Financial Risk Analysis: Review

Transaction risk is the risk of loss as a result of in adequate personnel in the business or insufficient systems while financial risk is a nutshell of numerous sort of threat connected with financing. Some of the transactions risks affecting Gumpbell manufacturers are the ones listed below:

Inability to manage information, product or deliver service

Since the Gumpbell Soup Company, Inc. is going to have a binding agreement with Hen Hao, a company based in Hong Kong, an element of information technology treat will we envisaged. The company will incur extra costs for ensuring that the system technology is fully controlled to reduce chances of being hacked. Information technology will pose threat to the company, and as a result, transactions cost will increase. Failure to uphold a competitive position will make the Gumpbell Soup Company work against itself by creating a competitor within its Asian market. The company has already exported Noodle to Asian market, and as a.result, its competitive edge will be comprised by Hen Hao selling the same product in the same market of the equivalent quality in their industry. The transaction risks to the business should therefore be considered in creating a binding agreement with Hen Hao in order to safeguard the company’s competitive edge.

Mode of delivery and point of sale

The existing method of transporting goods is deemed risky to the business since the company does not transport the product in a 2-piece hermetically preserved container as proposed by Hen Hao and as a result, the product might burst or leak implying loses to the business. The terms and conditions of Hen Hao as that the company does not tolerate any substandard product as a condition of acceptance implies that a transactions risk might occur to the business where a spoilage or damage of the product occurs in the cause of transit.

The Financial risks associated with the business agreement are outlined as follows.

Uncovered transport cost and uninsured good

The Gumpbell Soup Company, Inc. transport goods to Hen Hao without insuring them. This will pose risk incase goods are lost or damaged in transit. The current agreements between both parties do not provide for safety of goods in transits. It is therefore considered a risk to the company since huge amount of finance will be lost.

Research and Development cost

A financial drain occurs if the Gumpbell Soup Company, Inc. does not have an efficient market penetration. Yet the company will have invested a huge capital outlay not realizing the value for the money.

Volatility of exchange rates and unsettled exchange rates

The company will be at a greater risk of exchange rate loss since there is a volatility exchange rate in trading with a foreign country as compared to American market in which a unified currency is used across the state. Where there is a frequent fluctuation in exchange rates, a loss to the company as per currency devaluation is inevitable.

Some of the proposals that should be instituted in order to mitigate for risk are

Insurance of goods in transit

The business should insure the goods in transit in order to reduce chances of loss or damages at a smaller fee called premium and paid to insurance firm. Hence the company will be freed from probable massive financial loss. Also, a detailed research on Hen Hao Company must be ascertained since the Gumpbell Soup Company is not familiar with Hen Hao. An initiative should be taken in order to have a clear profile of Hen Hao since concluding a business deal with the company will pose threat without background information on company’s risks and potentials.

Mode of delivery and Point of sale

The Gumpbell Soup Company should produce high quality product that meets the specifications and safety standards as proposed by Hen Hao that packs their product on a 2-piece hermetically preserved container since thus a reduction in damages is guaranteed.

Justification for the proposal

To mitigate loss of property in transit, the company should ensure that goods in transit are fully insured since loss to the company will result in unnecessary costs to the business. This can also be ascertained by ensuring that a clear and binding agreement is reached between both the parties on how to provide a comprehensible mode of transaction. There is a risk of fluctuating exchange rates, and stringent measure should be instituted such as preparing the translated trial balance so as to cater for effect of transaction translation differences. This is because exchange rate will lead to a greater failure because of foreign transaction risks. The Gumpbell Soup Company should analyze and gain a good understanding of Hen Hao along with assessing a proper reputation in view of the fact that the business might face the risk of failure or the reputation of Hen Hao will affect the general performance of the company in Asian market. Though insurance is an incremental cost, this will not affect the profit margin of the business because of their comparative competitive advantages of its high quality and consistent product in comparison to the competitors.

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