4.2 Discussion-- Identifying Risks

docx

School

Embry-Riddle Aeronautical University *

*We aren’t endorsed by this school

Course

510

Subject

Finance

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by CaptainIce8722

Module 4 Identifying Risks Discussion Discuss In this module, you are studying identifying risks. For this discussion, you will consider cash. What are the risks of holding too much cash? Identify two risks and apply the risk categorization and definition (RCD) framework in analyzing your risks. Your initial post is due by Day 4, and you must respond to at least two of your classmates and to all of the professor's comments on your post by Day 7 . Review the discussion rubric for detailed grading criteria. This activity supports Module Objectives 1 and 2 and Learning Outcomes 2 and 4. Search entries or author Filter replies by unread Reply Reply to 4.2 Discussion: Identifying Risks  Collapse Subdiscussion Xavier Barrett Xavier Barrett Oct 31, 2022 Oct 31 at 10:41pm ERM Challenges Xavier Barrett College of Business, Embry-Riddle Aeronautical University HROM 510 Enterprise Risk Management Prof Chris Mandel November 10, 2022 Within the ERM framework, there's a vital step known as risk identification. To have a successful ERM framework that can be implemented within the company, it is critical to identify the risks correctly. When it comes to cash, a couple of risks come to mind that must be addressed as early as possible. There's an operational and strategic risk associated with a company holding onto too much cash that I will explain. Starting with operational risk as my category, my view of a company having too much cash will risk human resources (subcategory) talent management and recruitment team(risk division) not being able to recruit and retain the best talent available in the workforce, which defines the risk and definition. Companies that want to stay ahead of competitors and innovation must know the importance of retaining their top and critical employees, who will most likely always receive offers from other companies, along with maintaining and improving strong recruitment efforts to bring in top talent. Once an employee becomes critical of the company, they will need to feel they are being compensated and taken care of by that company, not only with pay but with benefits, retirement, etc. Recruitment efforts must also be attractive when persuading top talent to join the company. If a company has too much cash on hand and not investing in the "people" of the operation, there's a substantial risk of things becoming stagnant. On the other hand, there could be an upside risk of a company having too much cash. Ever since the COVID-19 pandemic, it may have been necessary for some companies to revamp their ERM framework by adding pandemic-related events to their risk identification list. This risk may cause a need to have too much cash on hand in the event revenue drops drastically or is halted due to any unforeseen event affecting the company's ability to pay its staff or debt.

The second risk of having too much cash on hand is strategic. With a subcategory of strategy, the division at risk would be the teams responsible for the progress and development of a company, like its R&D and M&A teams. With so much cash on hand, companies should take advantage of increasing development budgets and research on innovation, along with acquiring other companies that can improve their core value and help reach their strategic goals. An example would be Facebook deciding not to acquire Instagram or Whatsapp and instead trying to maintain the competitor's risk of losing users and engagement. As I stated, there are cases where certain types of companies may analyze their risk through the qualitative risk assessment and determine there is a need to have extra cash on hand. Still, as described above, operational and strategic risk is associated with that. Companies that need extra money on hand can monitor known risks through the emerging risk identification process to make that determination but trying to determine unknown risks is more of a challenge because it can't be directly monitored. I also put together a Risk Categorization and Definition Tool Chart below for you to review. Reference Segal, Sim. Corporate Value of Enterprise Risk Management : The Next Step in Business Management , John Wiley & Sons, Incorporated, 2011. ProQuest Ebook Central , http://ebookcentral.proquest.com/lib/erau/detail.action?docID=699453. Created from erau on 2022-11-01 02:27:20. Reply Reply to Comment  Collapse Subdiscussion Marcel Melo Marcel Melo 7:26am Nov 10 at 7:26am   Xavier- I enjoyed the break down of your Risk Categorization and Definition Tool Chart. I am a visual learner and this helped me to put things more into perspective. I enjoyed reading your post and with the clearly defined strategic and operational risks, plus examples. I looked at the risk associated with investing, liquidity, and inflation versus having too much cash on hand. The strategic or operational risks that the company would be willing to accept is based on their risk appetite. While some companies would benefit from having more cash on hand, others would be doing their organizations a disservice. Great job this week putting things into perspective! Respectfully, -Marcel Melo Reply Reply to Comment  Collapse Subdiscussion Dallas Anderson Dallas Anderson

Monday Nov 7 at 10:02pm Hi Everyone, I am trying to make these risks fit into the categories laid out in chapter 4 of the book, its not a perfect fit and leaves some room for the imagination. Risk Category .... Risk Sub Cat ....... Risk Division ..... Risk ...................... Definition Financial Market Liquidity Cash on hand Too much cash on hand is at-risk of being subject to inflation compared to being invested Financial Market Liquidity Cash on hand Too much cash on hand (physical) is at risk of being stolen or destroyed during an event (fire, storm, earthquake etc). Too much cash in the bank beyond the insurable amount is at risk of being digitally stolen and not refunded. Risk #1 In the financial arena inflation is called the silent killer because it sneaks up on people and cuts down their purchasing power. Inflation is defined as the increase in goods and services over time. Holding on to large amounts of cash for too long can cause it to be subject to inflation and worth less than when it was originally put in the bank because life got more expensive. For personal finances the recommended amount of cash is 3 to 12 months worth of bills, I would imagine that could also be applied in business as well. (Kellar, 2022) Risk #2 The Federal Deposit Insurance Corporation (FDIC) only insures $250k per account type for a user. Meaning that if you have $280k in your bank account and your identity gets stolen then you accounts get drained, you will be out $30k. Another risk is keeping tangible cash on-hand, such as in a safe or like in the movies under/in a mattress. Although safes do protect against fire for limited amount of time it is still at risk of potential fire damage, being stolen, earthquake, flood etc. (Capital One, 2022) While there is no guaranteed or perfect plan on how to manage cash, the stock market is the most popular way to increase wealth. Having said that the stock market has its drawbacks as well, when there is a downturn it could take months/years to recover an investment. Investing in tangible items is risky as well because they can be stolen or damaged. Dallas References Capital One. (2022, March 16). Understand FDIC insurance and coverage limits . Capital One. Retrieved November 7, 2022, from https://www.capitalone.com/bank/money-management/banking-basics/fdic- insurance-limits/ Kellar, W. (2022, June 16). The risk of holding cash . Human Investing. Retrieved November 7, 2022, from https://www.humaninvesting.com/450-journal/the-risk-of-holding-cash#:~:text=Inflation%20Creates %20Permanent%20Loss&text=Holding%20too%20much%20cash%20long,permanently%20deteriorate %20their%20purchasing%20power. Segal, S. (2011). Corporate value of enterprise risk management: The next step in Business Management . J. Wiley & Sons. Reply Reply to Comment  Collapse Subdiscussion Xavier Barrett Xavier Barrett Tuesday Nov 8 at 11:43am  Dallas, those are great points. Especially with inflation. I believe we are seeing that happen now across the economy. It's always important companies and individuals look ahead to see what amount of cash or cushion they should have on hand. The stock market is a great back up as a place to put your extra cash if you know how to invest it right.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Reply Reply to Comment  Collapse Subdiscussion Aaron Pennington Aaron Pennington Yesterday Nov 9 at 6:53am  Dallas, You mentioned that stocks have become a popular way to invest, but not necessarily the best way. "While there is no guaranteed or perfect plan on how to manage cash, the stock market is the most popular way to increase wealth. Having said that the stock market has its drawbacks as well, when there is a downturn it could take months/years to recover an investment." Your entire investment may be lost. Investors will sell a company's shares if it performs poorly, which will cause the stock price to fall. You will not recover your initial investment when you sell. Bonds should be purchased if you can't afford to lose your initial investment. If a corporation fails, preferred investors, bondholders, and creditors are paid last. But that only occurs if a business declares bankruptcy. If any company fails, a well-diversified portfolio should keep you safe. If you are buying stocks on your own, you must first conduct due diligence on each firm to establish whether you believe it will be lucrative before purchasing its stock (Amadeo, 2022). Thanks Aaron References Amadeo, K. (2022). Pros and cons of investing in stocks . The Balance. Reply Reply to Comment  Collapse Subdiscussion Theodore Roper Theodore Roper Yesterday Nov 9 at 1:34pm   Dallas, I love points you make about stock market. Crypto currency is extremely volatile. I also agree on the old- school method of saving money in a mattress a house fire could occur and destroy what you have spent years saving. Also I am glad someone else thought of this from a personal stand point not only does organization deal with risks. Be we as individuals deal with it daily from small and light to big and extreme risks. Thanks for your insight! Reply Reply to Comment  Collapse Subdiscussion Marcel Melo Marcel Melo Tuesday Nov 8 at 3:54am What are the risks of holding too much cash? Identify two risks and apply the risk categorization and definition (RCD) framework in analyzing your risks: There are two types of dangers associated with keeping too much cash on hand. First, the loss of prospective earnings that might have been earned by investing the money instead of keeping it in reserve. Secondly, the possibility that the cash would lose some of its purchase value due to inflation. By making use of the RCD framework, we are able to further classify and assess these risks in the following ways:

Risk Categorization: The opportunity cost and the danger of inflation are both financial problems that might arise from retaining an excessive amount of cash. There are also strategic hazards where the risks associated with keeping too much cash might also be regarded as strategic risks since they could hinder the company's capacity to invest in growth prospects and maintain a competitive advantage. Definition: The potential return that is lost as a result of not investing the cash is the prospective return that is referred to as the opportunity cost of having too much cash. The opportunity cost of holding too much cash is the opportunity cost of not investing the cash in something else that could have a higher return. For example, if you have $1,000 in cash and you don't invest it, you could miss out on the potential return from investing in stocks, bonds, or other assets. Liquidity risk is the risk that you will not be able to convert your cash into a liquid asset (such as cash) when you need to. For example, if you have $1,000 in cash and you need to pay for an unexpected medical bill, you may not be able to convert your cash into a liquid asset quickly enough to cover the cost. Inflation risk is the risk that the purchasing power of your cash will decline over time. For example, if you have $1,000 in cash today, it may be worth less in the future due to inflation. The danger of inflation allows another financial risk connected with having too much cash is the possibility that the buying value of the cash may be eroded by inflation. The potential return that is lost as a result of not investing the cash is the prospective return that is referred to as the opportunity cost of having too much cash. This cost of missed opportunity has to be evaluated against the risks associated with investing the money, such as the possibility of incurring a loss on the initial investment. The danger of inflation is another financial risk connected with having too much cash. This is because of the possibility that the buying value of the cash may be eroded by inflation. This risk has to be evaluated against the possible advantages of retaining cash, such as the peace of mind that comes with possessing a liquid asset. In conclusion, there are several risks associated with holding too much cash, including opportunity cost, liquidity risk, and inflation risk. Before settling on an amount of cash to have on hand, one has to give serious consideration to the dangers that come with having too much of it. The potential advantages of retaining cash have to be evaluated against the possible opportunity costs as well as the danger of inflation. Applying the RCD framework to these risks, we can see that the opportunity cost and inflation risk are both economic risks, while the liquidity risk is a financial risk. REFERENCES: Goodman, A. (2018, December 5). The dangers & frustration of holding cash in your business: Albert Goodman . Albert Goodman | Chartered Accountants. Retrieved November 8, 2022, from https://albertgoodman.co.uk/insights/the-dangers-frustration-of-holding-cash-in-your-business Lundqvist, S. A., & Vilhelmsson, A. (2016). Enterprise risk management and default risk: Evidence from the Banking Industry. Journal of Risk and Insurance , 85 (1), 127–157. https://doi.org/10.1111/jori.12151 Vecchio, W. by L. D. (2022, October 6). Cash flow risk in business and how to reduce it . PLANERGY Software. Retrieved November 8, 2022, from https://planergy.com/blog/cash-flow-risk/ Reply Reply to Comment  Collapse Subdiscussion Xavier Barrett Xavier Barrett Tuesday Nov 8 at 11:48am  Good points Marcel, something has to be done with all the extra cash that is on hand. Not investing it or putting it to good use is just as dangerous as not having enough cash on hand with all the potential

risks out there. Being able to implement a risk framework when it comes to cash can help a company or individual properly handle a lot of cash. Reply Reply to Comment  Collapse Subdiscussion Dallas Anderson Dallas Anderson Tuesday Nov 8 at 9:20pm  Hi Marcel, Thank you for sharing, I think you were able to summarize two risks of keeping too much cash on hand very well. On one hand if the cash isn't invested its missing out on the potential yield, on the other hand cash over time looses it purchasing power due to inflation. For example in 1980 the cost of a movie ticket was $2.89, in 2019 the average cost is $9.16. Even with house prices over the past 20 years, my parents bought their house for $150k in 2000 and now its work $450k. That's roughly 3x more expensive in both examples. This is a very important concept to consider when planning out retirement, what the cost is going to be not what it is currently. (Schmidt, 2022) Dallas Reference Schmidt, J. (2022, October 14). How inflation erodes the value of your money . Forbes. Retrieved November 8, 2022, from https://www.forbes.com/advisor/investing/what-is-inflation/ Reply Reply to Comment  Collapse Subdiscussion Aaron Pennington Aaron Pennington Yesterday Nov 9 at 6:42am  Marcel, You mentioned the issues with inflation and most of us have experience that over the last year. For example gas prices have increased over the past year and so have many other expenses. As you stated earlier "dangers of inflation is another financial risk connected with having too much cash due to the possibility that the buying value of the cash may be eroded by inflation. This risk has to be evaluated against the possible advantages of retaining cash" For the twelve months ending in June 2022, food prices rose by 10.4%, the highest rate since February 1981. The cost of food purchased at home increased 12.2% over the previous 12 months, which is the highest increase since April 1979. The highest 12-month change in food prices since November 1981 was 7.7 percent, which increased the cost of eating out. The annual increase in energy prices was 41.6 percent, the highest 12-month increase since April 1980. Motor fuel prices, which cover all varieties of gasoline, rose 60.2 percent over the course of the year within the energy category. The greatest 12-month increase in gas prices since March 1980 was 59.9%. The greatest 12-month increase in electricity rates since April 2006, up 13.7%. Prices for natural gas (piped utility gas) climbed by 38.4% during the previous 12 months. This has increased risk for loss upon investments (U.S. Bureau of Labor Statistics, 2022). Thanks Aaron References U.S. Bureau of Labor Statistics. (2022) Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years . U.S. Bureau of Labor Statistics. Reply Reply to Comment 

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Collapse Subdiscussion Theodore Roper Theodore Roper Yesterday Nov 9 at 1:59pm   Marcel, Great way to mention the loss of prospective earnings due to lack of investing. Inflation is definitely a risk and it can happen. The fact buying value could be eroded by inflation (if it does happen) is a serious issue. I really did enjoy reading you assignment and the insights you have. Reply Reply to Comment  Collapse Subdiscussion Aaron Pennington Aaron Pennington Tuesday Nov 8 at 4:42am What are the risks of holding too much cash? Identify two risks and apply the risk categorization and definition (RCD) framework in analyzing your risks. The ratings downgrade is a direct consequence of one or more of these risk factors. Once it happens, the ratings downgrade is just a preliminary result; it may also have financial repercussions, such as decreased revenues, increased costs, and/or a higher cost of capital. these connections in terms of their progression from various real risk causes to the intermediate result of a ratings fall and then to financial repercussions (Segal, 2011). Use of the risk categorization and description RCD is crucial as a result. Monitoring allows in between periodic reperformance of the qualitative risk assessment, the fully populated RCD tool is used to monitor any potential changes in the importance of any of the risks listed therein. This is part of emerging risk identification (Segal, 2011). Reputational Risk can directly originate from a number of different risk sources. It's possible that product quality falls short of customer expectations or business advertising strategies. A tipping point may have been reached in the decline of customer service. It's possible to find a large instance of internal fraud or for an internal scandal to go public. This situation will benefit from reporting. This gives additional information and encourages the kind of thoughtful conversation that raises senior-level risk awareness and culture. The RCD tool also offers a consistent report structure that may be maintained over time when used for internal reporting (Segal, 2011). If firms remain indecisive and merely hoard cash, they will lose the unusual benefits and opportunities that having too much cash poses. Holding too much cash can be problematic because it's frequently equally as harmful as holding too much debt. Businesses often seek to use money to pay off high interest debt, buy back shares, make acquisitions, or raise dividends since money lying idle raises potential costs. In the previous three years, the majority of businesses have resolved their issue with high interest loans, but they are still unsure of their alternative options. As a result, more money is coming in than is leaving. Boards need to start deciding what to do with all that money because there aren't many good short-term investment possibilities. To keep from losing the advantages that the money can offer, they must begin using it. Some people need to carefully consider making smart purchases that will help them when the economy eventually improves. Others ought to utilize the money to raise the value of their shares by repurchasing them or raising their dividends. Others should consider making capital investments in already-existing structures and machinery. (Picard, 2021). Aaron References Picard, R. (2021). Too much cash becomes a really serious business problem . Forbes.

Segal (2011) Corporate Value of Enterprise Risk Management : The Next Step in Business Management , John Wiley & Sons, Incorporated. Reply Reply to Comment  Collapse Subdiscussion Xavier Barrett Xavier Barrett Tuesday Nov 8 at 11:53am  Aaron, those were good points made. Having loads of cash on hand and remaining indecisive is not a good combination, especially if there's room for improvement in the quality of your products. I agree that boards should have decisions in place on what to do once a firm reaches a certain amount of cash on hand. Companies may tend to start keeping a little more cash on hand now because of what happened during the previous pandemic but there should still be a plan in place for any extra cash held outside of that safety net. Reply Reply to Comment  Collapse Subdiscussion Dallas Anderson Dallas Anderson Tuesday Nov 8 at 9:31pm  Hi Aaron, Thank you for sharing, you have presented an interesting scenario with a company that is getting cash in but having analysis paralysis on what to do with it. As you mentioned when there is high interest loans involved that should obviously be the primary objective. But I would imagine that there are times when companies do get ahead alittle and struggle to figure out what is the best way to utilize this cash. Is it put it back into the business, invest in the stock market, keep it socked away etc? I totally understand the difficulty of the decision because the stock market has ebbs and flows so its not a guaranteed money maker, although over time is always goes back up. (Fiorillo, 2018) Dallas References Fiorillo, S. (2018, August 29). What is inflation in economics? definition, causes & examples . TheStreet. Retrieved November 8, 2022, from https://www.thestreet.com/personal-finance/what-is-inflation- 14695699 Reply Reply to Comment  Collapse Subdiscussion Marcel Melo Marcel Melo 7:19am Nov 10 at 7:19am   Aaron- I enjoyed reading your post. Good points on how the RCD tool can offer a consistent reporting structure for internal reporting. One way companies can actually lose money is from lack of investing (both short term and long term). Also, inflation is a risk for companies not investing wisely. You mentioned that if a firm hoards cash, they will lose the benefits and opportunities that having too much cash poses. What benefits or opportunities were you mentioning specifically? One possibility is that the buying value of the cash may be eroded by inflation. This risk has to be evaluated against the possible advantages of

retaining cash, such as the peace of mind that comes with possessing a liquid asset. Great post this week! Respectfully, -Marcel Melo Reply Reply to Comment  Collapse Subdiscussion Theodore Roper Theodore Roper Tuesday Nov 8 at 10:07pm 4.2_Discussion_Identifying_Risks_Theo_Roper-1.docx Download 4.2_Discussion_Identifying_Risks_Theo_Roper-1.docx Reply Reply to Comment  Collapse Subdiscussion Theodore Roper Theodore Roper Tuesday Nov 8 at 10:11pm Sorry above is incorrect file. Attached is the correct file with reference included. 4.2_Discussion_Identifying_Risks_Theo_Roper-2.docx   Download 4.2_Discussion_Identifying_Risks_Theo_Roper-2.docx Reply Reply to Comment  Collapse Subdiscussion Christopher Mandel Christopher Mandel Yesterday Nov 9 at 7:44am  As you consider this question of the risks of holding too much cash, think about it in terms of risk trade-offs or balancing risk and reward. Keeping a certain amount of cash on hand, is a fundamental operational decision that obviously flows naturally into the financial risk management realm where return is a central consideration. On the one, a certain amount of cash is always needed to fund continuing operations of a business or even a non-profit, but especially these days, holding that cash comes at great sacrifice of return where it would otherwise be invested in some asset class that would ideally appreciate over time. Thus, the risks of holding too much cash have implications for operational effectiveness as well as financial management strategies and tactics. Are there implications for strategic risks? Well consider the risk of being competitive enough tin your space. For example, in the insurance industry, in order to price products competitively, it is necessary to secure a certain return on invested assets that gets figured into what's known as the "combined ratio" a measure of profitability once claims are investigated and paid. In the highly competitive world of say auto insurance, an automobile insurance provider won't be able to meet its financial targets without a certain return on invested assets. Thus, the more cash held with little or no return, the more other investments must return to offset this need for cash. There are of causse other risks of holding too much cash, but this is just one example of how to think about it. using the RCD tool to assist in the identification of risk is a succinct and straight forward way to gather the key criteria for relevant risks which then form the basis of building a risk register of key risks for the organization and which would then be the source of information informing the risk profile of your organization. I hope you find this useful in thinking through this discussion.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

PM Edited by Christopher Mandel on Nov 9 at 7:44am Reply Reply to Comment  Collapse Subdiscussion Michele Paetznick Michele Paetznick Yesterday Nov 9 at 9:19am Identifying Risks, Module 4 Discussion Michele Paetznick HROM 510 Enterprise Risk Management Prof. Chris Mandel November 9, 2022 The risk categorization and definition tool, or RCD, has three primary risk categories; financial risk, strategic risk and operational risk. If your organization is carrying too much cash, one would assume this would pose a financial risk, but it could also pose a strategic risk. The definition of the financial risk category in the RCD model is the, “unexpected changes in external markets, prices, rates, and liquidity supply and demand. This includes market risk, credit risk, and liquidity risk” (Segal, pg. 116). When carrying too much cash, it could present what is known as a “drag” on the overall value of the cash. For instance, cash may be seen as a liquid asset, but that asset can lose value by not being invested properly. This non-investment could be categorized as a market risk in which the rates at which the stock market rises, are not proportionate in value to the cash on hand; therefore the money is being "dragged" down based on the value not increasing. There is also the market risk of inflation, in which the cash is not worth as much as the prices of goods and services increases. We are seeing this today in our own economy. Another way in which cash can be seen as a risk in the RCD tool is as a strategic risk. A strategic risk, as defined by Segal, is “a category of risks related to unexpected changes in key elements of strategy formulation or execution” (Segal, pg. 117). Some subcategories of a strategic risk include the organization’s strategy, competition, execution and strategic relationships. One example of a strategic risk for carrying too much cash is that the organization is unable to execute its strategy as planned. This could be due to the markets they are going into that require more capital than liquidity, or the value proposition of the organization for mergers and acquisitions. With mergers and acquisitions, it is more attractive for investors to have a portfolio that is well diversified; having too much cash on hand can be seen as being less attractive to potential suitors. Another example of a strategic risk is that the organization could also “experience fights over whether to hold onto cash, reinvest it or distribute earnings to investors” (Kokemuller). If there are multiple owners, this could cause some conflict within the organization when the overall strategy is not shared. Another strategic risk example is that, “if you opt to hold onto cash, you run the risk that some investors will become fed up with delays in returns on their investments” (Kokemuller). This would be seen as a strategic relationships risk with joint venture partners or possibly, a parent company. As you can see, although cash can have its advantages, most people do not think about the risks involved with holding onto too much cash. It is important to have a tool, such as the RCD, to be able to compile a complete list of risks, and then clearly categorized and define those risks so that informed decisions can be made. Segal, Sim. Corporate Value of Enterprise Risk Management : The Next Step in Business Management , John Wiley & Sons, Incorporated, 2011. ProQuest Ebook Central , http://ebookcentral.proquest.com/lib/erau/detail.action?docID=699453. Created from erau on 2022-11-09 02:44:20.

Neil Kokemuller, Why Is It a Financial Risk for Businesses to Have Too Much Cash on Hand? Created from https://smallbusiness.chron.com/financial-risk-businesses-much-cash-hand-81214.html  Links to an external site. 2022-11-08 Reply Reply to Comment  Collapse Subdiscussion Nick Hechler Nick Hechler Yesterday Nov 9 at 2:20pm On the surface, holding a pile of cash may seem like a good idea. Unexpected expenses such as a your car breaking down (on a personal level) or a warehouse fire (organizational level) can be quickly covered with the excess liquidity. However, on a deeper, more comprehensive level, a stockpile of cash is worse than it may sound, especially in the long run. The biggest risk of holding excess cash would be considered a financial risk associated with the market economy and its associated inflation. As time goes by, a dollar becomes worth less, the basic principle of time value of money. Where 20 years ago a dollar was able to buy a coffee, a bag of candy and a newspaper, today, a dollar will maybe get you one of those items. With that being said, by holding stockpiles of cash, the company, or person is risking losing money without doing anything. While investing into the stock market, bond market, or any other equity, would return interest rates at a minimum proportional to the cost of capital (inflation rate), the risk of losing large sums of value in the cash stockpile is a serious risk that is almost certain to happen. Another risk, of holding too much cash on an organizational level could be strategic in nature. Holding large sums of cash, signals that the company is not actively seeking investment opportunities to grow, expand or innovate products and services and may therefore miss and neglect market innovations and lose its position in the market against a competing firm. This risk is not only compiled in one single risk subcategory but could have impacts on multiple buckets such as competitor risk and execution risk. The question should then be asked if the set strategy is still being followed by the executive level and if it is, if the strategy is appropriate in the current situation the organization is in. The RCD framework provides a simple, yet effective way, to categorize risk and therefore associate responsibility for individual risks or determine which department has the most control over it. In this example, the first risk would likely be attributed to the finance department, whereas the second risk would want to be managed by the executive level. Reply Reply to Comment  Collapse Subdiscussion David Ufen David Ufen 10:59am Nov 10 at 10:59am   Nick, Reading through everyone's posts it seems that many of us have landed on inflation as a big risk for this holding too much cash. I always wonder if the risk is as bad as we show or if it is a perspective? When looking at a business cash holding is a large risk, but from a person perspective Is holding too much cash really an issue if you are dept free and self-sufficient with less needs? I don't really know how to answer it. Regards, David Reply Reply to Comment

 Collapse Subdiscussion John Barbachano John Barbachano Yesterday Nov 9 at 5:15pm  A business holding cash as part of their financials can be a considered a financial risk. One of the main reasons carrying cash could be a risk is due to there not being any return of the investment. Cash carries a low return on assets. This means that their minimal earnings coming from the amount of cash a business carries. Versus higher earnings based on a business' overall ROA causing them to lose money for the cash they carry. Another risk involved in carrying too much cash could be since cash typically cannot be track as well. There is a chance that a company's financial team could easily transfer those cash funds into accounts outside the business' and start to illegal money launder the cash without the business having any real trace. The way the RCD framework could be used to analyze these risks would be that a group of financial experts could possibly be employed to conduct the risk surveys and interviews. I would think that especially for the fraud-based risk you might want an outside team of interviewees to identify the risk source, that way they would be less chance of anyone covering up the fraudulent actions. Once the source of the key risks were identified then the team of interviewers and interviewees would determine the proper severity and define the needed metrics. Like what would be the risks of keeping too much cash and what would be the overall results based against the organizations possible ROA. For the fraud risk, a determination could be decided on what the severity would be if the fraud were to persist, or the individual kept on committing without being identified. An important aspect of using RCD framework for these risk identification purposes would be to take the required amount of time needed to gather all the needed information and making sure that everything is collected correctly so that there is minimal revisiting of the risk survey interviews needed. Then once all the risk data is collected and determined to satisfy the need to identify the needs of these two risks, then all the key risks that have been provide a severity and likelihood ranking could be ranked and analyzed even further to ensure that the proper levels of the key risks can be identified and monitor. Reply Reply to Comment  Collapse Subdiscussion Olutosin Olajide Olutosin Olajide Yesterday Nov 9 at 8:44pm  Risks of holding excessive cash flows could either introduce Strategic or Operational risk for an organization. Using the Aviation Industry as an example, holding excessive cash may be categorized as an Operational risk for such an airline and using RCD framework of risk identification, a subcategory of such risk is for economic reasons. If there is a boom in the economy, household income increases which encourages vacations and more travels as consumers have more cash to spend however during a downturn in the economy, either as a result of a recession or low seasonal periods, an argument for holding excessive cash cannot be overlooked and will be viewed as a strategic plan for an airlines to remain profitable. Having excessive cash flow in this instance will be viewed as a methodology of mitigating operational risk for such airlines. Investors on the other hand may view holding excessive cash as an excuse for top management executives to escape the pressure of performance appraisals, as cash is not being put into work to enhance organizational expansions or company values. Additionally, holding too much cash as an organization is for some companies to prepare for future risks. In a situation where companies are faced with uncertanities due to unexpected changes in judgments

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

and civil lawsuits. Identifying risk of litigation could be a strategic risk categorization for some organizations who see the need to have excessive cash flow to prevent such risks which may negatively affect the organization. Using the RCD risk framework, the categorization of risk identification either as operational or strategic risk depends on what uncertanities the organization is trying to mitigate. Such may also be subcategorized based on sources or probabilities of occurrences and general perspective of such risks and their impacts to organizational values and objectives. By and large, the positives overweigh the downfalls when considering whether to holding too much cash or not. Olutosin Reply Reply to Comment  Collapse Subdiscussion Jose Perez Calderon Jose Perez Calderon Yesterday Nov 9 at 10:21pm What are the risks of holding too much cash? Identify two risks and apply the risk categorization and definition (RCD) framework in analyzing your risks. From my point of view holding too much cash has two major risks. First, it leads to financial risk by giving the holder a false sense of security. For example, having too much cash makes it easier to cover expenses, which means less work is needed to maintain the norm. A decrease in work leads to a decrease in revenue. Having a lot of cash does not guarantee growth or progress, it does, however, lead to stagnation and lack of action. If the amount of cash available is large enough to cover all expenses for extended periods of time, there is no sense of urgency or a need to create value. Second, it leads to strategic risk due to stagnation and inaction. Cash is not an asset and tends to lose value over time. It is a great tool for generating value if utilized properly. To generate value cash must be invested in assets. Having too much cash sitting in the bank generates little to no return on investment. The return is too low to fight inflation which leads to a decrease in value. Economic changes are hard to predict and occur unexpectedly, fluctuations in prices and interest rates also affect the value of cash over time. Investing cash in value generating assets is the only way to increase return on investment and minimize these negative effects. The success of this is based on a good strategy and execution plan. Reference: Segal, S. (2011). Corporate value of enterprise risk management: The next step in business management . John Wiley & Sons, Incorporated. Reply Reply to Comment  Collapse Subdiscussion David Ufen David Ufen 10:51am Nov 10 at 10:51am   Jose, I enjoyed reading through your post and had a few comments. First, your statement of cash is not an asset and loses value over time is really accurate. I know it is easy to think to yourself that I have this dollar and this dollar will always be a dollar, unfortunately we can convince ourselves that that is true value, however, with costs changing hourly that dollar does not carry as much weight, gas prices are a good way to measure that in a quick way. That dollar does not get as many miles as it once did. Make the dollar eb and flow with the market and then the vacillation will not impact you as much. The other point that you stated about false sense of security really is interesting. When cash is available and you

have enough to cover a situation, I get that security and I would find comfort in that as well, however, when looking at the long haul that security is more and more eroded. I know I personally have little cash, how has this learning affected your opinion on cash? Regards, David Reply Reply to Comment  Collapse Subdiscussion Eric Holzbierlein Eric Holzbierlein 3:40am Nov 10 at 3:40am Holding cash can be a cause for concern for any organization. Using the RCD framework, there are a few risk categories that stand out to me. When dealing with cash, there are risks, whether bad investments, missed opportunities, or inflation. A leading risk factor to hoarding cash is the amount lost due to inflation. Inflation is listed under the Strategic/Economic category. The chart below shows the annual inflation rates in the US from 2012 to 2022. Here we can see the volatility of USD inflation rates which makes them difficult to predict and budget for. Inflation in 2015 was minimal at 0.7% and raised to 8.2% by 2022. An organization holding cash during the period shown would lose an average of 2.7% to inflation. Risk managers will use market data to help determine more volatile periods vs more sustainable inflation rates. Another possible risk of holding too much cash is the risk of not taking any risk at all. We have learned through our readings that ERM is not about avoiding risk but instead making informed decisions about how to manage risk. Holding cash could mean missed opportunities in other investments. Organizations that do not take advantage of opportunities will lose the competitive advantage over others willing to take risks and execute them successfully. A comparative analysis of the competitor's risk can be added to the RCD tool to determine where cash is best appropriated. However, under extreme market conditions, some risk managers may view the consequences of large investments to outweigh the possible ROEs. Reply Reply to Comment  Collapse Subdiscussion Eric Holzbierlein Eric Holzbierlein 3:41am Nov 10 at 3:41am

Reference US Inflation Calculator. (2022). Current US Inflation Rates: 2009-2019 . US Inflation Calculator. https://www.usinflationcalculator.com/inflation/current-inflation-rates/   Links to an external site. Segal, S. (2011). Corporate value of enterprise risk management: The next step in business management . John Wiley & Sons, Incorporated. Reply Reply to Comment  Collapse Subdiscussion David Ufen David Ufen 10:42am Nov 10 at 10:42am  Hello, I am really enjoying learning about how risks are both good and bad and how much process and management goes into how risks can cause either effect. For this week we are being asked what the risks are for holding too much cash. First, the one that is really near the top of my mind right now is inflation risks. Cash is hand is stagnant and does not grow. Its value is subject to increased costs. The risk with holding cash in an inflationary period is that it will be inhibited from keeping up with cost of living and if you were say investing that same cash you could potentially outpace the inflation and make your money work for you instead of staying put (SmartWatch, 2022). Another risk of holding too much cash is spending what you have in hand. I can say from personal experience if I have it and I want something I will probably buy it. I will not wait and see if I really want it. Cash in hand has an influence on our impulsive natures. Looking the at the two risks I have identified inflation can be categorized as a financial risk. Inflation causes unexpected change in external markets, prices and rates and it has a subcategory of economic (Segal, 2011). The second risk I have identified is spending and not planning for your money is also categorized as a financial risk and it subcategorizes under credit. If you spend it, you will not have it. David Segal, Sim (2011) Corporate value of enterprise risk management. John Wiley & Sons, Inc Hoboken, New Jersey. SmartWealth (2022) Are you holding too much of your money in cash? SW. Are You Holding Too Much of Your Money in Cash? - The Smartwealth Digest (nbkcapitalsmartwealth.com) Reply Reply to Comment

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4.2 Discussion-- Identifying Risks

Related Documents