Question

Impact of business risk at Simo Ltd. Simo Ltd is an Australian owned company that obtains and refurbishes second hand computer parts such as hard drives and motherboards. Recently Simo has begun using a new refurbishment technique which is claimed to be more effective and cost efficient. Simo has also made a decision to focus on the export market, and has been selling parts to several Indian companies where the parts are used in the manufacture of computers. Recently however, there have been delays in delivering the parts to India due to strike action amongst custom officials at Australian ports. The delays have angered Indian customers who have threatened to reduce the amounts owing by 15% because of lost production time. Adding further concern to Simo is that one of their customers, Calc Ltd, is claiming that the latest batch of parts they received was faulty, and are refusing to pay their account which is already 3 months overdue.

Question 1: The business risk impact and the accounts (as well as the related assertions) most likely affected by the strategic decisions made by Simo Ltd .

Answer 1

Risk is the potential loss associated with identifed circumstances i.e unfavourable environment.

There are many type of risk faced by ant entity. Among those, we will discuss risk applicable to Simo Ltd.

1. Brand Risk : Due to faulty production and delay in delivery to customer, there is loss of reputation to Simo ltd. It is stated that Simo ltd is recognised for providing products which are more effective and cost efficient as compared to others. Brand risk will lead to destroy of such reputation in market. The market share may get reduce and the export may also decline.

2. Financial Risk : Indian Customer are not happy with production of Simo ltd and threatened to reduced purchase by 15%. This is financial risk to entity because it is result of loss of revenue from Indian customer. Financial loss is never acceptable because if not cured in time then it lead to financial crunches for any organization and ultimately to closure of business.

3. Liquidity Risk : Liquidity risk arise when our working capital cycle get disturbed. Calc ltd., one the customer, whose account is outstanding for more than 3 months, is refusing to pay overdue amount. This will disturb working capital cycle. Simo ltd may not be able to pay creditors on time as no payment is going to come from Calc. ltd. Simo ltd. will have lose of credibility in creditors market also.