Sample Report Paper on Foster’s Financial Risk

Foster’s Financial Risk

The Management of Foster Company has always been faced with several management problems, but one of the fundamental problems has been dealing with financial risk that affects the performance of the company. The financial risks of the company are classified into two aspects: liquidity and commodity price risks (Carlton & United Breweries 18). All these factors are geared towards affecting the financial position of the company, which in turn affects the company’s profits.

Liquidity risk refers to the ability of the firm to easily convert its assets to cash and cash equivalents when required without lose of value of the assets (Carey, and Stulz 58). Foster’s liquidity problem can be accessed from the longer trade receivables period, which is 90 days (Carlton & United Breweries 24). This policy was adopted to attract customers to buy their goods as clients prefer companies with longer credit period, as it gives them time before they pay their dues. This policy was introduced in 2012, and it has led to the growth of trade debtors from 198.4 in 2012 Million to 332 Million in 2013 (Carlton & United Breweries 30). This poses as a liquidity risk to the company which in turn leads to a financial risk.

Secondly, the firm faces commodity price risk, which is brought about by the changes of the cost of production. The cost of production fluctuates due to suppliers changing of the prices of their commodities, which has a direct impact on the profits of the firm as it was experienced in 2010/2011 financial year, whereby a change of a supplier’s commodity led to a decrease in the firm’s expected profits by $13 million (Carlton & United Breweries 16). The unexpected change in price of the commodity is always absorbed by the company rather than pushing to the consumer. This therefore implies that the company bares the financial loss incurred due to the increase in the cost of production.

However, despite the fact the company faces the two financial risks; there are several measures, which can be taken to mitigate themselves against such risks. The liquidity risk can be mitigated by ensuring that the company maintains enough cash reserves in the banking facilities. This can be done by critically analyzing the company’s maturity of their debts. Furthermore, the company should reduce the debt period to 60 days, and negotiate for a longer credit period (Paramasivan, and Subramanian 58). This will ensure that the company maintains enough cash reserves to meet the day to day running of the business.

The company’s commodity price risk can be mitigated by the company taking long term supply contracts. The long term supply contract will ensure that the company is protected against any fluctuation in prices of the suppliers’ commodities (Paramasivan, and Subramanian 72). The contract will stipulate the prices of commodities for a specific period of time, such as 10 years. This therefore implies that the supplier cannot change the price of the commodity within the time frame given (Carey, and Stulz 27).

The analysis above clearly demonstrates how liquidity and commodity price risks pose as financial risk, which has an impact on the firm’s profits. The two risks negatively affect the profits as they reduce the firm’s revenues or increase the cost. The firm should therefore employ the measures outlined above to help improve on the financial position of the company, which will in turn lead to the improvement of the company’s performance in the beverage industry.

 

 

Works Cited

Carey, Mark S, and René M. Stulz. The Risks of Financial Institutions. Chicago: University of Chicago Press, 2006. Print.

Carlton & United Breweries. The Annual Report of the Financial Stability of Foster’s Group, August 22, 2013. N.p., 2013. Print.

Paramasivan, C, and T. Subramanian. Financial Management. New Delhi: New Age International (P) Ltd., Publishers, 2009. Print.