The Importance Of Financial Risk Analysis

The pursuance of a new strategy inevitably exposes an organisation to some risk, and an evaluation of the risk factors will help to determine the acceptability of a particular strategy. Lynch suggests that the analysis of business risk has two principal components, each of which has a variety of associated techniques. These are financial risk analysis and sensitivity analysis. Financial risk analysis looks specifically at the financial risks of strategic options that have emerged from the strategy choice process. The type of analysis is relatively familiar, according to Lynch (2003) types of financial risk analysis include: Cash flow analysis, Break-even analysis, company borrowing requirements, financial ratio analysis, and currency analysis.

A vast number of companies declare bankruptcy, simply because of uneven cash flow (Hall, 2010). For example, due to many problem plus cash flow issues General Motors went bankrupt (More, 2009). Break-even analysis is an approach that estimates the amount of sales or revenue created that is essential to cover the cost of the initial investment in the launch of the strategy. It is used to decide when the business can cover all its expenses and start making a profit (Bakhru, 2005).

Taylor and Sparkes (1977) discuss the importance of sensitivity analysis in strategic evaluation. Sensitivity analysis considers how sensitive a project is to changes in the assumptions that underlie profitability forecasts. Important factors to consider may include how the following affect profitability: changes in sales, prices, interest rates, costs and in exchange rates. Lynch (2003) suggests that sensitivity analysis gets to examine all the assumptions behind any strategic option, and how any change would influence the suitability, feasibility, and acceptability of the

The Board of Directors manages the liquidity risk exposure through ensuring that Byggmax has sufficient credit facilities in place to satisfy the future needs of the business. The need is established through continuous follow up of forecast and actual cash flows with consideration taken to the tenors of financial assets and liabilities in the balance sheet. Byggmax’s primary credit facility is provided by Svenska Handelsbanken by way a credit agreement. The agreement with Svenska Handelsbanken extents until November 2, 2018. The size of the credit facility available is reviewed regularly and designed to cover forecast peaks in the gross debt level with a healthy margin. On December 31, 2015, the Group had cash and cash equivalents totaling SEK 31.7 M (30.9) and an unutilized credit facility of SEK 251.6 M (99.2).

Management of financing/capital risk

The Byggmax Group works to reduce its capital/financing risk by:

• establishing adequate credit facilities well in advance of foreseeable needs.

• Monitoring due dates for the total debt in order to match amortization to anticipated cash flow

• satisfying key ratios according to financing contracts. The key ratios are the interest-coverage ratio, debt/equity ratio and the equity ratio/ risk bearing capital

• optimizing working capital within the