Swati Anand

1212210015

Case -2

Question 1 ) 1. How do exchange rate fluctuations directly affect the bottor line (profit) of a small
business, and thus present a risk to be managed? Can Alliance Design Concepts share the foreign
exchange risk that it experiences with others in its supply chain (e.g., suppliers, customers)?

Answer - Businesses with an international emphasis expand more quickly, are more successful, and are
better able to add value and generate jobs than their counterparts with a domestic focus. These
companies frequently need to transact in foreign currencies in order to do business with foreign
customers, suppliers, financial institutions, and other partners, which exposes them to some risk.
Currency risk is a problem for businesses that have clients, suppliers, or sources of production abroad
due to recent changes in the value of all currencies

For all those small businesses who source or import their raw materials from other nations and export
their goods to other countries, exchange rates play a significant role. Due to the greater than anticipated
prices of imports, a depreciation of the exchange rate would be a major danger to the domestic
company and have a negative effect on its profitability. All imports of the equipment made by Alliance
from the US would be more expensive if the CAD depreciated against the USD, which is the scenario in
this instance.The profits of a small firm are immediately impacted by exchange rate variations since they
have an effect on the costs of imports and the raw materials that are bought from other nations.
However, other factors, such the elasticity of the firm's product demand, also have an impact on how
profitable small enterprises are. A slight rise in demand would result from a depreciation of the currency
rate if the foreign country is offering goods with low price elasticities.

Second, the percentage of products or raw materials that are imported from other nations has an effect
on profitability. In either way, depending on the movement of the exchange rate, the impact on
profitability would likewise be substantial if this proportion is high. Last but not least, the majority of
firms enter into set contracts to purchase raw materials from foreign nations; however, this is
uncommon for small businesses, who must purchase raw materials on an as-needed basis and pay
according to the current spot exchange rates. Their profitability is impacted and uncertainty is
raised.Last but not least, Alliance is unable to share the foreign exchange risk with other parties in its
supply chain, as this is not customary. Customers would be uncertain and the company would be unable
to propose a set price to them if it shared the foreign exchange risk with them. Customers and suppliers
can be sceptical and unwilling to incur the risks even if Alliance slightly increases the margin in the final
quotation. Overall, this would result in a price increase for Alliance and a decline in demand.

2) 2. Discuss the importance of cash to a smali business, and general "levers" for managing cash (such as
receivables and payables) that are relevant in this case
Answer - It’s basically the movement of funds in and out of your business. Typically, businesses track
cash flow either weekly, monthly or quarterly. There are essentially two kinds of cash flows:When the
money coming into your business from sales, accounts receivable, etc. is greater than the money leaving
it through accounts payable, regular expenses, staff wages, etc., you have positive cash flow.Negative
cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally
means trouble for a business, but there are steps you can take to fix the negative cash flow problem and
get into positive zone.

lets see how you are find solutions to cash flow problems:

1)Brief Term Financing

2) Long-Term Financing

3) Speed Up Recovery Of Receivables

4) Liquidate Cash Tied Up With Assets.

5) Delay Your Payables

its important to continuously maintain a healthy cashflow in your business or startup. Lets see how you
can do this:

1) Recognize business risks and get ready beforehand

Running a business entails a lot of risks, and major difficulties should be anticipated in the future. The
question "What if that huge order comes in suddenly?" "What if a big order is cancelled?" and "What if
that significant client disappears while still owing me money?" are just a few of the possibilities you
need to think about. You can incorporate this form of risk analysis into your cash-flow budgeting
procedure.

2)Create A Separate Bank Account For Your Business

A common mistake associated with running a business – especially among start-ups – is mixing business
and personal bank accounts and credit cards. Since initial financing often comes from the owner’s
personal savings, it’s easy to see how that can happen.

3)Monitor Your Inventory Efficiently

Analyze inventory movement to determine which items are selling and which ones are duds that soak up
your working capital. Try to keep inventory levels lean so that your working capital isn’t tied-up
unproductively and unprofitably

4)Always keep a reserve of cash

As said previously, after you determine the breakeven threshold, you must make sure your company has
enough cash on hand to cover your working capital requirements. Three months' worth of expenses
should be kept in the bank for a rainy day. If that applies to you, make sure you have some form of
buffer, whether it is personal savings on hand, an open overdraft, or a revolving credit facility.

5)Cust Costs, Control Cash Outflows

Best way to control cash flow is to stay on top of your expenses. When we start making profits, we often
tend to ignore the cost cutting opportunities. Unmanaged outflow could be a silent business killer.

3) . What are the relative strengths and weaknesses ef the proposed risk mitigation strategies, in the
specific business context of Alliance Design Concepts?

Answer - The strengths and the weaknesses of the proposed risk mitigation strategies for Alliance are as
follows:

Method 1: Involve the Client

The company would be able to mitigate the foreign exchange risk and exchange rate uncertainty it
faced, and the overall magnitude of the risk it faces would decrease. This is the strategy's strength or
advantage. The Alliance can specify a risk sharing ratio of 50:50 to equally divide the foreign exchange
risk between itself and its suppliers, for example, if the final costs are based on the specification that
they would depend on exchange rate changes at the time of project completion.

Let's examine the principal tactics:

1. Accepting risk: Accepting risk means "risking it." Accepting the fact that the risk exists and that there
is nothing you can do to reduce or alter it. Instead, it recognises the likelihood of it happening and
accepts any potential repercussions. When risk is low or unlikely to occur, this is the optimal course of
action. When the expense of minimising or avoiding it will be greater than just accepting it and leaving it
to chance, it makes sense to take on risk

2.Risk avoidance: It may be preferable to steer clear of a risk if it is too great to take while beginning a
project, introducing a product, moving your firm, etc. Risk avoidance in this context refers to refraining
from engaging in the risky activity. This method of risk management closely resembles how individuals
manage their own risks. Everyone has a tipping point where something becomes just too hazardous and
not worth trying, despite the fact that some people are more risk-loving and others are more risk-
averse.

3.Risk mitigation: Some hazards are better not to avoid or accept when they are analysed. Risk
mitigation is investigated in this case. Risk control procedures and approaches are referred to as risk
minimization. You can devote resources for management once you've determined the risk and its
likelihood.

4.Risk Reduction: Businesses can assign a level at which risk is acceptable, which is called the residual
risk level. Risk reduction is the most common strategy because there is usually a way to at least reduce
risk. It involves taking countermeasures to decrease the impact of consequences. For example, one form
of risk reduction is risk transfer, like that of buying insurance.

7 risk mitigation strategies to protect business operations

Risk mitigation planning.

Common risk mitigation strategies.

Accept and deal with the risk.

Avoid the risk.

Challenge the risk.

Prioritize the risk.

Control and manage the risk.

Transfer the risk.

4) 4. Propose an implementable mitigation strategy for Alliance Design Concepts. The strategy can
include a combination of any of the straiegies mentioned in the case, and/or other strategies that you
may have come up with.Your strategy should explicitly address the business process regarding
quotation/sourcing/payment

Answer

-Strategy 2: Changes to Internal Processes

The Alliance's working capital would be enhanced as a result of this strategy, and the cash conversion
cycle would shorten, lowering the company's exposure to exchange rate risk. For instance, Alliance can
bargain for a longer period of time to pay suppliers and shorten the terms of its receivables to bring in
rapid cash. This strategy's shortcoming is that, despite internal process modifications, foreign exchange
risk may have a negative impact on the company's profitability. Although changing the cash
management or equipment procurement procedures can improve the company's internal operations
and sales, the foreign currency risk may still not be reduced because this risk can have a significant
impact on costs and pricing at any given time

Strategy 3: Foreign Exchange Services

The strengths of this strategy are quite valuable and significant. Opening of a foreign exchange account
would surely reduce the service charges on the most frequent transactions of the company and CAD
funds could be quickly converted to USD funds long before they are paid to the supplier. The biggest
strength of this strategy is the forward contracts. Company can simply lock in a fixed exchange rate and
completely eliminate the risk of depreciation of the currency. However, the weakness of this strategy is
that the company will have to manage its accounts and if enters into forward contracts then it would
not be able to take the advantage of the favorable currency movements.

I advise Andrew Wag staff to apply strategies 2 and 3 simultaneously and use the combination of these
techniques to reduce the foreign exchange risk based on the examination of the advantages and
disadvantages of each of the three strategies mentioned above. The company's operational efficiency
would increase and its working capital management would be improved with the implementation of
internal process modifications. Alliance's cash situation would be strengthened. Finally, putting
approach 3 into practise would lower service fees on the most frequent transactions, and Alliance
should sign forward contracts to lower the risk associated with currency fluctuations. Combining these
two tactics would reduce the foreign exchange risk and increase Alliance's profitability.