Assignment 3: Risk Management Research
Introduction
Changes in financial markets, manmade disasters, or legal liabilities disrupt business operations. These changes expose a company to financial risks such as credit risks, operational risks, market risks, and liquidity risks. Thus, financial risks refer to the possibility of a firm losing funds on a business venture or an investment. Studies by (Andersen, 2011) indicate that the dangers of financial risks lead to loss of capital to interested stakeholders. Financial risk analysis investigates the potential problems that can affect a company’s daily operations. For example, in Microsoft Corp, the risk score remains a relevant measure for assessing stock attractiveness. This paper will explain the financial risk concept and assess the effect of the different financial risks on Microsoft Corp’s operations. The research will be based on the financial statements, i.e., balance sheet, income statement, and cash flow statement, as analyzed in assignment 2.
Market Risk
Market risk refers to the possibility that a company will experience losses on financial investments due to adverse price fluctuations in the financial markets (Arnold, 2012). Examples of market risks include interest rate moves, changes in equity prices, changes in product prices, foreign exchange fluctuations, and more. In the software and computer hardware development industry, Microsoft Corporation is exposed to various market risks that interfere with its financial performance. According to (Moak, 2016), Microsoft Corp is exposed to market risks from foreign currency exchange rates, equity prices, interest rates, and commodity prices. Besides, a portion of these economic risks is hedged. However, they impact the company’s financial statements.
The company’s assets, liabilities, and forecasted transactions are exposed to foreign currency risk. This risks Microsoft’s stability, interfering with its economic effectiveness. The risk surfaces on the company’s assets and turns into a liability because changes in exchange rates, financial assets, and interest rates are traded instead of being held on the balance sheet (Arnold, 2012). When liabilities exceed assets, the company is operating under debts; and this impacts the income statement by lowering profits or even amounting to losses. In the income statement, losses resulting from the prevailing market risks reduce Microsoft’s income. Where there is a risk, the possibility of reporting gains in the income statement is minimal (Elhossary & Nobanee, 2020). Thus, market risks result in losses with are reported in the cash flow. With market risks, this adversely affects Microsoft’s financial performance.
Liquidity Risk
Liquidity refers to a firm/company’s ability to repay debts without suffering disastrous losses. Conversely, liquidity risk is the lack….
….Middle of Paper.
Credit Risk
Credit risk refers to the possibility of a loss happening from a borrower’s failure to repay a loan. Typically, it means the risk that the lender may not get back the owed principle + interest, and this interrupts the lender’s cash flow and raises the collection costs. According to (Arnold, 2012), credit risk is the risk that a company may not meet its contractual financial obligations when due and any estimated financial estimated financial loss in the event of impairment or default. In the case of Microsoft, the company is exposed to credit risks if customers fail to make a payment due on a mortgage loan, a company or customer fails to pay a trade invoice when due, and more (Elhossary & Nobanee, 2020).
Any credit default by customers exposes Microsoft to credit risk, lowering its financial ability to fund its projects. Payment of trade invoices due enables Microsoft to run its operations, repay any bank loan, and maintain creditworthiness. However, if customers do not honor their payments on Microsoft Corp’s products, this increases credit risk and affects the company’s financial status and creditworthiness (Moak, 2016). Also, an increase in credit risk raises the loan loss provision by financiers, which gets netted off against the loan assets and interest income. As a result, this amounts to reduced incomes and profits for Microsoft Corp, disrupting its financial performance.
Operational Risk
Moak (2016) defines operational risk as the prospect of loss resulting from failed or inadequate procedures, policies, or systems. It summarizes the hazards and uncertainties an entity encounters when it tries to discharge their daily operations within the market and industry where it operates. In Microsoft Corp, operational risks result from faults in internal systems, procedures, and people, unlike challenges resulting from external forces, such as economic and political events, or inherent to the whole market segment (Elhossary & Nobanee, 2020). Thus, in Microsoft Corp, the evident operational risk is related to errors or omissions by employees, business interruption, IT systems failure….Order Paper Now….
Conclusion
Risk exposes an entity, company, or organization to the danger of loss. In the current business environment, every organization is exposed to a risk, be it market risk, operational, liquidity, or credit risk. This necessitates risk management whereby the threats are identified, assessed, and controlled. In Microsoft Corporation, risks stem from financial uncertainty, strategic management errors, legal liabilities, economic threats, and credit rating, among others. Thus, Microsoft Corporation needs to establish a firm risk management system to prevent or remedy the adverse effects caused by exposure to these risks.
References
Andersen, T. J. (2011). Strategic risk management practice: How to deal effectively with major corporate exposures. Strategic Direction, 5-24.
Arnold, G. (2012). Corporate financial management. Pearson Education.
Elhossary, R., & Nobanee, H. (2020). Financial Statement Analysis of Microsoft. Finance, 4-18.
Moak, A. (2016, December 1). Enterprise Risk Management at Microsoft. Retrieved April 7, 2021, from Anthonysmoak.com: https://anthonysmoak.com/2016/12/01/enterprise-risk-management-at-microsoft/