andcategorise several key risks facing Quickwich, my team and I proceed to therisk quantification step. To determine the baseline company value, financialdata for Quickwich is provided by Randall R. Watson from accounting department.The data has been gathered from a variety of sources and has not beenreconciled or verified against any independent data. I am asking to review thedata and justify whether it should be used in developing the baseline companyvalue.
Data EvaluationWhen determining thedata discrepancies, I evaluated the data by following some guidelines in ASOP#23. Firstly, I determine the definition of each data element such as dataformat used and data definition. After that, I tried to identify questionableor inconsistent data such as missing data and outliers. Lastly, I furtherchecked whether dependency among variables is reasonable as below:· Food andBeverage Revenue is positively correlated with COGS.· Wages ispositively correlated with # of Hourly Employees.· Salaries are positivelycorrelated with # of Salaries Employees.· Salaries are positivelycorrelated with Food and Beverage Revenue.· Rental of eachstore must be reasonable over these 6 years.
After reviewing alldata provided based on above approaches, below summarise some findingsregarding 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 RecommendationsAfter addressing abovedata issues, I believed that this data will be more sufficient to be used indeveloping the baseline company value. Instead of removing the missing data andoutliers, I recommend that we should review the financial report and resourceswhich are used to gather this data set. Not only validating the data accuracy,we should further investigate the inconsistent data such as outlier and decidewhether it should be taken into account to the model.
To be convenient in riskanalysis, I also suggest to input more data regarding strategic and operationalexpenses as well such as marketing fees, legal fees and data that can used toidentify internal fraud. Task 3: Risk Quantification – Shock of key MetricDear Cleopatra,As your request, Iproceed to summarize the results of an individual risk scenario involving theimpact to company value associated with food poisoning from tainted food productsprovided by the supplier to assist the board with the decision regarding whetheror not spending additional dollars on marketing is sufficient by itself tomitigate this riskBased on the output fromthe valuation model for the baseline and shocked scenario, I have summarizedthe results as below:· Revenue reducesby 5% ($16.8 million).· COGS increase by19% ($21.2 million).· Wages reduce by20% ($11.0 million).· Salaries reduceby 23% ($8.
7 million).· Insurance feesincrease by 20% ($4.0 million).· Marketing feesincrease by 100% ($7.3 million).· Legal feesincrease by 80% ($0.9 million).· Equipmentexpense reduces by 20% ($2.
1 million).· Supplies reduceby 20% ($0.3 million).
· The impacts toother expenses are small. As summary above, theimplementation of spending additional money on marketing will increase therevenue as expectation. However, increase in marketing expenses will lead toincrease in Cost of Goods Sold (COGS), decrease in wages and salaries, increasein 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 marketinginvestment. As you can see, suggestion of mitigating risk regarding decline insales by spending extra money on marketing is not appropriate and efficient asexpected. Further clarification on reason of change in above elements isrequired.
Please do not hesitateto contact me for further clarification.Best regards,Tan Hong WeeFAP Module 4 Candidate Task 4: Risk Decision MakingDear Cleopatra,To assist Quickwich’sERM committee to define the risk appetite, Individual Risk Scenario Exposuregraph 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 examinedThe definitions ofabove risks mentioned from the Risk Categorization and Definition (RCD) toolare:Inappropriate Strategy – New stores opened onor near college and university campus are not as profitable as anticipated.Counterparty Risk- Food’R’Us files forbankruptcy causing a required change in our supplier of food products.Tainted Meat Products – Our customers atseveral store locations are made ill from food poisoning caused by tainted meatproducts provided to us by our supplier.Increase to Minimum Wage – Minimum wage isincreased across the country by 10%.Based on above agreed hardlimit and soft limit of risk appetite requirements, below summarise the review ofrisks from Individual Risk Scenario Exposure graph and recommendation of sufficientmitigation strategy for each area.
Inappropriate Strategy – % Change in GrossProfit and % Change in Company Value exceed soft limit (10%) but below hardlimit (15%). – Suggest mitigatingthe risk by investigating further and gathering further information such asmarket survey before implementing the marketing strategy.Counterparty Risk- % Change in GrossProfit exceeds soft limit (10%) but below hard limit (15%) while % Change inCompany Value exceeds hard limit (15%).- Suggest to mitigatethe risk by engaging with several suppliers rather than single wholesalesupplier.Tainted Meat Products – % Change in GrossProfit and % Change in Company Value exceed hard limit (15%).- Suggest to mitigatethe risk by engaging with suppliers who have global recognition in food safety.- Suggest to mitigatethe risk by engaging with several suppliers to diversify the risk.Increase to Minimum Wage – % Change in GrossProfit and % Change in Company Value is below soft limit (10%).- Since there is a possibilityof gain in gross profit, exploitation of further risk can be considered.- Suggest to exploitthe risk by providing training to staff and employees to improve the quality ofservice.Please do not hesitateto contact me for further clarification.Best regards,Tan Hong WeeFAP Module 4 Candidate
